For many of us in the West, waking up to the aroma of a pot of fresh-brewed coffee is one of life’s little pleasures. In fact, over the course of a year, the average American consumes the equivalent of roughly 9 lbs. (~4.5 kg.) of coffee beans. In Finland, that average is nearly three times higher!
But could this morning ritual catch on throughout Asia? In recent years, China’s annual per capita coffee consumption has been less than a negligible half an ounce (~0.01 kg.). This may help explain a statement I heard recently: “China will never be a coffee drinking nation due to their love of tea.” But is this view really correct?
Japan, which has the highest rate of coffee consumption in the region, was introduced to the brew at the end of the 18th century, with bulk imports starting in 1877. However, only in the 1960s did Japanese demand for java soar, notwithstanding its famous tea culture. Between 1965 and 1980 demand grew six-fold and these days Japanese consumers drink almost as much as Americans. Similarly, in South Korea, consumption grew considerably between 1982 and 1992.
Annual Coffee Consumption Per Capita (lbs. of beans), 2011
26.8 lb. (12.2 kg.)
9.3 lb. (4.2 kg.)
7.3 lb. (3.3 kg.)
4.8 lb. (2.2 kg.)
2.4 lb. (1.1 kg.)
2.3 lb. (1.0 kg.)
0.02 lb. (0.01 kg.)
While the region’s new coffee drinkers may be paving the way, it is unlikely demand in China will climb immediately. There are many challenges to growth—complexities surrounding the import of beans and coffee powder, material import duties and taxes, just to name a few. These factors have pushed the cost of coffee well above the reach of the average consumer. Currently, only the well-off lounge in the overstuffed sofas of Chinese coffee shops. But we know that times do change. And we may well see a sharp rise in demand over the next decade as global players and locals all enter this underpenetrated market.
Between 2012 and 2013, Starbucks opened 500 stores in China—more than it opened in the previous 12 years and the company has set a target of 1,500 stores by 2015. And they are not alone. Taiwanese, Korean, Singaporean and Australian chains, too, are all planning rapid expansions of their own chains. And this is even before the usual army of ubiquitous local competitors sets up shop. All these efforts combined could raise exposure, spread the taste for coffee and ignite demand.
Should Chinese demand build, global supply of the commodity could be strained. If China’s coffee demand approaches annual consumption even just below Taiwan’s relatively low 1 kg. per capita, then China would be consuming the equivalent to over 22 million bags (60 kg.) of coffee—accounting for around 24% of total exports, up from less than 1%. This kind of growth could have a big impact in a market where it took global exports a decade to increase only 4.4% while prices rose by 69%/lb. (ending in 2010).
We could see Chinese demand (not to mention demand from other emerging markets) impacting prices sharply. Once coffee culture in India starts brewing, let’s hope we can all still afford our favorite cup of joe. In a world of fairly static supply growth, it seems we might need to wake up and smell the coffee.
Opinion column by Robert Harvey, CFA; Portfolio Manager, Matthews Asia
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Robert Harvey is a Portfolio Manager with Matthews International Capital Management, LLC and co-manages the firm's Emerging Asia strategy. Prior to joining Matthews in 2012, he was a Senior Portfolio Manager at PXP Vietnam Asset Management from 2009 to 2012, where he focused on Vietnamese equities. Previously, he was a Portfolio Manager on the Global Emerging Markets team at F&C Asset Management in London from 2003 to 2009. Robert started his investment career in 1994 as an Assistant Equity Portfolio Manager with the Standard Bank of South Africa's asset management division.