Coffee is becoming increasingly popular, but Nestlé is not enjoying the same popularity. Once, Nestlé was almost synonymous with instant and ready-to-drink coffee. According to Euromonitor International, Nestlé's market share in instant coffee was as high as 72.3% in 2017, making it the undisputed industry leader. But now, its dominance is being slowly eroded by new brands. A coffee brand called Three Squirrels (三顿半) developed premium instant coffee that dissolves in 3 seconds. On Double 11 in 2019, it topped Tmall's coffee sales, becoming the first domestic coffee brand to surpass Nestlé. Another brand, Shicui (时萃), created a hanging coffee bag with a hemispherical filter cloth, named "Coffee Donut," which is irresistibly cute. Tianrun (隅田川), focusing on freshness, developed a cold-extracted, nitrogen-flushed fresh coffee liquid, offering better flavor options. Yongpu (永璞) is the master of co-branded coffee, having collaborated with over 400 brands to launch a series of visually appealing, interesting, and high-quality coffee products. ... These new brands are continuously fueling consumer frenzy. In contrast, Nestlé's 3-in-1 coffee appears somewhat plain and rigid. The former instant coffee giant is showing signs of decline. Why is traditional coffee losing to new coffee, and what opportunities has Nestlé missed in recent years? How are these new brands winning over consumers? -01- The Rise of New Consumer Groups Opens a New Landscape in the Coffee Market Undoubtedly, the domestic coffee market has huge potential. The compound annual growth rate over the past decade has exceeded 15%, far higher than the 2% in the US and 1% in Japan. Currently, the annual per capita consumption is less than 5 cups, and even in Shanghai, where coffee shops are denser, it is only about 20 cups per year, far below the US's 269 cups and Japan's 188 cups. The future of coffee is full of possibilities. As an imported product, coffee's early development benefited from the underdeveloped domestic economy and information asymmetry. In the 1990s, even instant coffee was rare, let alone freshly ground coffee. This created opportunities for Starbucks and Nestlé, which leveraged mature overseas business models and products to educate consumers and establish their brand positions. However, with the improvement of economic levels and the deepening of cultural exchanges between East and West, consumers have more opportunities to learn about coffee culture and taste different flavors, leading to new demands for coffee quality. As choices increase, coffee is not just a beverage but also a reflection of consumption taste and lifestyle attitude. Therefore, the coffee market is bound to undergo a new transformation. This transformation is first reflected in the shift of consumer groups. The post-90s and Generation Z are becoming the key focus groups for coffee. According to Tmall data, in 2017, over 60% of new users who made their first online coffee purchase were new to the platform. Among these new users, those under 29 accounted for a higher proportion than older users. These users are mainly young white-collar workers and students. However, a person in charge of the retail business department of Nestlé (China) Co., Ltd. Hangzhou Branch said that from the offline market perspective, the majority are middle-aged and elderly people over 45. Nestlé, which dominates instant coffee, may be losing the younger market. The needs that young people cannot meet offline have shifted online. The demands of post-90s and Generation Z consumers are vastly different from those of coffee consumers 30 years ago. They grew up in relative affluence, prefer domestic products, seek cost-effectiveness and high aesthetics, do not blindly follow big brands, and value the product's own characteristics. New products that can meet the needs of this consumer group have emerged. Brands like Huaxizi and Perfect Diary in the cosmetics market, Yuanqi Forest, Wang Baobao, and Mo Xiaoxian in the food and beverage sector, and Pop Mart in toys, are all developed based on precise insights into consumer groups. The needs that Nestlé's 3-in-1 cannot satisfy require new coffee products that express individuality and taste. Secondly, the shift in consumer groups brings richer consumption scenarios. According to Jiguang Big Data, although refreshing and energizing remains the main reason for coffee consumption, relaxation and leisure follow closely, with tasting coffee and habitual intake also accounting for over 20% each. Besides staying up late, scenarios like binge-watching shows and traveling are also main consumption scenarios for coffee. Data