During Q1 2019, Coca Cola acquired Costa Ltd., a British coffeehouse company and planned to launch Coca Cola Coffee in more than 25 markets by the end of the year. According to Coca Cola’s official first quarter release, “the company will begin to leverage Costa’s scalable platform across formats and channels with the introduction of Costa ready-to-drink products.” Acquiring Costa Coffee allows Coca Cola to dive into a market they haven’t fully excelled in and a reason to diversify.

While China’s coffee consumption market isn’t as mature as their American counterparts, Starbucks still control a majority of the coffee shop market share in China. Despite Costa owning a relatively small portion, the company still hopes to expand its store count from 449 to 1,200 by 2022.

However, despite business benefits to both brands in the acquisition, Coca Cola coffee may pick up steam in China is avoiding saturated markets by focusing on smaller cities and strategic partnerships.

Monopolization

Starbucks and Luckin Coffee occupy more than a fair share of China’s coffee market, especially in first-tier cities such as Beijing, Shanghai, Guangzhou, and Shenzhen. The idea of coffee is already established. Therefore, emerging brands do not need to sell the product but only their brand. However, established brands such as Starbucks and Luckin Coffee do not only need to sell the product or their brand.

In smaller cities where the coffee market is less saturated, emerging brands stand a better chance at the concept of coffee is still new and unknown. Consumers in second and third-tier cities are also becoming wealthier and do not face as much financial pressure than their first-tier counterparts.

According to data published by Morgan Stanley, “consumption in China’s smaller cities could triple by 2030, thanks to favourable government policies, a population boom, higher household income and a stronger appetite to spend.” Their “stronger appetite for discretionary spending” attributes to “lower housing cost burden.” By 2030, consumption power from those in lower-tier cities is expected to reach USD 6.9 trillion.

A recent Chinese tea start-up is using this strategy to avoid competition. Recently opened Reinforcements of the Monkey (猴子的救兵), co-founded by a star athlete, ZHANG Jike (张继科), is focusing its efforts on smaller to medium-sized Chinese cities as larger tea start-ups HeyTea and Nayuki compete predominantly in first-tier.

Strategic Partnerships

According to CNBC, Coke Coffee targets a specific market: consumers during particular occasions such as energy during a mid-afternoon slump. Therefore, it’s meant to be convenient and easily accessible. Coca Cola also announced its “plans to start selling ready-to-drink Costa coffee products in European markets.” However, a possible tactic Coke Coffee could use is to sell its product through established convenient stores in China to cover more ground regardless in large or smaller cities.

Despite the emergence of coffee brands like Starbucks and Luckin Coffee, consumers still look toward convenience stores to buy tea and coffee, according to Deloitte. While not as much as “in-store food,” Deloitte argues that branding is an important measure for convenience stores to “[adhere] to the concept of providing high-quality goods with reasonable prices.” Therefore, Coke Coffee will see the benefit in partnering with various convenient stores effectively utilizing this concept.

According to Fung Business Intelligence, convenience stores and community stores have “been the fastest-growing retail format in China in recent years.” A report published by the Boston Consulting Group (BCG) and the China Chain Store and Franchise Association (CCFA), the sector reached CNY 190.5 trillion in 2017, a 23% YOY increase. Additionally, the total number of convenience stores in China exceeded 100,000, a 13% YOY increase.

Bottom Line

Coke coffee may not be the best appealing drink, and while it does not necessarily target the same market as Luckin Coffee and Starbucks, it may pick up steam in China’s lower-tier cities. However, it also depends on Coca Cola’s brand positioning as a coffee brand and how it controls its downward supply chain.

Regardless if Coke Coffee does or doesn’t pick up in China, the brand is well established elsewhere. It’s also likely that Coca Cola will follow up with innovative drinks in the future.