California-born Jim Lee moved to China four years ago to open a gourmet coffee and tea shop.
His Ocean Grounds store in Shanghai, which sells lattes for 38 yuan each, has seen booming traffic that has broadened over that time. The clientele began largely as urbane young Chinese professionals and expats, but now ranges from "younger people to old people—it's really hard to say" who our average customer is, Mr. Lee said. "This market is exploding."
Demand for commodities in China might be on the wane as its economy slows, but in a nation of tea drinkers, coffee—even a pricey cup—is a rare bright spot. Demand is also burgeoning for other small luxuries like imported fresh fruit, driven by changing tastes and an expanding middle class, analysts said.
Coffee illustrates this shift best. China's population consumes just 4.5 billion cups of coffee a year, well below North Americans, who drink 133.9 billion cups a year, according to data from Euromonitor International. From 2014 to 2019, Chinese coffee consumption should rise 18%, said Euromonitor, while U.S. growth is expected to be 0.9% in that time.
Coffee represents "the Western lifestyle that is attractive to all those upper- and middle-class urban consumers," in contrast to tea, which is seen as a more traditional drink, said Raphaele Auberty, a food and drink analyst at BMI Research in London.
That could eventually be good news for coffee prices, which have slumped because of a glut in the market as well as the fall in the Brazilian currency.
Barclays said coffee tops a list of commodities, including gold and silver, that could benefit as China shifts to a more consumption-oriented economy from one driven by exports and state investment.
China's population is so large that it is the biggest customer of a number of commodities. It consumes about 30% of global rice production. With just 1% of the world's coffee drunk in China, the potential for this to increase is huge.
Wine and chocolate are among other aspirational goods that appeal to China's increasingly urbanized population even as the economy slows. While Beijing's anticorruption drive has hurt sales of those two products in China because of a crackdown on gift giving, analysts expect rising demand as tastes change. National Australia Bank said data show that as people move from the lower class to the middle class, their consumption shifts significantly, with wine consumption, for example, increasing more than 700%.
Coffee companies are betting on increased Chinese demand for the drink, with some making their offerings sweeter and milkier to appeal to the Chinese palate, said Ms. Auberty of BMI Research. Large coffee chains like Starbucks Corp. and Pacific Coffee Co. have opened outlets in major cities across the country and have outlined ambitious growth targets. Starbucks has more than 1,700 stores in mainland China and hopes to exceed 3,400 in the country by 2019.
Pacific Coffee, which has about 400 stores in Hong Kong and mainland China expects strong growth for its beverages in China over the next five years.
"The rising number of foreign-based coffeehouses in China strengthens the popularity of coffee culture in the country, while overseas returnees have brought with them their overseas experience to China," a Pacific Coffee spokeswoman said in an email, noting that the rise of the middle class is fueling the boom of the coffee market in China.