Instant coffee encounters challenges Can new products such as capsule coffee help Nestle?

"Coffee's home."

Juerg Zaugg, Nestle SA's director of agricultural services for Greater China, holds a cup of Dolce Gusto Yunnan limited edition espresso coffee and banters with local coffee farmers at a coffee farm in the mountains of Puwen Town, Xishuangbanna Dai Autonomous Prefecture, Yunnan Province.

In September this year, Yunnan local coffee beans produced a limited edition of Duoqu Kushi capsule coffee officially entered the Chinese market.

In 2015, Nestlé, the world's largest food producer, purchased more than 12,000 tons of coffee beans in Yunnan, of which 80 tons of selected coffee beans from seven suppliers were exported to Nestlé's factory in Spain at the other end of Eurasia, refined into multi-fun Yunnan limited edition capsule espresso coffee, which was sold in more than 70 countries around the world.

Puwen Town is more than 1000 meters above sea level and more than an hour's drive from "Nescafe Center" in Pu 'er City. Local Nestle employees have given this coffee producing area in southern Yunnan a romantic name,"Coffee in the Clouds."

Yunnan is one of the few areas in China suitable for growing coffee. It is close to the Tropic of Cancer, which is the theoretical northern boundary of coffee cultivation. The mountainous landscape and abundant precipitation provide good conditions for coffee cultivation. More than 100 years ago, some foreign missionaries brought coffee beans to the western and southern mountains of Yunnan for planting. After the reform and opening-up, there were still some sporadic farms growing coffee, but because the domestic coffee consumption market had not yet formed, Yunnan coffee production was not high at that time, and the quality was not satisfactory.

In the 1980s, Maxwell and Nestle entered the Chinese market successively, and their instant coffee brought the first coffee enlightenment to China. In 1988, Nestlé began purchasing coffee beans in Yunnan Province. "In that year, Nestle's total purchase volume in Yunnan was only 86 tons, barely filling 4 containers." Gonzalo Contreras, manager of agronomic services at Nestle China Coffee, told Interface News.

Kong Zanlong, from Mexico, is the sixth generation of Nestle experts stationed in Yunnan to provide technical guidance and training to local coffee farmers. In March this year, Nestle Coffee Center was completed in Pu 'er City, Yunnan Province. Nestlé also regularly sends staff to the countryside to provide technical guidance to coffee farmers in areas such as breeding, cultivation, processing and pest control, and to help its suppliers pass certification standards from international sustainability organizations such as the Rainforest Alliance and the 4C Association.

Catimor coffee beans, a small Arabica coffee bean, are currently the most widely grown in Yunnan. In addition to supplying raw materials for Nestle's two solid beverage factories in Guangdong and Shandong, more than 80% of them are exported overseas as raw materials for coffee blends or as single-serve coffee. Nestle has also spared no effort to create the brand of "Yunnan Coffee". In addition to the just-launched limited edition capsule coffee, Nestle has also launched Yunnan-themed packaging gift boxes many times before.

At present, China ranks 11th in the world in total coffee bean output, surpassing Mexico, Nicaragua, Costa Rica, Cote d'Ivoire and other Central and North American and African countries, among which Yunnan coffee output accounts for more than 90% of China's total output. Yunnan coffee beans per hectare yield can reach 2.5 tons, the world's leading level. Yunnan coffee can be an option for coffee makers looking for alternative sources when drought or disease threatens major producing regions such as Brazil.

With the reduction of Brazilian coffee beans in recent years, more and more foreign traders have begun to visit Yunnan frequently to seek cooperation with local suppliers. Starbucks Corp. since 2010 Started building farms in Yunnan in an attempt to further control upstream raw material production. Switzerland-based trading company Ecom agroindustrial corp.ltd, Volcafe and French trading company Louis Dreyfus have all set up shop in Yunnan.

Although Nestle is still the largest local buyer, purchasing more than 10% of Yunnan's producing areas, the increasingly noisy coffee trade market has made Nestle, which has been deeply cultivated here for more than 20 years, nervous. At present, China consumes 4 to 6 cups of coffee per capita, which still has huge market potential, but the traditional instant coffee category seems to have difficulty meeting the increasingly picky tastes of consumers. It seems that more consumers in first-tier cities have become accustomed to going to cafes to buy a cup of freshly ground coffee. According to a report by consulting firm Mintel, the market share of instant coffee has fallen from 80.7% in 2009 to 71.8% in 2014 over the past five years and will continue to decline, with instant coffee market share expected to fall to 66% by 2019.

In early 2015, Nestle destroyed more than 100 tons of instant coffee at its Dongguan plant. Although Nestle clarifies that it is only a normal packaging update and the destruction of temporary inventory products, there are still many doubts in the industry about whether Nestle Coffee is no longer in the spotlight. Maxwell, another popular instant coffee brand in China, confirmed last month that its Guangzhou plant would be discontinued and that products for the Greater China market would be supplied from its Bangkok production base in Thailand.

Nestle, which has firmly controlled the Chinese instant coffee market for many years, naturally understands that the good days of eating fresh food are over. While Nestle says its instant coffee category continues to grow positively, it is also trying to introduce more coffee products in the hope that innovative products will drive sales growth further.

Dokusi is a capsule coffee machine launched by Nestle in cooperation with Italian appliance company De 'Longhi. It entered the Chinese market in 2014 and currently has 6 models with different specifications. Compared with Nestle's previous high-end brand Nespresso capsule coffee machine, Doozy is more affordable, with each capsule selling for between 3 and 5 yuan. The machines and capsules are currently imported from overseas.

Ready-to-drink coffee (RTD) is also Nestle's new direction. According to Euromonitor statistics, China's ready-to-drink coffee retail channel sales reached US $2.645 billion (about RMB 17.91 billion) in 2015, nearly 10 times the market size in 2010, and the compound annual growth rate in the past five years reached 23.4%.

Competition in the ready-to-drink coffee market seems to be fiercer than instant coffee. Uni-President, Starbucks, Coca-Cola, China Resources Kirin, Suntory, Wahaha and other major beverage enterprises all hope to share a piece of this high-growth market. Nestle's greater advantage lies in its brand and channel. Through the developed sales network of local enterprises such as Yinlu acquired before, canned Nestle instant coffee takes the lead in occupying shelves in small and medium-sized cities of the third and fourth tiers, temporarily occupying the first place in the market competition.

According to Nestle Group's financial results for the first three quarters of this year released this month, it recorded an organic growth rate of 3.3% in the first nine months, with total sales of 65.5 billion Swiss francs (about 446.45 billion yuan), and lowered its organic sales growth target for the whole year from 4.2% to 3.5%.