China Thirsts for the World’s Tea

Photo by Dan Bolton

China’s 1.39 billion people already drink nearly 40 percent of the world’s tea – and they are thirsty for more.

China, the world’s top producer and the largest consumer of green tea, is now exploring black tea from India, Sri Lanka, and Kenya as well as European fruit and floral teas, American-inspired tea fusions and sophisticated oolongs from Asian producers.

China’stea market is valued at $10 billion (RMB67 billion) and expanding asout-of-home tea drinking leads to new discoveries. Modern tearooms featuring puercheese tea, colorful bubble tea, Hong Kong milk tea, and western-style blends,teaspresso, and fusions are profiting from young people’s interest innon-traditional offerings.

InWe in Shanghai and Vital Tea, a concept developedby ElementFresh, radiate a new vibe, leading the urban revival of tea.

Domestic Demand

Chinaproduced 2.8 million metric tons of tea in 2018 but even that is not enough tomeet demand, which has increased an average of 10 percent per year for the pastdecade. The growth has encouraged the Chinese to try ready-to-drink tea and teaconcentrates for preparing iced tea, formats that are relatively new to China.

Fruittea, herbal tea, rooibos, and even purple tea are in demand. Consumers thereprefer higher quality teas, often relying on third-party certification forassurances the tea is organic and sustainably grown. They are accustomed topaying much more per serving than Western tea drinkers. The best teas in Chinabring $1,000 per 500 grams. Everyday tea retails for $10 per 500 grams at thelow end and $15 per 100 grams at the high end. Nicely packaged tea, presentedas a gift, sells for $100-$500 per 500 grams. In China a cup of tea costs a fewyuan, a bottle of mineral water costs RMB2 ($0.30) and a small Coke is RMB5($0.75) while a can of local beer is RMB10 ($1.50).

Caixin reports “imports of tea were up by 33.9 percent in 2017 to a total value of $1.49 billion, according to a report released in November 2018 by the China Chamber of Commerce of Import and Export of Foodstuffs (CFNA), as part of the China International Import Expo in Shanghai.”

“Theincrease in imports also reflects ‘trading up’ as people want more of range,particularly ‘Western’ style tea, a trend catered to by a rising servicesector,” industry analyst Chenjun Pan told Caixinat the time of the report’s release.

SriLanka’s tea exports to China grew to 10 million kilograms in 2018. The largelyblack tea is sold in bulk and used for blends and bottled tea. Exports increased230 percent during the past five years with a 30 percent surge from 2016 to 9.9million kilograms in 2017.

In2018 India shipped 4.4 million kilograms of mainly black tea to China. India isthe third largest tea exporter to China, earning $25 million in 2018, but Chinais a small customer compared to Russia which buys 50 million kilograms of Indiatea annually.

Chinaimported 1.8 million kilos of Kenyan black tea in 2017 valued at $3 million.Kenyan exports have declined by half since 2011.

Economic Slowdown

TheEconomist Intelligence Unit’s monthly tea commodity report predicts that aslowing economy will temper domestic growth to 6.7 percent annually through2020 but even a small percentage increase leads to a massive gain in volume dueto China’s population.

Chinaexports only 15 percent of the tea it produces, drinking all the rest.

“The fact that although production is rising, teaexports are remaining stable indicates that local demand is rising firmly,”according to EIU. “But despite this strong growth projection, risks to ourforecast are primarily to the upside; average consumption per head stands atjust over 1 kilogram per year, ranking China 14th in the world. This leavesroom for growth, particularly as only around 35 percent of the populationdrinks tea.”

Teavana, a western tea company owned by Starbucks,caters to the new generation of tea drinkers trying tea lattes and fusions. In2016 the company introduced “tea reimagined” with drinks like matcha andespresso fusion and shaken iced teas like green tea with aloe, ruby grapefruitand honey and prickly pear flavored tea.

VeraWang, director of product line innovation for Starbucks China and Asia Pacific,said in an interview with Fortune, that consumers appear to begetting more sophisticated in their tastes. “The growing middle class” of Chinathat’s looking for new experiences “is very in line with what the Starbucksexperience is about,” she said.

InWe tea shop, Shanghai (Photo Courtesy InWe)

“Untilrecently, Chinese consumers were generally too new to the market to focus onanything beyond the basic functional attributes of most products,” writesMcKinsey & Company. “These shoppers were also historically quite pragmatic,particularly in making purchase decisions in prosaic product categories whereemotional connections aren’t strong,” according to McKinsey.

“Starbucksprospered by learning to create strong emotional ties as “occasion” products – emphasizing attributessuch as “the coffee break experience.” By 2012 emotional benefits had become atop-five key buying factor – and in many cases the top one or two,” accordingto McKinsey.

Willmodern tea replace traditional? Matthew Barry, a senior beverage analyst atmarket research firm Euromonitor International, says “It's not about onereplacing the other so much as multiple approaches co-existing at the same time.”

“Idon't think there is any risk of China stopping drinking domestic teas any timesoon,” he told Caixin.

China’s middleclass numbers 400 million, (140 million households) a market largerthan the entire U.S. population. In 2000 just 4 percent of China’s populationwas considered middle class. In 2018 that cohort had risen to 30 percent. McKinsey& Company, which defines middle class household earnings as$9,000-$34,000 per year, predicts the proportion of middle-class Chinese willincrease to 76 percent of households by 2022.

The entire middle class is oriented toward improving its diet, both in varietyand in the number of healthful offerings. Ren Hongbin, at CFNA points out that in the past two decadesfrom 1997 to 2017, the average compound annual growth rate of China's importedfood was 14.6 percent.

“In2017, China imported $66 billion of food, up 11 percent. Every year, Chinaimports large quantities of dairy products, aquatic products, meat products,fruit and nuts from more than 180 countries and regions, not only satisfyingthe diversified and personalized consuming demand of people, but also bringingrich returns to agricultural exporters,” said Hongbin.

In2019 China will spend $5.64 trillion at retail, according to market researchfirm eMarketer, while the U.S. will spend $5.53 trillion, making China for thefirst time the largestretail market in the world.

Source: Fortune,Caixin,ChinaDaily, McKinsey& Company, DezanShira & Associates