content: Summary of coffee consumption reasons, data source: Jiguang Research Their coffee consumption is also more diverse and interesting, with coffee consumption methods changing rapidly. Coffee can be paired with fruits, alcohol, ice cream, and other ingredients, sparking heated discussions on creative coffee consumption. Finally, based on the demographic dividend and scenario diversification, new brands and new categories in the coffee market are thriving. In terms of categories, there are different product types such as ready-to-drink, instant, hanging, freshly ground, capsule, and coffee beans. In terms of corporate strength, large groups leverage channel resources to seize market share, entrepreneurial brands focus on niche segments with capital support, and convenience stores and fast-food chains introduce freshly ground coffee to share the pie. E-commerce, supermarkets, new retail, and delivery channels are becoming increasingly mature, providing channel support for the growth of different types of coffee. Nestlé's camp is facing threats from all sides. The processing mode of ordinary instant coffee sacrifices coffee flavor, while freshly ground coffee is limited by regional constraints. Between the two giants, a new balance between flavor and convenience needs to be found. Moreover, there is a huge price gap between Nestlé's instant coffee at 2 yuan per sachet and Starbucks' 30 yuan per cup, providing ample room for new brands to grow. What products are replacing the first cup of coffee for young consumers? We analyzed popular products such as premium instant coffee, hanging coffee, and ready-to-drink coffee to identify the pain points and delights of young people's coffee consumption. -02- Premium Instant Coffee: A Higher-End Instant Coffee Premium instant coffee is showing strong growth momentum. According to feedback from Tmall's coffee category manager, Kun Cheng, the platform's coffee category grew by over 100% after the pandemic. Among them, the sales of premium instant coffee increased by over 1000% year-on-year. Brands like Three Squirrels and Yingji are performing exceptionally well. Three Squirrels Premium Instant Coffee Three Squirrels has been in the spotlight in recent years, completing a B-round financing of over 100 million yuan in early September. On Double 11 in 2019, its transaction volume was 10 times that of the previous year, surpassing Nestlé, which had dominated for 10 years. On 618 this year, it beat Starbucks and Nestlé to take first place in the brewing beverage category (coffee is a subset of brewing beverages). Founded in 2015, this brand has become a benchmark for the new upgrade of the coffee category. With its premium instant coffee concept, novel industrial design, and creative marketing, it quickly became a favorite among young consumers. The mini coffee cup is Three Squirrels' unique symbol and visual hammer. Its cute design and creative numbering from 1 to 6 make the product highly memorable. Three Squirrels redefined premium instant coffee. Using super extraction technology with cold brew extraction and intelligent drying, it better preserves coffee flavor factors. The finished product has zero additives, avoiding the consumption burden of traditional instant coffee's creamer, flavorings, and sugar. The product dissolves in 3 seconds and can be brewed hot or cold, further lowering the barrier to enjoying coffee. It can be used in outdoor settings like travel and picnics, allowing consumers to enjoy good coffee anytime. Compared to 3-in-1 coffee, which must be consumed hot, it can be served cold or warm, reducing the seasonal impact. Three Squirrels created numbers 1-6 to distinguish different roasting levels. Lower numbers have more fruity acidity, while higher numbers have stronger bitterness. Since it's hard for consumers to remember the characteristics of different roasting levels, simple numbers make it easier for repeat purchases and sharing. Three Squirrels chose the 5-10 yuan price range, which also defines its brand positioning: a substitute for a cup of freshly ground coffee. The product comes in 18, 24, 64, and 80-cup sets to meet the needs of first-time trial and bulk stocking. In terms of marketing, unlike Nestlé's traditional high-profile marketing, Three Squirrels excels in influencer marketing. In its early days, it used the food platform Xiachufang as a base to cultivate a group of coffee enthusiasts, continuously refining flavors based on user feedback, achieving a cold start for the brand. After the product matured, the brand launched the Navigator Plan, finding influential groups to help refine the product