The development of a coffee culture can be visualised as occurring in different waves. The first wave is when coffee is introduced to the market in the form of mass-produced brews. The second wave focuses on tastes and roasting styles and brings “espresso beverages” to the menu via coffee chains such as Starbucks and Peet’s.
The coffee scene in Asia is exploding, but many countries have yet to experience the "third wave" of cafe culture.
The third wave is when coffee becomes more of a craft, emphasising the quality and origin of the beans. This particular wave introduces coffee drinkers to baristas and to bean growers as well. Observing cafe culture in different countries along these waves helps position our businesses better toward increasingly competitive cafe markets.
First observation is in Vietnam which has a deeply rooted coffee culture from the French colonisation. Yet, it is still considered to be in the early stage of the second wave. While many consider coffee to be synonymous with espresso, or Americano, these beverages won’t be found in any local Vietnamese coffee shop. Instead, traditional coffee in Vietnam is generally the dark drip coffee with thick sweetened condensed milk that can be found in every street cafe. The first coffee shop chain, Highland Coffee, did not appear until 2002, and more local players have entered the market.
Nevertheless, independent coffee shops still dominate the market in terms of number and valuation, and still record double-digit growth. Serving local coffee flavours, independent coffee shops in Vietnam began to provide comfortable seats and Wi-Fi to attract teenagers and young workers. It remains to be seen whether Starbucks, who only entered Vietnam in the beginning of 2013, will be able to penetrate the market with its strong coffee offering and create a modern coffee culture as in the modern westernised world.
While a coffee culture gradually picked up in Vietnam, for China it was a completely different story. The interesting story about China is that it has been a land of tea for more than four thousand years. However, the arrival of the Seattle-based giant Starbucks at the end of the 20th century played a significant role in building a coffee culture in China and, to be precise, associating coffee with an aspirational lifestyle.
Thanks to the success of Chinese economic reforms between 1978 and 2000, the country has been growing at an exponential rate, benefiting from foreign direct investment (FDI) growth as well as fueling domestic consumption, and resulting in coffee chain market growth of 64% annually. After coffee giant Starbucks’ outstanding financial achievements, more and more foreign players found China a promising market and decided to enter.
For younger generations and the newly rich, the cachet of drinking coffee in the warm, comfortable ambiance of a foreign coffee shop is enticing. Nonetheless, the question remains whether or not the Chinese really like the taste of coffee or just like the experience and status they get from sitting in a Starbucks. It is not surprising to learn that Starbucks’ classic black coffee might not be as popular as the sweetened specialty drinks that locals favour, such as red bean frappuccino and green tea latte.
In contrast with China and Vietnam, a more sophisticated coffee culture is gradually emerging in Thailand. In the past, traditional coffee and instant coffee were widely consumed and were an integral part of Thai culture. The turning point toward a more modern coffee drinking style occurred 20 years ago when the Black Canyon chain emerged, followed by Starbucks in 1998.
These coffee shop chains changed consumer behaviour, making coffee the beverage of choice in the morning hours. This particular trend triggered higher coffee consumption in Thailand, resulting in a healthy 7% compound annual growth rate (CAGR) between 2008 and 2012 in the consumption of coffee beans, fresh ground coffee, instant coffee, and ready-to-drink coffee.
This behavioural change toward a more westernised lifestyle can be witnessed from the expansion of coffee stalls and coffee stores chains nationwide. In 2007 alone, four new foreign players, namely McCafe, Segafredo, Gloria Jean’s and Caffe Ritazza entered the market to reap the benefits of the growth in coffee consumption. After that, different types of coffee shops were opened, including boutique coffee shops along Sukhumvit road, local coffee shops chains such as True coffee and Cafe Amazon, and street-side coffee kiosks.
The growth within the chain segment has been stronger than growth for independent shops and will continue to grow well. Per capita coffee consumption is still low in Thailand compared to developed markets such as Japan and the United States. However, like a double-edged sword, as coffee shop chains grow and build a strong coffee culture in Thailand, they must bear in mind that consumers will be increasingly demanding. To be precise, consumers will become more sophisticated. With standardisation, coffee shops chains will have to compromise on the experiences that consumer might receive. Not only that, with cost concerns over investment, coffee shop chains will not likely invest in locations without enough traffic to justify high investment, leaving room for small lifestyle coffee shops to grow.
To be successful, independent coffee shops must differentiate themselves moving toward the next wave of coffee culture. In Australia where coffee drinking is sophisticated, small local lifestyle cafes are often more successful than chain coffee shops, and many people will drive past a Starbucks to go to a cafe offering coffee they prefer. Thailand is now moving in the same direction, but perhaps at a slower pace. Specialty cafes have opened up along high-traffic areas, but are still restricted primarily to the Thong Lor and Sukhumvit areas. These specialty coffee shops must offer a new experience by providing nice decor, comfortable seats, Wi-Fi, unique food offerings, and a wider variety of beverages. One advantage local shops enjoy is that it will always be easier for them to adapt to local lifestyles.
Thailand is buying a ticket to a third-wave coffee culture where coffee is all about the flavour, not merely a caffeine fix. Increased coffee consumption will drive growth in the coffee shop market. Those who dream of opening a small coffee shop should quickly grab this growing opportunity. There is still room to grow in this highly competitive market, and those who adopt the right strategy will thrive.
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