Investor alert: China is drinking a lot more coffee, and taking the supply chains off our exchanges

China is the fastest-growing coffee market in the world. There are now more coffee shops in China than in any other country, by far, up from virtually zero just twenty years ago.

It is instructive to observe how China is meeting this new, booming demand, because it is so similar to China's supply chain strategies across entire industrial and consumer sectors. For this presentation, we will follow the recent moves of Luckin Coffee. Luckin is now the biggest chain of coffee shops in Asia, with Cotti close behind, but neither company existed just ten years ago.

First, Chinese domestic companies will rapidly scale up production in-country. At the same time, Chinese companies overseas begin meeting with suppliers to sign medium-term contracts to ensure increased production abroad, with a "right of first refusal" on any excess production by those same suppliers.

Then, as Chinese demand grows further, entire supply chains shift, away from seasonal or short-term production represented by commodities contracts traded on global exchanges, to bilateral trades.

These trading arrangements are mutually beneficial. Sellers to Chinese firms lock in pricing over several years, which makes business operations and cash flow far more certain. And Chinese companies can largely ignore short-term price moves in global markets, and guarantee flow of raw materials to factories and stores.

Resources and links:

Photo archive, Starbucks Coffee in Xintiandi, Shanghai

Luckin Coffee blew past Starbucks in China; now it’s coming to the US
https://sherwood.news/business/luckin-coffee-blew-past-starbucks-in-china-now-its-coming-to-the-us/

China’s coffee production: A New Frontier in the Global Market
https://coffeebi.com/2024/08/23/chinas-coffee-production-a-new-frontier-in-the-global-market/

Why would a Brazilian billionaire buy a coffee farm?
https://intelligence.coffee/2024/07/billionaire-buys-brazilian-coffee-farm/

Luckin Coffee agrees $500m Brazilian coffee sourcing deal as Chinese demand soars
https://www.worldcoffeeportal.com/Latest/News/2024/June/Luckin-Coffee-agrees-$500m-Brazilian-coffee-sourci

Luckin Coffee will buy 240,000 tons of coffee from Brazil
https://www.forumchinaplp.org.mo/en/economic_trade/view/8455

Luckin Coffee strengthens Brazil trade with $1.38bn coffee supply deal
https://www.worldcoffeeportal.com/Latest/News/2024/November/Luckin-Coffee-strengthens-Brazil-trade-with-240,00

Coffee commodities charts, FINVIZ futures
https://finviz.com/futures_charts.ashx?p=d&t=KC
https://finviz.com/futures_charts.ashx?p=m&t=KC

A closer look at Chinese (dairy) consumers
https://hoards.com/article-34072-a-closer-look-at-chinese-consumers.html

The rise of China as the biggest beef buyer
https://www.cattlebusinessweekly.com/articles/the-rise-of-china-as-the-biggest-beef-buyer/

The Economist, China is now the world leader in coffee shops
https://www.economist.com/china/2024/08/08/china-is-now-the-world-leader-in-coffee-shops

BBC, Coffee price surges to highest on record
https://www.bbc.com/news/articles/c36pgrrjllyo

Closing scene, Hong Kong Polytechnic University

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