"Yunnan Coffee" May Be the Story Nestlé Wants to Tell Today, and Can't Tell Well

Instant coffee is Nescafé's biggest source of revenue and its biggest brand burden. At winning over young consumers, this company may not be nearly as deft as it needs to be.

Simao, the city in Yunnan renamed Pu'er in 2007, does not only grow tea.

It sits near the Tropic of Cancer. Below 1,000 meters, bananas and rubber trees grow in dense stands. Higher up, where the air cools, the band between 1,000 and 1,400 meters is now planted heavily with coffee. Apart from one small pocket of Hainan, this is essentially China's only coffee-growing region.

In 1892, a French missionary priest, Tian Deneng, planted the first coffee tree in Zhukula village, Binchuan county, Dali. That is generally traced as the earliest record of coffee reaching Yunnan. For the next hundred years the trees did not spread through the region. Only when multinational companies moved into Yunnan one after another in the late 1980s was this imported crop planted and put to use again, and exported around the world.

It sounds like a classic globalization story: Western civilization arriving once more in the mysterious Far East. But in an age when globalization is no longer a novel idea, Nestlé had gone a long time without telling it.

It picked the story up again at the end of October 2016. With the coffee cherries nearly ready to pick, Nestlé invited five media outlets to Yunnan to look at the trees, the coffee factory, and a mock bean-buying session at the Nestlé Coffee Center.

By now the word "Yunnan" has changed enormously inside the coffee world. At the consumer end, "Yunnan" has, after several years, finally made the menus of specialty coffee shops. It carries a trace of pride in local produce, and some sentiment about supporting growers at home. The more practical change has come further upstream. Chain brands such as Starbucks have in recent years built plants and buying operations in Yunnan too, and now sell Yunnan beans directly in large numbers of stores.

Nestlé is the largest operator in Yunnan coffee: it bought 12,000 tons in 2015, nearly twice Starbucks' volume. Yet it has rarely turned the region's terroir and culture into material for its own brand, treating Yunnan mostly as a supply source for export. The policy has been so steady that even now only one-fifth of what it buys there goes to the Chinese market.

Now Nestlé is realizing this is a good chance to improve its image in China. In March this year, when Paul Bulcke, then Nestlé's global CEO, flew to this city five hours by air from Beijing to cut the ribbon at the Nestlé Coffee Center, he told several outlets: "There is no doubt that China will also be Nescafé's biggest market in the future."

The company's awkward position is that the Chinese market is changing in ways both complicated and fast. In cities like Shanghai, Beijing and Chengdu, coffee chains and even specialty shops are expanding quickly, while the far larger world of small and mid-sized cities is extraordinarily varied. After years in China, Nestlé's greatest strength is a retail network as fine as capillaries, not chain stores taking one city after another, and the brand authority it built through television has faded.

This is not an easy business to run: Nestlé has to hold on to the sales it has while also raising the brand's weight in the minds of tomorrow's young consumers.

Nescafé's best-known product is still the instant line. This consumer good, which reached the mass market after World War II on the back of television, has always stood for convenience, practicality and low price. But to hold costs down it uses cheap raw material, robusta beans among them; and spray drying, the process that makes instant coffee, strips out the aroma, so the smell of the beans can only be put back afterwards with flavoring. All of this has steadily made instant coffee a synonym for poor quality, cheapness and artificiality.

The Nestlé Group also owns Nespresso, its higher-end capsule-coffee subsidiary, which sells both machines and capsules. The better beans among those it buys in Yunnan also go into capsules.

A coffee capsule is a sealed aluminum pod holding 5 to 6 grams of ground coffee. To extend shelf life, sterilize the contents and keep the flavor, the capsules are also filled with a non-toxic inert gas. Put into the right machine, a capsule is extracted quickly under high pressure into 40 or 110 milliliters of coffee.

Because it is positioned differently, Nespresso likes to open its own boutiques, often next door to luxury stores, to underline the high-end image. In the first half of 2012, Nespresso's sales reached about US$3.5 billion, with a 30% profit margin, nearly a third higher than Nestlé's other coffee lines.

Perhaps having seen Nespresso's pull on consumers, Nestlé launched a mid-range coffee machine in 2006, Nescafé Dolce Gusto. Priced around 1,000 yuan, the line was meant to bring convenience and relatively high quality into ordinary homes, though its capsules do not fit Nespresso machines.

As you would expect, the influence of these capsule coffees, including Nespresso, the sister brand at the same level, keeps growing, but it is nowhere near enough to change what the Nestlé brand stands for. According to Euromonitor, even counting hard capsules and soft drip bags together, Chinese consumers spent only US$5.6 million on the two in 2015. That is more than four times the 2010 figure, but still tiny beside the US$13.5 billion spent worldwide in the same period. Dolce Gusto and Nespresso have 70,000 and 19,000 followers on their Tmall flagship stores, next to 667,000 for Nestlé's official flagship store and 875,000 for Starbucks. And George Clooney, Nespresso's global spokesman, has landed in China about as coolly as the brand's own shops in high-end malls.

