Coping with Copious Amounts of Kopi
How an Indonesian coffee startup is fighting the Goliath of coffee brands
I’m proud to say that I’ve been clean for a month and a half.
It’s no easy feat, given that being stuck at home hasn’t boded well for my mental and physical health. Like with all types of withdrawal, the first two weeks were definitely the most dreadful. I felt drowsy and unmotivated most days to go anywhere beyond my work station. I would easily catch myself taking more power naps to fend off my headaches and re-watching clips of hit TV shows like Seinfeld to distract myself from my pent-up anxiety. Yet, with extreme exertion and unwithered determination, the fatigue gradually subsided, the headaches faded, and my weird TV habits retreated.
The takeaway? Avoid withdrawal altogether. Especially when you’re abstaining from coffee.
Besides almost mistaking my caffeine withdrawal for Covid-19, going on a coffee cleanse has been quite liberating. I don’t feel the need to grab a cup of joe to jolt back to life when I wake up. I’m able to sustain my productivity levels at work without crashing and relying on a caffeine boost at 2PM. And, most importantly, I can sidestep any future Starbucks trip that’s been a sore spot for my wallet.
Coincidentally enough, it isn’t just me who’s trying to avoid Starbuck’s expensive drinks, long drive-thru lines, and intentional efforts to misspell names on cup orders. Kopi Kenangan, Indonesia’s fastest growing coffee chain, is giving the global brand a run for its money, with its recently announced $109 million Series B funding round led by Sequoia. It plans to use its proceeds to strengthen its operations locally, launch new products, and invest in technology to better serve customers and employees amid Covid-19. Prior to the pandemic, the brand saw a steep rise in popularity that garnered the attentions of big-time players like Jay-Z, Serena Williams, basketball player Caris LeVert, Sweetgreen CEO and co-founder Jonathan Neman, and Eduardo Salverin, co-founder of Facebook. Its upbringing is a fascinating read in its own right. As we see a shift in consumer behavior upon entering the new “normal”, the startup’s future will demonstrate whether or not its ‘grab & go’ retail concept is a sustainable one.
Global Ambitions, Local Intentions
Founded in 2017 by serial entrepreneurs Edward Tirtanata and James Prananto, Kopi Kenangan (translate: Coffee of Memories) is a Jakarta-based startup that makes quality, fresh coffee affordable to Indonesian consumers. For a coffee chain that’s now valued at $500 million, which is larger than Starbucks Indonesia’s market capitalization, one might ask what makes this start-up all the more different than your local coffee shop at home?
The three-year-old coffee chain has been riding the wave of ‘new retail’, an online-to-offline (O2O) trend in commerce that was initiated and has gained tremendous foothold in mainland China. While the concept is still flourishing beyond its infancy in Southeast Asia, Kopi Kenangan has proven its viability within the region’s largest populated country. The ‘grab-and-go’ company propped up storefronts that are designed for on-the-go or delivery-only purposes. Instead of doubling down on upscale stores with large seating areas that have nice couches and free Wi-Fi, the startup operates stores 10–20% the size of a normal café, thus keeping capital expenditure, overhead, and rent expenses low. In a world where people prefer not to linger outside for too long in crowded places anyway, Kopi Kenangan has created a business model that proved to be advantageous ahead of its time.
While averting operational costs, it’s been diverting its attention towards technological enhancements and its bread-and-butter: coffee. With its focus on staying true to its roots, the coffee chain has been leveraging the proximity of its source of beans and branding the entire operation with the locals at its focal point. For example, its most coveted drink, Es Kopi Kenangan Mantan, is a sweet locally brewed coffee that uses palm sugar and other locally sourced ingredients, which are not uncommon in its menu of beverages.
What makes the beverage even sweeter is its pricing point. Kopi Kenangan charges, on average, $1.20 for a cup of milk coffee, an attractive price that serves as a sweet spot between high-priced coffee served at international coffee chains and the instant coffee sold at street stalls. As cheap as that sounds, the startup can sustainably offer drinks for less than half the price of a Grande Mocha Frappuccino from Starbucks while maintaining a healthy profit margin and reaching more people.
In regards to its digital infrastructure, Kopi Kenangan is doubling down on its own app and implementing interesting smart retail strategies. It’s currently launching cloud kitchens (optimized for delivery items), unmanned coffee shops, and smart vending machines that will roll out in phases throughout the year. In tandem with driving traffic on its app, the company wants to fulfill an uptick in customer orders with more pick-up options outside your typical brick-and-mortar shop. To help drive traffic online, Kopi Kenangan is developing in-app personalization features as well that will serve as a ‘personal barista’ for the consumer. By exploring deep learning methodologies and using past transactional data, the company will know you better than your morning caffeine-deprived self.
‘Luckin’ of Indonesia
As an ex-coffee fanatic, I can now say that I wake up feeling more refreshed and ready to tackle the day.
As an unfortunate Luckin Coffee investor (🏳️), I also wake up feeling more anxious, waiting to see what news will be stirring the markets today.
The rapidly growing Chinese coffee chain tried taking on premium coffee brands like Starbucks in an attempt to woo Chinese consumers into drinking “discounted” coffee. In light of the accounting scandal that saw its sales figures being inflated by a mere $314 million, Luckin demonstrated the pitfalls of growing a coffee brand at an unsustainable and unprecedented rate. Its downfall should be closely observed as a cautionary tale.
