72 STiR tea & coffee industry international

By Si Chen

C hinese tea companies are attracting frugal middle class customers with “right size” pricing, value packaging and innovative tea café concepts.

Sales of consumer goods grew at 7.4% last year, less than half the rate of three years ago signaling a cooling of China’s $185.3 billion consumer goods market.

The slowdown forces both local and foreign brands to target the same middle class customers, according to a Reuters news service report:: “Increasingly, the domestic firms are winning: nearly two-thirds of foreign brands surveyed report lost market share in China, according to Bain & Company and Kantar World Panel.”

“The good domestic brands are able to play off the idea that they know how to develop something that a Chinese person is going to want,” Reuters reported.

Here are three trends demonstrating the resiliency and market prowess of Chinese tea retailers:

Tea service innovationsHow to serve Chinese tea? There is a renaissance of tea ceremonies in China but tea service means different things to different people. Tea houses now compete with cof-fee and international giants like Starbucks which enjoys worldwide fascination. West-ern influences are beginning to morph the tea-making style in China’s tea bars. Chi-nese retailers, inspired by Teavana, now serve tea alongside displays of retail products. Yunitea, a tea bar in Kunming (Yunnan province), offers eye-catching beverages like ‘Green Teapucino’ and ‘Caramel Black Teachiato’. Owner Wei Wen Bin, young and sharp and confident, describes his view of the changing market as he tamps 4 grams of CTC black tea before inserting the tea into a fancy Italian Espresso maker.

“Chinese tea has been cultural-laden for centuries, which has been heavy and out-dated for lots of young people,” said Wei. “I want to offer an alternative solution for people who are warded off by the tea tradition. Coffee should by no means be the only choice for the modern life-style. If they are in a rush, they can just grab something and leave.” What’s more, “if you really need to perk up,” Wei grinned, “I can make you a double tea shot. Wanna try?”

Long term prospects are optimistic despite the fact that wholesale and retail prices for the most prized domestic teas have dropped at least a third due to government enforced frugality policies following an anti-corruption campaign dating to 2012. Tea companies that specialized in luxurious high-end gift sets find “the loss nightmarish” writes STiR Tea & Coffee correspondent Si Chen.

China’s CleverlyEvolving Tea Retail

Tea retailing has a bright future in China according to the China Academy of

Social Sciences which reported the domestic tea

industry generated $80.6 billion in 2013 and

$1 billion in exports.

Matcha station at ‘Yutai Oriental’ cafe in Qianmen, Beijing

STiR tea & coffee industry international 73

Inside the ‘Yutai oriental’ café on the second floor of Wuyutai tea shop you can grind your own matcha powder us-ing a table stone mill. Patrons can stay as long as they like for RMB50 ($8). The store provides a complete matcha set in-cluding a Japanese whisk for those who want to drink freshly ground matcha.

Tea espresso and make-it-yourself matcha are new retail concepts. It is too early to tell whether customers will em-brace these and other retail innovations as China’s tea companies probe for cre-ative solutions to ambiguous challenges.

Convenient packagingCustomers walking through Wuyutai and Hua Xiang Yuan tea stores now find most products offered in small, conve-nient packages. According to the sales staff at several stores, tea tins of small quantity, such as 20 or 50 grams, are well-received by customers. The top selling product at Yu Cha Yuan, a tea supermarket in Beijing, has consistently been the mini Pu-erh cake, a moderately priced 6-gram individual pack.

Propelling this trend is the shift from the high-end buyers to less affluent con-sumers. Tea has long been one of the most popular gifts in China, especially among government and state-own enterprises who formerly reserved a fat percentage of their budgets for tea gifts. The price of tea gifts remained high because the money was com-ing from the state’s budget and not their own pockets. It was not a best practice by any

Wei Wen Bin, owner of Yunitea, is demonstrating the making of the tea beverages using an Expresso machine.

74 STiR tea & coffee industry international

means, but the tea retailing industry thrived on these high margin gifts. Luxurious gift-sets have always been an important portion of tea companies’ profits; some companies allocated their entire resources to producing tea gifts.

The impact of the frugality and anti-corruption campaign of 2013 is no less than a hurricane for affected industries. Beginning in late 2012, the central government cut expense budgets and instituted airtight supervision of lavish spending such as ban-quets, tours and the acceptance of expensive gifts. High-end restaurants, spas, hotels and the gifting industry have been impacted severely. According to one government officer, the 2013 budget for banquets hosted by his department was a mere 7% of the previous year. A series of corruption cases have deterred officials from violating the rules. Enforcement of the policy has been army-firm, which suggests these policies are not likely to fade away soon. As a result tea businesses are pressed to be innovative in terms of product design as well as business structures.

The result is greater attention to middle class consumers, a segment that will ex-pand to 186 million people by 2020. Small-quantity and individually packed products suit the need for daily usage; and for those accustomed to extravagant layers of packag-ing, the easy-to-use, standardized packages are refreshing.

