Japan's Java wars: Convenience stores angle for coffee market crown

By Chang-Ran Kim TOKYO (Reuters) - Japan's convenience store operators are jostling for eminence in a famously cut-throat industry, and one product has come up trumps for the market's top players - coffee. Millions and millions of cups of it. Inspired by a popular 100 yen (0.58 pounds) blend launched by McDonald's <2702.T> in 2008, Seven-Eleven <3382.T> touched off a boom in convenience store coffee last year, lifting Japan's long-stagnant coffee market and rankling rival businesses. Late last month, Lawson <2651.T> became the latest convenience store chain to offer 100 yen coffee, a move that its president says has already buoyed sales. Coffee, more than anything else, attracts both new and repeat customers, who typically also spend money on other items, convenience store executives say. Like other fast-food items, it also carries relatively high margins. "The impact of coffee on customer traffic is huge," Lawson President Genichi Tamatsuka said recently. As convenience store coffee heats up Japan's 1.3 trillion yen (7.42 billion pounds) coffee market, Starbucks Coffee Japan <2712.T> is planning to step up its premium teas and ready-to-drink products. Convenience stores have been serving machine-made coffee for years but it never caught on due to quality reasons. Lawson changed that in January 2011, starting its over-the-counter drinks service with a menu ranging from blends to lattes to teas. FamilyMart's self-service espresso machines were launched in late 2012, offering coffee, lattes and frappes. But it wasn't until January 2013 that Seven-Eleven gave rivals a jolt with black coffee that was not only low-priced but also considered high quality. The 100 yen, grind-on-the-spot all-Arabica "Seven Cafe" ignited a coffee war that has intensified as FamilyMart <8028.T> and Lawson matched the price. 'SHOCKED' The popularity of "conbini coffee" - Seven-Eleven alone aims to sell 600 million cups in the year to February - pushed coffee consumption in the world's fourth-biggest market up 4 percent in 2013 to a record 446,392 tonnes, according to the All Japan Coffee Association. Data so far suggests another rise this year. "At 100 yen, 'conbini coffee' is very attractive for consumers," said Toyohide Nishino, the association's executive director, adding that he was "shocked" when he first tried Seven Cafe. "Everyone else has to be feeling an impact, however minimal." Industry insiders say canned coffee, which typically costs more than 100 yen, has been hit hardest: about 30 percent of Seven Cafe drinkers have switched over, the company says. "It's a step up from canned coffee," said Hengtee Lim, a contributor at coffee website sprudge.com, calling conbini coffee "serviceable". "Starbucks will be fine - their audience is less about coffee and more about dessert drinks and a place to hang out." Indeed, Starbucks Japan last month raised its earnings guidance, citing brisk sales of fruit frappucinos. Meanwhile, Seven-Eleven is refining its coffee further with a process called husking to remove the silverskin layer that carries a bitter and rancid taste. "No other convenience store does this, and neither does Starbucks or Tully's," said Seven-Eleven Japan director Yasushi Kamata. The new blend has boosted daily sales in the southern Kyushu region - its first market - by about 15 cups per store already, and will be available nationwide by month-end. FamilyMart, for its part, hopes to draw customers away from Seven-Eleven and attract more women by adding a chocolate latte next week. Is it a matter of time before Seven-Eleven offers its own lattes? "I can't tell you that," Kamata said, smiling cryptically. "We first wanted to get the taste of black coffee right." (Additional reporting by Ritsuko Shimizu in TOKYO; Editing by Ryan Woo)