Key View: As Chinese consumers retain their spending focus on essential products during the latest wave of restrictions, we believe that food and beverage spending, particularly coffee spending, will post good growth over both the short and the medium term (2022-2026). Various companies, both domestic players and international companies, are taking advantage of this and entering the growing coffee market in China. These companies are aiming to leverage on the growing popularity of cafes and coffee chains to complement their key business offerings.
Lockdowns And Stay-At-Home Orders Force Spending Emphasis Towards Food and Beverage
Our Food & Drink team forecast a stronger emphasis on essential spending over 2022 as Mainland China continues to face economic uncertainty, caused by lockdowns and restrictions on the types of non-essential shopping allowed. Essential spending will grow by 6.7% y-o-y in 2022, compared to the 2.4% growth projected in non-essential spending. Chinese consumers' focus on essential spending and their immediate needs also feed into our forecast of strong growth in household spending on food and non-alcoholic drinks in 2022. As such, we revised up our forecast for food and non-alcoholic drinks spending over 2022, to 10.8% y-o-y, from the previous 9.6% pre-lockdown (January 2022) forecast.
Longer Lockdowns Forces Spending Priority To Focus Further On Food And Beverage
China - Food And Non-Alcoholic Drinks Spending, CNY % y-o-y (2019-2026)
Real Incomes Growth Bodes Well For Spending Recovery But Focus Still On Essentials
Despite the weaker economic environment forecast for the Mainland Chinese economy over 2022, we still hold a positive outlook for household incomes in the country going forward. In 2022, we forecast average household disposable income to post solid growth, growing by 5.9% y-o-y, to reach CNY112,800 (USD17,090), from CNY106,500 (USD16,514) in 2021. Effectively, this puts nominal household disposable income in 2022 at 18.7% above 2019 levels (in local currency terms), following a subdued growth rate of 3.1% y-o-y in 2020, a result of the heightened unemployment and reduced income resulting from the initial stage of the Covid-19 pandemic. Over the medium term (2022-2026), the average disposable income for Chinese households is forecast to grow by an average of 7.3% annually, from CNY112,800 (USD17,090) in 2022 to CNY151,800 (USD22,241) in 2026. Inflation is forecast to average 2.5% annually for the same period. This will result in the average household in Mainland China seeing their disposable incomes posting solid real growth over the medium term. While this would normally result in a greater willingness and ability to spend on discretion items, we believe that while Mainland China continues to pursue its 'Zero Covid-19' policy, the spending priority of households will focus on the essentials spending categories.
Positive Real Growth In Disposable Incomes
China - Disposable Incomes & Consumer Price Inflation (2017-2026)
Strong Growth Forecast For Coffee Spending In Medium Term
We believe the lockdowns, as well as the likely trajectory of restriction elsewhere across the country, have had both an economic and a psychological impact on Chinese consumers and that consumers' purchasing dynamics have moderated downwards in 2022. This would mean that the widely expected 'revenge spending' phenomenon is likely to be tapered even after lockdowns end in China. Depressed economic conditions and real income growths are likely to mean that consumers will defer big-ticket purchases and other discretionary spending categories like jewellery and furniture. However, we believe that the prolonged lockdowns would create a strong interest for in-person dining as consumers look forward to returning to cafes and restaurants for their meals instead of cooking at home. Coffee spending (through the Mass Grocery Retail channel) in particular, will benefit from this strong demand upon lockdown. Coffee spending will grow 10% y-o-y to CNY89.9bn (USD13.6bn) in 2022. Over the medium term, coffee spending will reach CNY146bn (USD21.4bn) in 2026, an average increase of 12.3% annually. We believe that the coffee sector offers good growth for companies looking to gain market share through innovative offerings.
Strong Growth In Coffee Spending In Mainland China
China - Coffee Spending, CNYmn (2020-2026)
We believe this strong growth in coffee spending through the MGR channel comes from a greater acceptance and demand for coffee products arising from the country’s rapidly developing coffee shop culture. A historically tea drinking nation, the country’s millennial and Gen Z population, who live and work in the urban centres, have been driven demand for coffee shops, while players (both domestic and international), like Luckin Coffee and Starbucks, have been rapidly expanding their store network across the major cities. As the sector develops, more unorthodox players will enter the market, to take advantage of the strong growth potential. In June 2022, Chinese telecommunications company Huawei announced plans to open more than 100 coffee stores in Shanghai, indicating the telecoms giant's intentions to enter the coffee market in China. In May 2022, the sports apparel retailer Li Ning also made a similar move, launching its in-house cafe chain Ning Coffee. Ning Coffee cafes are expected to be housed within existing brick and mortar Li Ning stores, currently numbered at over 7,000 in China. Apart from domestic players, international companies whose primary business unit lies outside of coffee, such as fashion retailer Ralph Lauren has also made foray into China's coffee scene. Ralph Lauren opened its first Ralph's Coffee store in Mainland China in Beijing in April 2022. Most companies are hoping their coffee business will be able to complement their core business offerings, attracting more foot traffic to their physical stores and building greater overall loyalty to the brand.
This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.