From the perspective of consumer psychology, when making a purchase, consum-ers keep two prices in mind: the first is per capita tea or the ‘absolute price.’ This is the unit value based on what an individual consumes, calculated as the cost of drinking one cup of tea.The total depends on how many cups of tea one drinks per day, per month, etc. The second consideration is the ‘relative price.’ These are the actual dollars con-sumers must pay at the register. If a consumer feels comfortable at both price points, then one is likely to make the purchase. The challenge for companies is to make both prices appealing to customers.

Consider high-end green tea brand Zhu Ye Qing. Four different kinds of packag-ing are offered at a typical store. The first is a 20-gram tin containing 5 individual tea packets each containing 4-grams of tea. The tin sells for RMB65 ($10.50). The second offering is a 50-gram bag with 12 individual packages. A larger 100-gram bag contains 25 individual packages of 4 grams each. These sell for RMB158 ($25.50) and RMB268 ($43.20) depending on the grade. The largest “value” size is the 228-gram tin box which sells for RMB698 ($112.50). This includes 57 packets of 4-gram each. Individual pack-aging makes it easy for customers to calculate the ‘absolute price’, namely, how much they are paying per brew (i.e. 4 gram), which ranges from RMB10.7 to 13 ($1.72-$2) depending on the grade. Small packages of 25 grams or 100 grams sell for RMB65 to 158 ($10.50-25.00), which is viewed as affordable. The tea is not cheap, yet with a clear ‘absolute’ and ‘relative’ price point in mind, customers seem to be more comfortable in making an informed purchasing decision.

Highly processed teaTea companies now offer a range of tea-derived, highly processed products to increase sales. Examples include tea gum, tea candy, tea cakes and entrees. Hawley & Hazel’s Darlie green tea and jasmine flavored toothpaste is a top seller and there are even tow-els made of tea fiber.

Wuyutai’s tea ice cream, which debuted in 2009, is a remarkable example. The company’s three Beijing stores annually gross $325,000 each by selling up to $3,000 ice cream cones a day in only two flavors—green tea and jasmine tea—at $1 per serving.

On the Chinese version of Yelp—Dazhong Dianping, there are 932 rave reviews with an average ranking of 4.5 out of 5 for the ice cream sensation.

Reviewers compared Wuyutai’s tea ice cream with MacDonald’s and DQ’s, praising the slight bitterness of the green tea and the jasmine scent that make the treat authentic and unforgettable. Various travel books and websites insist that tasting the ice cream at the Qianmen Dashilan Street store is a must-do.

“Tea ice cream is a product that somehow goes beyond its basic function to cre-ate an emotional connection with the customer,” said Chen Xi, the public relations spokesperson at Wuyutai, “people feel like checking out our products while pampered by ice creams even when they have never thought of buying tea. The allure is hidden in the delight generated by the treats. ”

The result: Company revenue soared to $97 million last year.

Display of Zhu Ye Qing green tea at Wuyutai Tea Shop: the 20-gram tin pictured contains 5 individually pack-aged 4-gram servings.

Matcha stations at ‘Yutai Oriental’ cafe

Mini pu-erh cakes weigh 6 grams

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100-gram package (4-gram per package, 25 packages)

50-gram package

Wuyutai Tea Ice Cream (Green and Jasmineflavorsellfor$1acone).

Understanding the needs of Chinese consumers gives local companies an edge, according to Reuters. Privately owned Jiaduobao Group (JDB) makes canned herbal tea, claiming that the tea puts out internal “fires”, playing on a concept in traditional Chinese medicine. “Our cam-paign around ‘fearing internal fire’ has helped JDB herbal tea become the high-est selling canned drink in China,” senior executive Wang Yuegui told Reuters.

Online tea salesThe internet has ushered in permanent changes in Chinese life as tea companies jostle online for sales. In 2013 alone, the tea e-commerce industry reached a record high of RMB8.5 billion ($1.37 billion).

Efuton, established in 2008, recog-nized the rapidly-changing retail battle-field and was the first to launch itself as a tea e-seller at the heart of the phenome-non. Tailored to white-collar office staffs, Efuton offers a cost-effective solution with detailed guidance for tea selection along with an unconditional return policy.

The website has garnered three mil-lion online members and experienced exponential growth. It is now the biggest online tea seller in China with $32.2 mil-lion annual revenue.

E-mania has led to concern for tradi-tional brick-and-mortar shops that must compete with online prices while manag-ing greater operating costs.

“It is definitely crucial to have e-com-merce as a supplemental online presence,” said Lin Rong Xi, vp at Bama, “and the online sales have been steadily increasing. But customers are used to seeing cheaper prices online, a harmonized price tag of-fline/online turns customers away.”

“We are still at the infant stage of tea e-commerce,” predicted Wang Qing, vice chairman of China Tea Marketing Association.