In 2020, the coffee market remained hot, with major events unfolding. Among freshly ground coffee brands, Luckin survived its fraud scandal and was reported to have achieved profitability at its operating stores in August; Starbucks planned to add 500 net new stores in China during fiscal 2020; Tencent invested in Canadian coffee chain Tim Hortons, accelerating its domestic expansion. In non-freshly ground coffee, premium instant coffee brand Saturns completed a B-round financing of over 100 million yuan in early September, with a valuation exceeding 800 million. Other leading brands in categories such as drip coffee and coffee liquid, including Shi Cui, Yong Pu, and Tianshang, also successfully raised funds; Yili's Saint Rui Si launched cold-brew sparkling coffee, and Nongfu Spring's coffee brand Tan Bing launched drip coffee, completing their product lines. ... The coffee market is flourishing. It is clear that not only freshly ground coffee is receiving attention, but premium instant and drip coffee are also favored by capital, and ready-to-drink coffee products are innovating. These new products cater to the needs of different cities and consumer groups. If you still think coffee is exclusive to first- and second-tier markets, you are mistaken. Various data indicate that in third-tier and below markets, coffee is showing rapid growth, even outpacing first- and second-tier markets. What exactly is driving the growth of coffee demand in lower-tier markets, what unique differences exist in coffee consumption there, and how can the coffee capacity in these markets be tapped? -01- Small-Town Youth 'Detach' from Locality, Expanding the Coffee Market To study the prospects of coffee consumption in lower-tier markets, we must first understand the definition, lifestyle, and consumption needs of these markets. According to the Digital 100 Research Institute, third- to sixth-tier cities correspond to municipalities down to rural areas, covering over 300 prefecture-level cities with a total population of 1 billion, approximately 71.4% of the total population, making them absolutely heavyweight in terms of population and geographic coverage. Data: Definition of lower-tier markets, Source: Digital 100 Research Institute Compared with first- and second-tier cities, consumers in lower-tier markets have more leisure time and less life pressure. Prices in lower-tier markets are generally lower, and mortgage pressure is generally less. According to data, 43% live with their parents (compared to 27% in first- and second-tier cities), and parents help with home purchases. Consumers have shorter working hours and commutes than those in first- and second-tier cities, giving them more time and energy for entertainment and enjoying life. Lower-tier markets have a high number of internet users, and they seek parity in lifestyle with consumers in first- and second-tier cities. There are approximately 670 million mobile internet users in lower-tier markets, accounting for 74.7% of Chinese netizens. The internet has narrowed the information gap between cities of different tiers, allowing them to quickly learn about the lifestyles, daily hobbies, and consumption habits of consumers in first- and second-tier cities and imitate them, reducing urban-rural differences. A representative group here is the 'small-town youth.' Compared with the previous generation or even the lower-tier market population of 10 years ago, they have a stronger desire to escape the geographical constraints of lower-tier markets. Their consumption concepts and levels are continuously improving, which is what we call 'detachment' (脱域). Data: Definition of 'detachment' for small-town youth, Source: Alimama According to Alimama's report "Insights into Lower-Tier Markets: Small-Town Youth in Spatiotemporal Detachment," the consumption of small-town youth is not just about purchasing goods, but also about choosing and creating a lifestyle. They need consumption symbols to achieve a sense of identity, and the lifestyle and label significance represented by coffee make it a good choice. Current small-town youth have a high proportion of experience living in first- and second-tier markets. According to data, 63% of small-town youth have lived in first- or second-tier cities, and compared to 2018, 9.4% of urban youth from first- and second-tier cities have returned to lower-tier markets. They may have already developed coffee consumption habits or have some knowledge of coffee, which is conducive to the spread of coffee. In fact, in 2020, more urban youth from first- and second-tier cities returned to small towns, bringing back the lifestyles and consumption patterns of first- and second-tier cities to third- and fourth-tier lower-tier markets. These young, knowledgeable, and taste-parity-seeking consumers are driving the growth of coffee sales in lower-tier markets. The growth rate of new users in lower-tier markets is higher than in first- and second-tier cities. According to CBNData research, the proportion of new users from third-tier and below cities is higher than from first- and second-tier cities; among new users, students and office workers are key consumer groups, and these two groups also have a very large user base in third-tier markets. Data: Composition of new coffee users, CBNData Consumer Station The demand for coffee is not only reflected in quantity but also in the pursuit of coffee quality. Ordinary instant coffee can no longer fully meet the needs of consumers in lower-tier markets, and more quality-oriented premium coffee is becoming increasingly popular. According to Tmall premium coffee consumption data, the pursuit of advanced coffee in lower-tier markets is evident: from 2016 to 2018, the proportion of online premium coffee consumers in third-, fourth-, and fifth-tier cities increased year by year, and the consumption of quality coffee increased. Data: Online coffee sales performance, Source: CBNData After the pandemic this year, coffee demand in lower-tier markets recovered quickly. In addition to the growth of the online coffee market, offline