The author was a senior executive of a large tech-enabled coffee startup in China; he has decided to take an early retirement after selling his stakes (he had an earlier exit in the range of US$10 million a decade ago, and has invested most of the proceeds in the stock market). He prefers to be anonymous but accepts feedback through the TLD team (hello@mworks.asia).

The biggest lesson I have learnt, while running a coffee startup in China for the last couple of years, is to never try to educate the customers

It is costly, with uncertain results – and you might not even be able to benefit if it works out

The (growth potential of) the coffee market in China, my experience shows, is MUCH SMALLER than what many reports have claimed. 

The usual benchmark is that in Japan and Korea – traditional tea drinking East Asian societies – average coffee consumption per person is MUCH HIGHER than that of China. 

Different reports put consumption levels in Korea to be between 140-377 cups per person per year; and the reports I have seen put China’s level to be lower single digits. Even in the cosmopolitan city of Shanghai it is lower than 20 cups/year. 

So massive upside.

Also, we thought coffee would be highly sticky. If you become hooked to a cup of coffee every morning, or after lunch every day, you will not deviate from this habit. 

However, what those numbers fail to paint, is the reality of the market. 

First, it is less sticky than we thought. We have observed the coffee machines we have placed in the office buildings will each generate 30-50 cups of sales for the first 1-3 months, and very quickly dropped to 10-15 after that. And no matter what we did afterwards (with the exception of heavy discounts), the number just wouldn’t go up. The same happened across different cities, different types of office buildings in China. 

Second, we are really facing a generational issue here. In our company, we offered free coffee to all those who join us (and are issued a staff card), and charge 5 Yuan for each cup to those who do not have a card (e.g. new joiners who have not yet received their card). 

What we observed was interesting – some new joiners between 25-35 years old would actually pay 5 Yuan to buy it. Those above 35, even if you give them for free, they will not touch it – most are happy with just water, or tea. 

What happened to the rest of the young folks, especially those below 25? Well, what we have observed is that most of them would simply order bubble tea from delivery platforms, or buy packs of drinks such as Genki Forest. 

They just DO NOT DRINK COFFEE. 

Theories are that the coffee drinks actually either studied overseas, or watched too much US TV series. They picked up that habit over months if not years. Japan and Korea picked up coffee during the years of massive transformation – and bubble tea was not available then. 

It is generational, and use case driven. For those who do not have such a habit, it will probably cost us a lot to educate them – to the point that I do not think it is worthwhile anymore. 

The top sellers at Starbucks in China, as I observed (not based on actual sales data), are probably Frappuccino and Caramel Macchiato. Both contain much more sugar and dairy/fat than a normal cup of coffee – probably more caffeine as well .

If you are in the coffee business in China, you will not be surprised why Luckin Coffeee imploded. They probably figured this out a long time ago, but because of the high market expectations (of growth), did not have enough time to solve this and had to cover it with fake orders. 

Thanks for reading The Low Down (TLD), the blog by the team at Momentum Works. Got a different perspective or have a burning opinion to share? Let us know at hello@mworks.asia.