and promote user-generated content, creating opinion leaders. With its high aesthetics, it spread rapidly on Xiaohongshu, WeChat, and short-video platforms. As sales grew, the brand recently launched the "Return Plan" to recycle packaging, reducing the negative psychological impact of plastic packaging. The Return Plan also enhances the brand's influence in offline environments. In addition to Three Squirrels, brands like Yingji, Yongpu, and many other online brands have launched similar products. Unlike Three Squirrels, where numbers represent different roasting levels, Yingji uses different colors to correspond to coffee bean origin and roasting level. Concentrated Coffee Liquid Similar to instant coffee powder, concentrated coffee liquid is easy to dissolve and mix. It is mainly packaged in plastic film or mini cups, which can be easily poured into small-mouth containers, avoiding the issue of powder sticking to the bottle mouth. The product can dissolve in water, milk, oat milk, and other bases, and can also be used in desserts like pudding and ice cream to enhance flavor. Key brands include Tianrun and Yongpu. Tianrun uses mini cup packaging. In 2019, it was rated as Tmall's benchmark brand for coffee liquid, with cumulative sales exceeding 7 million cups. The product can be stored at room temperature with a shelf life of 420 days, available in original, slightly sweet black coffee, and caramel macchiato flavors. Each cup is 18g or 19g, with an average unit price of about 4 yuan per cup. Recently, it launched a 2.0 upgrade series with a concentration multiple increased to 13 times and a 30% flavor improvement, featuring low-temperature extraction and nitrogen freshness preservation. Yongpu's concentrated coffee liquid uses plastic film packaging and is a refrigerated product with a shelf life of 90 days. Low-temperature refrigeration better preserves the flavor. The product uses 8-hour ice-drip fresh extraction, and three Yongpu concentrated liquids are roughly equivalent to a Starbucks grande Americano. The price per strip is around 5 yuan. In terms of marketing, Yongpu focuses on brand collaborations, partnering with brands like Qipa Shuo, oat milk brand Oatly, Translation Publishing House, and QQ Music to launch co-branded products, earning the title of "Pop Mart of the coffee industry." Since its establishment, Yongpu has collaborated with over 400 IPs and co-branded partners, leveraging their influence to continuously enhance its brand awareness. Bottled Powder Coffee The representative brand for bottled powder coffee is Lian Coffee's Shake Shake Energy Coffee. The product concept originates from Silicon Valley's bulletproof coffee. In addition to coffee powder, it contains fat components, compound protein powder, and dietary fiber, providing caffeine while also offering nutrients and satiety, combining fullness and alertness. This product was launched by the original Lian Coffee team and comes in three flavors: original, sea salt cheese, and oatmeal. It is sold online in multi-bottle sets, with a single bottle priced at about 24 yuan, significantly higher than ordinary instant coffee. The product targets consumers with higher spending power, energy control needs, and high efficiency requirements. Compared to other instant coffees, its target audience is narrower but more precise. -03- Hanging Coffee: A Ritualistic Coffee with Participation For young consumers, drinking coffee is also an expression of life's rituals. If a bit of DIY is added, the ritual feeling is stronger. The difference between hanging coffee and instant coffee lies in the aroma that slowly emanates as you manually pour water over the hanging bag. Although hanging coffee developed earlier than premium instant coffee—for example, Colin's hanging coffee has a processing history of over 20 years—early hanging coffee was priced higher than instant coffee, and the acceptance of black coffee flavor was not high, leading to poor sales. As the coffee market matures, loyal consumers begin to pursue diversity and authenticity in coffee flavor. Hanging coffee, in the form of sealed coffee powder, maximizes the preservation of coffee flavor and has become a new choice for users. There are many hanging coffee brands, including established ones like Colin and Jinmilan, and newcomers like Shicui and Gan Coffee. Unlike Three Squirrels, which focuses on Arabica beans, hanging coffee more easily showcases the flavor characteristics of different origins and types of coffee beans. On Shicui's Tmall flagship store, there are 15 coffee bean options. Colin Coffee offers 10 flavor choices, providing consumers with more