coffee consumption demand has also increased. According to Talking Data, in March and April, epidemic prevention policies in lower-tier cities were relaxed first, and lower-tier markets, accounting for 24% of national food delivery orders, showed strong coffee demand. In March, order volumes in third- to fifth-tier cities increased by over 100% month-on-month, and by April, volumes had recovered to 65% of pre-pandemic levels. Data: Recovery of offline coffee delivery orders, Source: Talking Data With huge market demand, coffee in lower-tier markets is beginning to show strong potential. Unlike the relatively mature market environment in first- and second-tier cities, lower-tier markets have unique market demands, which determine that the experience of first- and second-tier markets cannot be directly copied; market potential must be developed based on local conditions. -02- Lower-Tier Markets Need 'Appropriate Coffee' Currently, the domestic coffee market is complex and diverse. In terms of categories, freshly ground coffee, ready-to-drink coffee, instant coffee, drip coffee, coffee liquid, and other product forms meet the needs of diverse scenarios. Within the same type, traditional and upgraded products coexist and compete, such as Nestlé's 3-in-1 instant coffee competing with Saturns' premium instant coffee. In terms of brands, Nestlé and Starbucks compete with new brands like Saturns, Yong Pu, and Luckin, while also facing the ambitions of traditional beverage companies like Yili and Nongfu Spring in the coffee market. Due to differences in category maturity and consumption levels, these products compete and will coexist for a long time. The consumption standards and needs of lower-tier markets differ from those of first- and second-tier markets. They need the right coffee, not just expensive or higher-end coffee. Therefore, there are special needs distinct from first- and second-tier markets. We need to better understand the current coffee supply in lower-tier markets to provide targeted solutions. The mismatch between supply and demand for freshly ground coffee in lower-tier markets favors the development of instant and ready-to-drink categories. Globally, freshly ground coffee accounts for about 87% of consumption, while in China it is less than 20%, and the number of coffee shops in lower-tier markets is even smaller. First- and second-tier markets have more coffee shops, covering larger areas and more consumer groups. Looking at well-known domestic chain brands, they all focus on first- and second-tier markets. Starbucks has only 10% of its stores in third-tier and below markets, estimated at about 500 stores across the vast lower-tier market. In addition to specialty coffee shops, fast-food chains like McDonald's and KFC also offer coffee products in first- and second-tier markets, and convenience stores like Lawson and 7-Eleven leverage their location advantages to provide convenient freshly ground coffee for white-collar workers. These stores are more prevalent in first- and second-tier markets. Data: Distribution of chain coffee shops, Source: Talking Data In third- and fourth-tier cities, the number of chain coffee shops is smaller or even zero. According to statistics, except for Jiangsu, Zhejiang, Fujian, and Guangdong provinces, most county-level markets do not have Starbucks. Only some local single-store coffee shops exist, limiting the coverage of freshly ground coffee. This gap in coffee shop distribution provides development space for instant, drip, and coffee liquid categories. Data: Distribution of Starbucks in county towns, Source: Tieba data Brewed coffee can better meet consumers' coffee needs, reducing dependence on environment and equipment. According to Digital 100's research, in third- to sixth-tier markets, instant coffee is a category with currently low penetration but high future growth index, with a growth index far higher than in first- and second-tier markets, further validating the market potential of the category. Data: Coffee growth index by city tier, Source: Digital 100 Research Institute Lower-tier markets need consumption upgrades, and traditional instant coffee can no longer meet demand. Coffee in lower-tier markets not only has great potential but also has upgrade needs. Consumers in lower-tier markets are transitioning from material-scarcity consumption to quality-scarcity consumption. They have complaints about many current products and have urgent needs for product upgrades. They dislike products with many additives, unhealthy, high-calorie options, and prefer fresh, well-known, tasty, and easily accessible products. Data: Consumption pain points and needs by city tier, Source: Digital 100 Research Institute It can be said that ordinary 3-in-1 coffee can no longer fully meet requirements, and new coffees with better taste and more refined appearance are receiving attention, such as Saturns' 0-6 premium instant coffee and Tianshang's concentrated coffee liquid. These products have significantly improved in craftsmanship and packaging, and their high 'photo rate' (the probability of users taking photos and uploading images after purchase) can also serve as social currency, allowing consumers to better convey their taste for refined living. Data: Images of Saturns, Tianshang, and Shi Cui coffee, Source: E-commerce websites In lower-tier markets, product upgrades should be moderate, not excessive. Price-performance ratio remains a key concern in lower-tier markets. High-priced, high-quality products may not necessarily lead to high sales; products with some upgrade but with prices not much higher than conventional products have greater market potential. This is evident from the performance of beverages in lower-tier markets: micro-upgraded products like Chaπ, Xiaoming Tongxue, and Baishuishan have high praise, while over-upgraded products like Vita Coco and sugar-free tea drinks perform poorly. Yuanqi Forest's tea drinks and sparkling water also show significant differences compared to first- and second-tier cities. Therefore, when choosing coffee, consumers