- KFC opened its first dedicated coffee kiosk in Shanghai last October
- In 2021, the fast-food chain sold around 170 million cups of coffee in China alone
- As China’s affluent areas become saturated, the focus has turned to its “third and fourth tier” cities
FROM THE breakneck expansion of Starbucks stores to the emergence of cafés backed by pharmaceutical firms, it’s been difficult to keep up with developments in China’s coffee industry of late.
Since the turn of the century, coffee consumption across the country has exploded, in part thanks to an expanding well-travelled, tech-savvy middle class. Last year, Shanghai became the city with the largest number of coffee shops and, if forecasts are to be believed, the market will exceed 200 billion yuan ($29bn) in value within the next two years.
Given the excitement around China’s burgeoning coffee industry, it came as little surprise last October when the fast-food fried chicken chain KFC widened its market presence by launching its first dedicated coffee kiosk in Shanghai.
The “KFC To-Go” window launched serving specialty single origin espresso (SOE) sourced from Guatemala at just 9 yuan ($1.30) – well below the average 30 yuan ($4.30) per cup of Starbucks coffee.
To maximise customer convenience, it was designed as a simple hole in the wall, meaning customers can avoid entering the store to purchase their coffee, and exclusively serves takeaway drinks. To promote its arrival, KFC held a free drink-tasting event two weeks before opening, which drew a wave of traffic.
The sale of KFC coffee is nothing new. Yum Brands, which operates KFC in China, reportedly sold 170 million cups in 2021 alone.
However, the launch of dedicated coffee kiosks is a clear statement of intent from the US chain. McCafé, the McDonald’s coffee sub-brand, stated just a month before the opening of KFC To-Go” that it planned to operate 3,500 outlets in China by the end of 2023.
Evidently, KFC is concerned it will start to lose out if it doesn’t bet a considerable chunk of its future on coffee market penetration. So what does this all mean for the likes of Starbucks and Luckin Coffee?
A false equivalence
KFC and McDonald’s would appear to be in pole position to take over China’s coffee market.
Having entered the country to considerable fanfare more than 30 years ago, they both command strong brand awareness among consumers and have pivoted well to keep up with changing tastes. KFC, for example, is known for its “glocal” menu, offering not only its signature fried chicken, but also traditional Chinese options such as congee, rice rolls, and steamed dumplings.
Gaining recognition as go-to coffee outlets, therefore, has been a relatively seamless process. As coffee has become increasingly important to young Chinese consumers, it hasn’t been difficult to convince them that one of their favourite fast-food chains can also cater to their caffeine craving – -articularly when it offers the same convenience and affordable prices.
The challenge, however, has been how to compete with coffee-first brands. Both international and domestic companies, including Starbucks, Tim Hortons, Blue Bottle, %Arabica, Luckin Coffee, Manner, and NOWWA, all have an increasingly strong presence across China.
Market share can only go so far – and despite rapidly growing figures, consumption per capita is still relatively low at just 9 cups per year.
Overlapping marketing strategies have become the norm. KFC and Luckin Coffee, for example, both use membership and discount cards, leverage official WeChat accounts to direct consumers to private domain platforms, and frequently send out coupons and advertisements for new products to drive consumption through repeated exposure.
There has also been a clear focus on delivering high-quality coffee – KFC’s new kiosks place a strong emphasis on single origin coffee beans in line with companies like Starbucks.
However, Li Hongkai, the founder of Chinese coffee media platform WAKA, suggests that the idea that fast-food and coffee chains are pitted against each other is reductive.
“I believe the two are more different than alike,” he explains. “For example, in terms of brand establishment, K coffee is a KFC subsidiary coffee brand established on the basis of KFC’s brand customer base, while someone like Luckin Coffee is a local brand with a customer base built from scratch.
“The former entered the Chinese market in 1987 and introduced American dining culture and a more ‘traditional’ understanding of coffee; whereas the latter is known for its product diversification and the speed of updates to meet consumer demand – which is more in line with young consumers.”
KFC has tried to break away from this association by partnering with other brands to cross-promote its coffee offerings. In 2018, it teamed up with music platform Kugou to create a music-themed store, offering consumers a unique coffee and singing experience.
And with the rise of camping during the pandemic, it partnered with car manufacturer Wuling Hongguang to offer “car trunk coffee”, breaking away from traditional coffee consumption scenes.
However, it still has the sense that it is playing catch up with coffee-first brands. This was reflected by its decision to exclusively offer Guatemalan coffee from its kiosks at a time when most domestic coffee brands have turned their focus on promoting Chinese coffees from Yunnan.
“Luckin, as a domestic brand, is highly representative and more suitable for China’s young consumer group,” Li Hongkai explains.
The battle for China’s third and fourth-tier cities
Most agree that China’s major metropolises such as Beijing, Shanghai, and Guangzhou, are near – if not already at – coffee shop capacity.
The battleground now, according to Li Hongkai, is China’s smaller and less developed cities – known as tier three and four cities. And it is in this target demographic that fast-food chains and coffee brands have found common ground.
“Nearly all brands are currently targeting lower-tier cities as the markets in first and second-tier cities have become saturated,” he says. “With a higher acceptance of coffee among consumers in third and fourth-tier cities, brands are looking to capture this market.”
And it is here he believes the likes of KFC and McCafé can thrive. “Luckin Coffee’s initial 9.9 yuan cup of coffee helped many white-collar consumers get used to its taste and lower the threshold of coffee. Now, K Coffee’s 9 yuan pricing further lowers the threshold for SOEs, with a focus on fast, portable, and low-threshold products.
“The difference between K Coffee and Luckin, however, is that K coffee can leverage its existing KFC stores without incurring additional costs, while Luckin needs to invest more in building its own stores.”
That said, the target market for KFC’s coffee kiosks are consumer bases with a high-intensity work and dependence on coffee. While it’s true that they have locations in third and fourth-tier serving fast-food, pivoting to promote their coffee may also incur significant costs – something Li Hongkai acknowledges could be key in the race to dominate the market.
“K Coffee still depends on KFC to some extent, while Luckin’s independent model may be more suited to the market.”
Whatever the outcome, the consensus is that the heightened competition is generally positive for China’s coffee market. Not only is it adding to the number of places Chinese consumers can pick up a cup of high-quality coffee, it is also driving more and more innovation. And that can only be a good thing.