varied and authentic coffee enjoyment. In terms of design, most brands use ordinary hanging bag filter cloth, but Shicui and Yongpu cater to new consumers' aesthetic needs by using hemispherical filter cloth, creatively named "donut" or "UFO," distinguishing them from competitors. The price range for hanging coffee is mainly between instant and freshly ground coffee, also primarily 3-10 yuan, with variations based on brand positioning. Tianrun positions itself as a daily coffee, more affordable, with single-pack prices under 5 yuan and as low as about 2 yuan, gaining consumer recognition through high cost-effectiveness. Shicui, with its high aesthetics and unique donut design, occupies the 5-10 yuan price range. In terms of marketing, brands have performed commendably. Shicui's founder has a strong internet background, and its marketing methods are also creative, using subscription models to guide repeat purchases. Depending on the subscription duration, it offers bi-weekly, monthly, quarterly, and yearly subscription options. Through fully customized subscriptions, flexible combinations meet individual flavor needs, converting future repeat purchase investment into user discounts. At the same time, Shicui has increased investment in live streaming, conducting brand promotion and product sales in super anchor live rooms like Luo Yonghao and Viya, leveraging live streaming channels to enhance brand communication and reach new users. Shicui has become one of the four super brands in Tmall's Super Category Day for coffee. -04- Ready-to-Drink Coffee: Beverage Giants Enter the Fray In addition to brands like Uni-President, Wei Chuan, and Coca-Cola, the most eye-catching in recent years are the coffee product layouts of Yili and Nongfu Spring. Shengruisi Coffee Shengruisi is an important member of Yili's health beverage product line. In 2019, it launched its first latte series. In 2020, following the sparkling water trend, it launched two canned sparkling cold-brew coffees (original and calamansi lime flavors), with a flagship store price of 69.9 yuan per box (240ml*15 cans). The product focuses on sugar-free and zero-fat, and also adds dietary fiber, making it more suitable for consumers who like coffee flavor but worry about gaining weight. The product uses low-temperature cold brew to preserve flavor substances, offering a dual experience of sparkling water and coffee, ideal for cold drinks in summer. Nongfu Spring Tanbing In May 2019, Nongfu Spring launched its coffee brand Tanbing, positioned as carbonated coffee drinks at 5 yuan per bottle. To address the issues of weak flavor and excessive sweetness, it later launched a strong series with 40% more coffee concentration and 15% less sweetness, at the same price. In October last year, Tanbing struck again, launching three mid-to-high-end aluminum can series: sugar-free latte, low-sugar latte, and sugar-free black coffee. Maintaining Nongfu Spring's consistent high-quality design, these products score high on aesthetics. The low-sugar and sugar-free options, with no added flavorings or preservatives, align with current health demands. The products use unique coffee beans from small production areas. For example, the sugar-free black coffee uses beans from Brazil's Monte Alegre Estate, which emphasizes history, premium quality, and full traceability, ensuring the purity and richness of the beans. The products are roasted and extracted at Nongfu Spring's own roasting facility, reducing flavor loss and preserving coffee aroma and the unique fruity acidity of the beans. Whether in raw material selection, processing technology, or coffee evaluation, it is clear that Tanbing's high-end series is aligning with premium coffee standards. -05- Capsule Coffee: Nestlé's Potential Star Capsule coffee requires a compatible machine, so the entry barrier is higher than for instant or hanging coffee. However, capsule coffee machines preserve coffee flavor well, and the preference for capsules reflects consumers' recognition of coffee culture. Therefore, capsule coffee has become a choice for a niche group of enthusiasts. The domestic capsule coffee market is also expanding. According to Euromonitor International, in China's fresh coffee market over the past five years, capsule coffee grew from 11.5 million yuan in 2013 to 73.6 million yuan in 2017, an increase of 540%. It is expected that in the next five years, capsule coffee will grow from 95.7 million yuan in 2018 to 187 million yuan in 2022, an increase of about 95.4%. Capsule coffee is still dominated by Nestlé, with its two main brands, Nespresso and Dolce Gusto, almost monopolizing