Description
The article “China Millennials Switch to Coffee as Starbucks Pushes East” by Isis Ameida, Craig Giammona, Jiefei Liu, and Corinne Gretler analyses the demand growth of coffee and expansion of China’s coffee shop hence paving way for premium sales. The increased demand of coffee in China has attracted major brands such as Starbucks which extended its reach in the market with $1.2 billion deal to control over one thousand coffee shops (Ameida, Giammona, Liu and Gretler 2017). This article indicates that despite that the China’s coffee consumption volumes is low according to the global standards, there could have high impact over time as coffee consumption has shifted to more populous and tea drinking nations. Traditionally, China is a tea drinking nation, however, customers especially the millennials are increasingly taking up what has been believed to be Western culture of taking coffee at coffee shops.
The article asserts that as a result, the demand for coffee has increased drastically in China especially among the millennials. In a graphical comparison of coffee consumption in China, this article indicates that there has been a 16% annual increase from 2004-2005 to 2013-2014 (Ameida, Giammona, Liu and Gretler 2017). This increase in coffee consumption has been attributed to increased urbanization, increasing incomes due to economic growth, and a rising middle class with high disposable incomes. The authors in this article indicate that China is following the steps of Japan which was traditionally a tea drinking nation but later became one of the countries where coffee is taken in large volumes. As the demand for coffee increase, the supply will increase hence the decision by Starbucks to invest heavily in the market. This article reports that Nestle is the main coffee player in the market enjoying 66% and capital share of $1.1 billion (Ameida, Giammona, Liu and Gretler 2017). Despite that the demand for coffee in China is lower than the United States and Japan; there is high potential for growth indicating that retails will flock for position. A good example is Starbucks and Dunkin Donuts which are targeting the millennials in the market.
This essay will analyse the coffee market among millennials in China applying macro and micro- economic concepts and theories. These theories and concepts will be used to explain the growing demand for coffee in China and the reason as to why major global coffee retailers such as Starbucks and Dunkin Donuts are expanding into the market. This essay discusses the demand and supply factors influencing the consumer behaviours as well as the actions by coffee retailers with a focus on how economic growth increase demand for coffee. The price and non- price factors and their influence on demand of coffee in China among the millennials are discussed in this essay. Lastly, this essay offers a conclusion on the article and economic analysis of coffee market among the millennials in China.
This report focuses on the demand and supply and their influence on the consumption of coffee in China. Demand and supply are microeconomic concepts used in analysing economic situations. Economically, the law of demand explains consumer behaviours with regard to buying behaviours and habits. Demand can be defined as the amount of quantity of service or good desired by buyers in a particular market within a particular period of time (Madeline and Seidman 2011). The law of demand states that when the price of product increases, the quantity demanded decrease holding all factors constant and vice versa (Prasch 2008). As a result, there is a negative correlation between price and quantity demanded which result in a downward slope on the demand curve. This negative correlation is affected by income and substitution effects. Nonetheless, these two factors are not considered in this article. On the other hand, the law of supply asserts that when the price increases, the quantity supplied increase in order to increase profits (Madeline and Seidman 2011). Therefore, there is a positive relationship between price and supply.
Fig 1: Downward slope Fig 2: Upward slope
The changes demonstrated in the two curves above are caused by price changes. However, in this article, the changes in demand and supply of coffee in China are caused by non- price factors. Demand and supply of coffee in China are influenced by factors such as consumer preferences, changes in income levels, personality, perceptions, and expected prices in future among others (Yang, Hu, Mupandawana and Liu 2012).
As discussed in this article, the percentage of coffee consumption increased by 16% annually from 2005 to 2014 which is very high as compared to the global rate of 2% estimated by the U.S. Department of Agriculture. This article states that this increase in coffee consumption is contributed by the millennials. The millennials like travelling and socializing and hence their demand for coffee is influenced by personal and perception factors (Bantiwalu and Demisse 2011). Change in income is another factor that influences the changes in demand of coffee in China. China is an emerging economy with high economic growth prospects such as high GDP, low unemployment, and low inflation rates. Therefore, the millennials have high disposable incomes to purchase coffee even at high prices (Qian and Xing 2016). Therefore, unlike what is indicated in Fig 1 above whereby the quantity demanded decrease with increase in price, the quantity demanded increase even with increase in price. The quantity demanded would increase because of the increased number of customers interested in the commodity and their increased disposable income levels.
Fig 3: Change in demand due to non- price factors
Based on the Fig 3 above, as the price increase from P1 to P2, the quantity demanded increase from Q1 to Q2 indicating that the increase in demand is caused by non- price factors. China is an emerging economy and hence people are more stressed, working for long, and life has become faster. As a result, consumers are attracted to drinking coffee regardless of the price. The millennials are interested with taking up western cultures such as drinking coffee and socialization. As such, millennials drink coffee in coffee shops rather than at their homes so as to socialize with their peers. In future, the market may have reduced rates of tea consumption and increased rates of coffee consumption among the millennials if this trend continues in the future. The millennials are mainly found in cities such as Shanghai and Beijing among others and hence coffee suppliers are concentrated in these cities to tap the increasing demand.