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’s tea market is valued at $10 billion (RMB67 billion) and expanding as out-of-home tea drinking leads to new discoveries. Modern tearooms featuring puer cheese tea, colorful bubble tea, Hong Kong milk tea, and western-style blends, teaspresso, and fusions are profiting from young people’s interest in non-traditional offerings.
China produced 2.8 million metric tons of tea in 2018 but even that is not enough to meet demand, which has increased an average of 10 percent per year for the past decade. The growth has encouraged the Chinese to try ready-to-drink tea and tea concentrates for preparing iced tea, formats that are relatively new to China.
Fruit tea, herbal tea, rooibos, and even purple tea are in demand. Consumers there prefer higher quality teas, often relying on third-party certification for assurances the tea is organic and sustainably grown. They are accustomed to paying much more per serving than Western tea drinkers. The best teas in China bring $1,000 per 500 grams. Everyday tea retails for $10 per 500 grams at the low end and $15 per 100 grams at the high end. Nicely packaged tea, presented as a gift, sells for $100-$500 per 500 grams. In China a cup of tea costs a few yuan, 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.”
“The increase in imports also reflects ‘trading up’ as people want more of range, particularly ‘Western’ style tea, a trend catered to by a rising service sector,” industry analyst Chenjun Pan told Caixin at the time of the report’s release.
Sri Lanka’s tea exports to China grew to 10 million kilograms in 2018. The largely black tea is sold in bulk and used for blends and bottled tea. Exports increased 230 percent during the past five years with a 30 percent surge from 2016 to 9.9 million kilograms in 2017.
In 2018 India shipped 4.4 million kilograms of mainly black tea to China. India is the third largest tea exporter to China, earning $25 million in 2018, but China is a small customer compared to Russia which buys 50 million kilograms of India tea annually.
China imported 1.8 million kilos of Kenyan black tea in 2017 valued at $3 million. Kenyan exports have declined by half since 2011.
The Economist Intelligence Unit’s monthly tea commodity report predicts that a slowing economy will temper domestic growth to 6.7 percent annually through 2020 but even a small percentage increase leads to a massive gain in volume due to China’s population.
China exports only 15 percent of the tea it produces, drinking all the rest.
“The fact that although production is rising, tea exports are remaining stable indicates that local demand is rising firmly,” according to EIU. “But despite this strong growth projection, risks to our forecast are primarily to the upside; average consumption per head stands at just over 1 kilogram per year, ranking China 14th in the world. This leaves room for growth, particularly as only around 35 percent of the population drinks tea.”
Teavana, a western tea company owned by Starbucks, caters to the new generation of tea drinkers trying tea lattes and fusions. In 2016 the company introduced “tea reimagined” with drinks like matcha and espresso fusion and shaken iced teas like green tea with aloe, ruby grapefruit and honey and prickly pear flavored tea.
Vera Wang, director of product line innovation for Starbucks China and Asia Pacific, said in an interview with Fortune, that consumers appear to be getting more sophisticated in their tastes. “The growing middle class” of China that’s looking for new experiences “is very in line with what the Starbucks experience is about,” she said.
“Until recently, Chinese consumers were generally too new to the market to focus on anything beyond the basic functional attributes of most products,” writes McKinsey & Company. “These shoppers were also historically quite pragmatic, particularly in making purchase decisions in prosaic product categories where emotional connections aren’t strong,” according to McKinsey.
“Starbucks prospered by learning to create strong emotional ties as “occasion” products – emphasizing attributes such as “the coffee break experience.” By 2012 emotional benefits had become a top-five key buying factor – and in many cases the top one or two,” according to McKinsey.
Will modern tea replace traditional? Matthew Barry, a senior beverage analyst at market research firm Euromonitor International, says “It’s not about one replacing the other so much as multiple approaches co-existing at the same time.”
“I don’t think there is any risk of China stopping drinking domestic teas any time soon,” he told Caixin.
China’s middle class numbers 400 million, (140 million households) a market larger than the entire U.S. population. In 2000 just 4 percent of China’s population was 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 will increase to 76 percent of households by 2022.
The entire middle class is oriented toward improving its diet, both in variety and in the number of healthful offerings. Ren Hongbin, at CFNA points out that in the past two decades from 1997 to 2017, the average compound annual growth rate of China’s imported food was 14.6 percent.
“In 2017, China imported $66 billion of food, up 11 percent. Every year, China imports large quantities of dairy products, aquatic products, meat products, fruit and nuts from more than 180 countries and regions, not only satisfying the diversified and personalized consuming demand of people, but also bringing rich returns to agricultural exporters,” said Hongbin.
In 2019 China will spend $5.64 trillion at retail, according to market research firm eMarketer, while the U.S. will spend $5.53 trillion, making China for the first time the largest retail market in the world.