“We’re here to catch the switchers” – Lipton on attracting tea drinkers in China’s deflationary market

When looking at the global tea industry, China is undoubtedly an important market but its growth is forecast to only simmer rather than boil over. 

Figures from GlobalData, Just Drinks’ parent, show tea was the largest category in China’s hot drinks market in 2023, with volumes sitting at 188.7 billion litres. However, that is expected to grow 0.8% in 2024. 

Lipton Teas and Infusions is no stranger to China, having first entered the country with black tea in 1992. When the group was formerly managed by Unilever, it also sold ready-to-drink (RTD) products such as bottled Lipton Iced Tea through a joint venture with PepsiCo.

Today, the group’s portfolio no longer features RTDs but does include black, green and oolong teabags, as well as fruit and milk tea powders.

Just Drinks sat down with Hiufan Tsang, Lipton’s general manager for China, to discuss where the pockets of growth lie for tea in the market against a tough economic backdrop and how the company is adapting to changing consumer behaviour.

Hiufan Tsang: The bigger part of tea in China is actually RTD [ready-to-drink] and out-of-home. We’re not in RTD [but] we are in out-of-home. 

The teabag is still actually quite a novelty amongst the Chinese. For example, in terms of preparing their own tea, they prefer loose tea. They have their own, let’s say, table, with a built-in hot water pot. Okay. They have this whole process of brewing their own tea, so teabags are really a foreign western concept for them, mainly for convenience. 

That is how we look at the market. The good part for Lipton in China is that, aside from the teabags, we do also have fruit tea powder and we also have milk tea powder. It gives us a bit of breadth in terms of seasonality because we can sell teabags all year long but then, during summer, we can sell more iced tea powder. During winter, we can sell more milk tea powder.  

In terms of opportunities, I think it’s just being choiceful as to where we want to play and when we want to play because it’s a huge tea drinking market and they have tea engrained in their history and culture. We just have to make sure that we have to be at the right consumption moment for them to be able to access the product. 

To dwell into that… a big part of our business is out-of-home, so we are pushing a lot into the fast-food chains, just to make sure that, for example, the iced tea powder is available in majority of the fast-food chains. Teabags, it’s more of an office setting more than anything, so the communication that we invest in, mainly in digital, is focusing on office scenarios, whether it’s a morning pick-me-up or an afternoon tea set-up. 

Funnily, if I look at our business right now, we have more than 30% of our business coming from e-commerce. The purchases spike during Monday to Friday and they drop during Saturday to Sunday. No-one buys tea during the weekend because they’re not in the office. It’s a behavioural thing that we’re trying to adopt as well but just to make sure that we are at the right place at the right time.

Hiufan Tsang: The way we project China is that it’s a minimum double-digit growth every year. I think that is the base expectation from China because the market is already there. It’s not like we’re teaching consumers to drink tea. We’re here to catch the switchers.

Right now, everyone is in savings mode. The economy is not too good, so probably the consumers who used to drink, let’s say, one bubble milk tea a day – which costs around, I’d say it’s not cheap at all, it’s around £3 for one cup of bubble milk tea – some of them probably won’t drink it every day anymore and they can switch with the milk tea powder, or even do a DIY, where they [use] the tea bag and put their own milk or oat milk as well.  

It’s really understanding [how to be] in that consumption moment when the consumer wants us to be. We’re customising our strategy with an identification of consumption moments… For out-of-home, we have a 200 [bag format]. For offices, we have 100 tea bag[s], and then we’re looking at being available in convenience stores in the ten [bags format] as well. There are a lot of convenience stores across all these office neighbourhoods and [workers are] not really going to wait for a day before their tea arrives. If they go down and they find a convenience store and they have a ten [bag format], they can just buy it immediately…

Hiufan Tsang: Actually, the problem with China is we’re not on inflation, we’re on deflation, so consumer prices are going down because sales are also going down. There are a lot of promotion mechanisms being implemented just to make sure we drive volumes.  

In essence, the prices of a lot of commodities have come down. Having said that, the volumes have not increased, despite being aggressive in terms of pricing promotions. For example, the recent e-commerce promotion called 618 – which was implemented during June, it’s something similar to the Double 11 [festival] but this is a half year event online – what we noticed was consumers did not stock up. They did buy but not necessarily stock up for the next six months.