Red flags were waved from the beginning. Luckin prided itself on its unprecedented way of doing business, yet its innovative business model was far from, well, innovative. Their massive growth was a double-edged sword, fueled by deep discounts (🚩), heavy marketing and customer acquisition costs (🚩), and expensive global expansion efforts (🚩). To compare apples to apples, Luckin opened 1,700+ shops in 21 cities since 2017; Starbucks has just 3,300 stores despite having its presence in China for over two decades. Its unsustainable business model can be compared to that of MoviePass (⚰️ and major 🚩), which relied on similar deep discounting practices. Prior to April 1st, it was difficult to gauge on whether or not this strategy of building fidelity first will be enough to help steer the company towards, dare I say, profitability.
- Not So Lucky, Luckin Coffee, Jeffrey Dong
In essence, Luckin’s strategy could be dumbed down to going all in on pure growth and market penetration, a fallible mindset that brought high-flying startups like WeWork to its knees. While Kopi Kenangan, long dubbed the ‘Luckin’ of Indonesia, has eerie similarities to those of its fallen Chinese counterpart, it has been trying out a fairly new mantra that’s been trending in recent months: make a profit.
The Indonesian coffee chain has proven to fulfill its promise and recorded positive growth in 2019. In regards to physical expansion, its storefronts grew more than 10x compared to previous year’s with same-store sales rising 82%. Thanks to its low operational cost per store, it’s been running storefronts that are EBITDA-positive.
Although both are scaling quickly, the differences in quantity is still paramount. Kopi Kenangan has 324 stores today vs. Luckin’s 4000; the company plans to hit 500 by end of this year and 1000 globally by end of 2021. Since you’re less likely to lounge in one of their stores, it’s increasing its presence away from city centers and into unconventional, but delivery-prone locations like gas stations.
Unlike Luckin, which tried to force a strong demand for coffee in a country that traditionally loves their local varieties of tea, Kopi Kenangan is capitalizing on a coffee-drinking culture that existed well before its arrival. An already major global exporter of coffee beans, Indonesia is starting to see more tech-savvy, “cultured” millennials develop a sweet tooth for kopi. With domestic coffee consumption and Instagram-scrolling habits on the rise, food and beverage (F&B) brands have the opportunity to market and tailor their offerings to the next generation of coffee consumers. Kopi Kenangan has been ahead of the social media curve since the beginning and has garnered the help of local influencers to send #kopikenangan viral. Today, the brand has served over 3 million drinks every month, raking in at least $3.6 million in monthly sales* (3m x $1.20/per).
A Long Road Forward
Kopi Kenangan’s pipe dream is to become the largest homegrown coffee chain in Southeast Asia. However, all it took was a mere global crisis to slow down its trajectory. Although the company has been able to maintain strong unit economics throughout the pandemic, it’s still reeling in the repercussions like any other F&B and retail company. Since March, 150 stores closed, revenue took a hit by 40–50%, and plans to expand into neighboring countries like Thailand, Malaysia, and the Philippines got delayed. Kopi Kenangan is also using the capital raised to upgrade their hygiene and safety standards throughout their storefronts and invest into contactless commerce.
In North America, we’re seeing a similar shift towards cloud kitchens and pickup-only stores, a nascent phenomenon that’s likely here to stay post-Covid as brick-and-mortar businesses bet on convenience and speed. Premium coffee brands like Starbucks are looking to reposition some of their stores to reflect these changes. With the advent of New Retail in Southeast Asia, it wouldn’t be implausible to see the coffee behemoth accelerate its digital innovation efforts in Indonesia (similar to what we’re seeing in mainland China).
Although no retail business is safe from the coronavirus, some people still need a cup of morning brew to get their day going at home. The demand for coffee is demonstrating resilience during these trying times and there’s no need to look further than coffee maker JDE Peet’s IPO in recent weeks to show otherwise. Kopi Kenangan is betting on this resilience in its home country and is still opening storefronts in residential areas to adhere to its target of opening 500 stores by end of 2020.
Tl;dr, a lot is at stake for Kopi Kenangan. Covid or not, investors are eyeing the $500 million startup for an imminent IPO in the coming years. Venture-backed F&B IPOs aren’t too common and are mostly unprecedented in Southeast Asia, which makes industry veterans wary about its blitz-scaling growth. Although most signs point in the right direction for the fledgling startup, both investors and former advocates of Luckin (🤚🏼) will watch closely as Kopi Kenangan unfolds in the spotlight.
And 🤞🏼, I’m only hoping its future is luckier than Luckin.
* To put that figure into perspective, Starbucks Indonesia (PT Sari Coffee Indonesia) is part of PT Map Boga Adiperkasa (a business unit of the MAP conglomerate). PT Map Boga Adiperkasa doesn’t break down its financials by individual F&B brand, but it generated a total of IDR 3 Trillion (~USD 210 million) in sales for 2019. Starbucks is the largest and oldest brand in its portfolio and is likely its cash cow. Kopi Kenangan is expected to open 500 stores by end of this year. If each store sells 480 cups per day, that totals to around 7.4 million drinks sold every month, raking in nearly $9 million in monthly sales (7.4m x $1.20/per). Assuming that the company operates back to pre-Covid levels, it could generate around $100 million per year. Not too shabby for a young startup. I want to give credit to The Ken for providing this information for me.
Originally published and edited from Issue #11 of my newsletter E-MERGE.
E-MERGE is a newsletter about and for the consumer of tomorrow. To help you discover the latest technology trends, I take a deep dive into some of the week’s major headlines and investments that have profound implications on the future of consumption.
If you were a fan of this post, you can sign up to my newsletter for regular issues.
Please share any comments, feedback, or tips to jreydon96@gmail.com. Thanks!