the domestic capsule coffee market. Due to early entry and mature technology, Nestlé's capsule coffee has advantages in both cost and channels. As for whether new brands will enter in the future, we do not think it is entirely hopeless. After all, instant and hanging coffee have made rapid progress domestically, and any industry or category is worth redoing with internet thinking. -06- Factors Behind the Success of New Coffee Brands Although Nestlé remains a brand that cannot be ignored in the coffee market, with the shift in consumer groups, traditional brands must pay attention to new trends and demands, and seriously study the advantages of new brands in product and marketing to better respond. First, a good product is the foundation of success. The product must have a strong functional point that forms brand recognition, such as Three Squirrels' 3-second dissolution, which gives users a surprise beyond expectations, turning them into brand advocates. In packaging, there should be a strong symbol, such as Three Squirrels' 1-6 cups, Shicui's donut shape, and UFO's flying saucer cup. In terms of taste, new products should provide solutions closer to the true flavor of coffee. This true flavor includes the richness and diversity of the product, specifically reflected in the variety of coffee beans and roasting levels. Although current consumers have relatively little knowledge of coffee, as young consumers grow, they become more open-minded and knowledgeable about coffee culture, and their demands gradually increase. Brands with diverse product solutions will maintain competitiveness in the future. High aesthetics is a bonus. Whether it's internet brands like Three Squirrels and Shicui, or new coffee brands from traditional companies like Tanbing and Shengruisi, products pay more attention to aesthetics. The post-90s and Generation Z consumers believe "aesthetics is justice," and attractive packaging also encourages sharing, creating social currency. Second, quality upgrade with affordable prices. These new products are mainly concentrated in the 3-10 yuan price range, ensuring product quality and better taste than 3-in-1 coffee, without over-upgrading and raising the trial barrier. The prices are competitive and sustainable for repeat purchases. Third, focus on user experience; coffee is not just a beverage but also a lifestyle. Drinking coffee also pursues a sense of ritual. Beautiful coffee tools and various brewing methods are essential. Various high-aesthetic pour-over kettles, exquisite mugs, travel cups, and other peripherals are powerful tools for coffee brands to attract users and serve as media for secondary brand communication. Brands can use these materials to amplify promotional effects. Three Squirrels' mini cups have various creative new uses, such as planting succulents or making keychains. Creative coffee consumption methods have also become a highlight of the products. Unlike the single flavor of traditional instant coffee, new products can be paired with milk, soy milk, sparkling water, etc., to create more novel and interesting products, offering more creative flavor stimulation. Fourth, marketing promotion combined with channels. According to Tmall research, e-commerce platforms are the most important channel for heavy consumers to obtain coffee information, and the number of people making frequent purchases on online platforms is growing rapidly. Brands like Three Squirrels and Shicui currently focus their efforts on online channels, giving them unique advantages in deep user engagement. At the same time, by leveraging channel resources, they create distinctive brand characteristics, gain more platform support, and further accelerate growth. Of course, the success of new coffee brands cannot be separated from capital drive. Luckin Coffee used capital to achieve strong customer acquisition and operations. After the fraud incident, with a strong user base, its stores continued to operate and even achieved profitability per store. Brands like Three Squirrels and Shicui, with capital market support, can accelerate development more easily. -07- Summary Nestlé's current problem is the contradiction between the growing coffee demand of consumer groups and the lack of brand innovation. We have also seen Nestlé's efforts to launch new products to keep up with market changes. Compared to internet brands that better understand Chinese culture and are more flexible, Nestlé, as a giant, finds it harder to turn around. However, with strong brand power, ample financial resources, and channel strength, it remains to be seen who will have the last laugh in the future.