In 2015 Nestlé's market share was 71.9%, still short of the 72.5% it held in 2006. In April 2016 its Dongguan factory destroyed 400 tons of coffee to protect product quality, the largest coffee dump in the company's history in nearly 20 years.

But the number Nestlé's own staff keep citing is this: "The average Japanese drinks 360 cups of coffee a year; the average Chinese consumer drinks 4 to 6."

They still insist this is an enormous market, even though by any measure they are already a step behind.

Nestlé sees the danger. Talking to CNBC in early 2016 about the 2015 results, Paul Bulcke, then CEO, said growth in China had slowed but the base remained large. "Chinese consumers are changing fast, so we need a strong portfolio strategy, using local and international brands to meet their expectations."

One of the new moves is capsule coffee made from Yunnan beans. By Nestlé's account, the Yunnan capsules now on sale are not made at the Dongguan factory nearby; they travel to the far end of Eurasia to be processed at a plant in Spain, then come back to China as imports. On the Tmall flagship store they come in the same 16-capsule packs, at 4.37 yuan each, as the capsules imported from Britain and Germany. But Nestlé has deliberately played down the Spanish import and stressed instead that this is a "Yunnan limited edition."

At the same time, Nestlé is putting more money back into ready-to-drink and instant coffee. Next to capsules, this is the safer, older business. A report from the China Industry Information Network says Nestlé still holds 50% of that market with its 268 ml bottles and 180 ml cans. But that is a fairly rough count. In any convenience store in Shanghai you can feel how many more rivals Nestlé now has in ready-to-drink. Coffee-flavored drinks go without saying; even Starbucks faces the threat of own-brand coffee from convenience chains like 7-Eleven. Nestlé has little room left to take share here.

Judged by its products, Nestlé's thinking has not changed much. In June it launched Snow Coffee Mousse. The distinguishing feature of this ready-to-drink product, sold in "Cappuccino" and "Italian Roast" flavors, is that it has to be chilled to 4°C and shaken eight times before you drink it. It costs 7 yuan, aims at young white-collar workers, and sells mainly through convenience stores.

Underneath, it is all the same thing, packaged food, and the decline in that market is already visible. In 2015, packaged-food sales fell steadily, with pastries, candy and ice cream all down more than 11%. The United States is in the middle of a loud anti-sugar, anti-fat movement, which may be part of the background to Nestlé's change of CEO this September: the incoming Ulf Mark Schneider came from the German healthcare group Fresenius.

Many analysts read this CEO, the first Nestlé has hired from outside rather than promoted from within in 94 years, as a sign of a strategic shift from food toward medical and health products, which would also mean leaning less on packaged food.

But the future is the future. Like the numbers its employees keep repeating, the company has so far shown no sign of changing its traditional business. It has not gone into coffee chains the way Starbucks and Costa did, and it was unmoved when McDonald's and the convenience stores started selling freshly ground coffee.

If you have read QDaily's analysis of Nestlé's 150-year-old business model, you may know that the company's ability to expand quickly and globalize completely rested on more than its own ambition and nerve. Standardization, in office software, logistics technology, advertising and marketing and much else, greatly simplified its operations worldwide. That was a victory not only for Nestlé but for packaged food everywhere.

But those good days are running out.

To most people, Nestlé, or instant coffee to be exact, was beaten by Starbucks. But the deeper reason should be the change in what the young middle class wants from life.

In the 1980s, just after it entered China, Nestlé used warm television commercials to persuade consumers who knew nothing about coffee to accept this dark stuff that tasted like Chinese medicine. "Take a teaspoon of Nescafé, add hot water, sugar, creamer or milk, and you have a cup of fragrant, fresh coffee." At the same time Nescafé pushed its red packaging into the mid-to-high-end gift market, which for a while gave it a heavy middle-class flavor. The people most willing to take up this new thing were the young people of the day.

As China urbanized on a huge scale and young people poured into the cities, their work and their lives became completely unlike those of the 1980s or even the 1990s. This generation born in the 1980s and 1990s asked for consumer products that were more real, more convenient, more varied. Competition in drinks had reached white heat. Even with instant coffee, the new consumers would try different brands from Southeast Asia and Japan, let alone Starbucks, Costa, or specialty coffee where you choose the bean variety yourself.

In the hands of the new competitors, the product is the marketing. The flavors Starbucks rolls out each season, the different cups on its shelves, are far more nimble than an unchanging instant cappuccino.

It is not that Nestlé never tried marketing at young people. You may remember the subway ads it ran with Han Han, whose fee at the time ran into the tens of millions of yuan. In 2011, when it hired Han Han, Nestlé also changed its slogan, to "Dare to Be." As it happened, at the end of that year Han Han set off an argument with three blog posts, On Revolution (《谈革命》), On Democracy (《说民主》) and On Freedom (《要自由》), which indirectly helped the campaign beat expectations. But with no real breakthrough in the product itself, nobody knew what a cup of instant coffee had to do with "Dare to Be."

Playing the "Yunnan" card will not solve any of the problems Nestlé has piled up over the years. It is still, in the end, a company living off its traditional business.

Cover image from Wikimedia Commons, Nespresso