consider better taste and health, but upgrades are still based on price-performance ratio. Data: Beverage performance by market tier, Source: Digital 100 Research Institute -03- Seizing the Blue Ocean of Coffee in Lower-Tier Markets As mentioned above, coffee in lower-tier markets is in a rapid growth phase. Seizing the opportunity in this blue ocean market can help establish new brand advantages. First, introduce upgraded products, stay ahead of consumption upgrades, and occupy the upgraded market early. Consumers in lower-tier markets have upgrade needs but also focus on high price-performance ratio. Therefore, premium instant coffee with price advantages, as well as better-quality drip coffee, coffee liquid, and ready-to-drink products, are more likely to gain consumer recognition. Distributors need to find high-value brands that meet consumer needs to compete for market share. These brands currently have low market share, but being in the growth stage, their future prospects are attractive. Second, pay attention to the first cup of coffee for target consumer groups. Post-90s and Gen Z are key coffee consumer groups. These consumers are in the early stages of their careers or under academic pressure. If they can be cultivated to form high-frequency consumption habits, it will bring sustained and stable consumption conversion in the future. Therefore, developing the campus market is very important. This can be done through back-to-school activities and bundling with stationery and cultural products closely related to the consumer group to strengthen communication. For white-collar workers, market expansion can be carried out in concentrated business office areas, using consumers' social sharing to create viral effects and promote brand conversion. Third, use a combination of online sales channels to guide consumption conversion. Lower-tier markets have developed internet access, so internet entertainment products can be used to reach lower-tier users. Content and products should be simple and interesting. Short-video e-commerce and flash-sale e-commerce with entertainment and cheap attributes can guide scenario-based consumption, and flash-sale platforms like Vipshop and Pinduoduo with cheap attributes can bring better consumption conversion. Data: Comparison of e-commerce shopping sites by market, Source: Digital 100 Research Institute In lower-tier markets, making products internet-famous and fashionable can promote consumption conversion. Compared with first- and second-tier cities, consumers in lower-tier markets are more likely to purchase due to internet celebrity recommendations and IP collaborations. Taobao and Tmall research shows that after being recommended by internet celebrities they like in short videos, young people in third- and fourth-tier cities are more than twice as likely to buy the same snacks as those in first- and second-tier cities. -04- Creating a 'Starbucks' for Lower-Tier Markets Although there are fewer freshly ground coffee shops in lower-tier markets, this also means less competition, and there is still an opportunity to build new coffee brands for these markets. The demand for freshly made beverages in lower-tier markets is not low, as evidenced by the good performance of milk tea and other tea beverage brands in these markets in recent years. However, unlike high-end brands like Heytea in first- and second-tier markets, brands like Mixue Ice City and Guming are more common in lower-tier markets. These brands have unique operating methods in lower-tier markets. The Digital 100 Research Institute report mentions that the roadside economy is an important component of lower-tier markets, and the street-side store resources in these markets should be fully utilized. This is very evident in brands like Mixue Ice City. Unlike Starbucks and Heytea, which often have stores of several hundred square meters, lower-tier market brands mostly use street-side stores with small areas and low costs. Mixue Ice City stores are about 30 square meters, simplifying the third space, with the brand focusing on products. They develop products that are more suitable for lower-tier market consumers in terms of price, specifications, and consumption needs. Adopt a dense store-opening model. Guming has nearly 4,000 stores, while Mixue Ice City has exceeded 7,000 stores. These stores have become defining brands for freshly made tea drinks among lower-tier market consumers. These street-side stores can cover more consumer groups and reduce raw material costs through high demand, further optimizing product quality. Taking Guming milk tea as an example, it is understood that Guming's strawberry ingredients are equivalent to top-tier brand quality, but at half the price. Product prices meet the requirements of lower-tier markets, and best-selling products are particularly affordable. For example, at Mixue Ice City, hot-selling products are mostly priced at 5-6 yuan, with most products under 10 yuan. Sales are also impressive, such as the Full Cup Passion Fruit selling over 100 million cups a year. Coffee product innovation is lower than that of milk tea, and there is a high requirement for consistency in quality, while the standardization of coffee processing is more conducive to consistency across chain stores. Currently, competition in the dessert and tea beverage chain market in lower-tier markets is fierce, but competition in the coffee category is still mild, and it may give birth to a 'Starbucks' brand for lower-tier markets, a 'Mixue Ice City' of the coffee world. Summary As Chinese and Western cultures become more transparent, consumption habits are increasingly converging. Bread and milk are gradually replacing soy milk and fried dough sticks in the breakfast market, and coffee with unique flavors and prominent functions will also occupy a place in contemporary life. The vast blue ocean opportunities in lower-tier markets bring new possibilities for coffee and will inevitably affect the new landscape of the entire coffee brand industry. Tips will be paid 400-2000 yuan upon adoption.