Probably it’s being more insecure about the future… stability of employment is also one, [the] stock market is not growing, so I’d rather have cash on hand than stock up on let’s say, I don’t know, five boxes of tea... That’s one of the trends that we saw this past 618, which was a bit of an eye opener, because we were always thinking that consumers were always looking for a very good deal but then, at the end [of the day], I think cash is still very important.

It also correlates with the trend amongst the Chinese, wherein… the normal savings rate here is probably 25% of monthly income. They’ve bumped it up to 35 to 40%, so it’s not like they don’t have money. It’s more they don’t want to spend it because they’re not sure of what’s going to happen in the future.

Hiufan Tsang: From an RTD point of view, there is demand for zero sugar. Zero sugar is really zero sugar, so it’s not the sugar alternatives. 

We have an Instagram app, a local one, we call it Little Red Book. We monitor that a lot in terms of words related to tea that come up, whether flavour or consumption and rooibos has come up recently from a functional point of view. I think someone promoted it [on] TikTok, and consumers started pushing it around…

Aside from that, I think ongoing trends would still be DIY. The Chinese consumers love putting their own fruit slices, whether it’s pear, it’s apple or lemon, into their teapot. It’s more of, I’d say, an office exercise for them... I think the DIY trend will still continue, because again, it’s very ingrained. The tea drinking culture is very ingrained amongst the consumers and it’s just trying to modernise a very traditional drink. They don’t want it to be too boring as well, so they want to add… more new flavours.

Hiufan Tsang: ​​​​​​​Rooibos would be something that we would be exploring next year.  

In terms of branding and positioning, what we’re also trying to do is curate our engagements with different parts of China… If we look at China geographically, of course, it’s 1.3 billion people. If we [look at] Europe, which has around 800 to 900 million people, we break down Europe into different countries with different cultures, right? China is very similar in terms of different cities and different municipalities. How we curate our engagements is, for example, in Beijing… they like a lot of outdoor activities, so we sponsor a lot of these types of events. In Shanghai, it’s a lot of these Instagram influencers, so we try to be in places where they like to have pictures taken… we have a building similar to New York’s Flatiron, so we had an activity specifically on that building at the coffee shop below. 

In terms of products, of course, we have existing products that match the different consumption behaviours but, in terms of new products, we are going to accelerate, trying to make sure that we capture the trends as well, whether it’s in terms of flavours or even packaging. One trend that we’re doing right now is we just launched a tea bag that [you don’t need to] hang at the rim of your mug…  we’re trying different concepts to make sure that we stay relevant with the consumers. 

Hiufan Tsang: Black tea is very popular. Green tea is growing very fast, but at very small base… It’s oolong and pu-erh, which are actually very strong in China.

Hiufan Tsang: Our retail business is very small. I think it’s the cost to entry that’s been very difficult in general for FMCG in China. That’s why there’s a massive shift towards e-commerce.

Hiufan Tsang: ​​​​​​​What we’re hoping for is first out-of-home to continue growing because it is a big part of our business. E-commerce is a bit more complex but, of course, growing very fast. I think in China, e-commerce is a business that’s easy to lose money [in]. I think we have to be very cautious in terms of growth expectations, because it’s easy to be greedy to see growth trends, especially in e-commerce.  

As a manufacturer, especially from an operations point of view, we have to make sure that we match stocks with demand but then if you over-forecast your demand and you have so much stock, then it becomes another problem. I’d say we’re more cautiously optimistic in terms of e-commerce, and [it] will bring the growth coming from the offices as well.

Hiufan Tsang: I think the bubble milk tea chains will still grow very aggressively. They are quite well funded by venture capitalists now. I think quite a few of them are already setting up, or already have set up IPOs in Hong Kong. I think for us as Lipton, the opportunity is very big, because we’re playing in different segments at different consumption moments for the consumer. We’re in teabags, we’re in iced tea powder, we’re in milk tea powder.  

What we did this year specifically was rejuvenate the brand, make it a bit younger, make it a bit more modern, make it more relatable to the consumers. Consumers can be as young as 18 years old to as old as 65, so we are trying to curate marketing activations in relation to the products we’re selling at the specific location where they’re actually consuming it. This way is the only way for us to have profitable growth. I think it’s easy to chase growth, but then it’s not easy to be profitably growing, so I think this is where we want to be at.