Amongst the deluge of unicorns created and start-up funding in 2021, it was easy for one to miss specific trends. One such one was the funding to the F&B sector.
In particular, there was a newfound addiction for coffee.
Something good brewing
2021 was certainly a landmark year for the F&B and coffee industry in Southeast Asia.
It saw its first unicorn emerge in Kopi Kenangan. The Indonesian coffee chain achieved this status in the last week of December. However, not only Kopi Kenangan, but others like Flash Coffee and Ratio also had big fundraises, along with rapid expansion.
This is certainly intriguing, as the pandemic ran rampage in the region over the last two years.
Southeast Asia was largely considered quite strict in its dealing with the spread of COVID, leading to multiple domestic restrictions on eating out. Whether it was restrictions such as cut-off times, a limited number of people in groups, or outright bans on dining, the damage was humungous.
This resulted in the death of many local F&B establishments, as well as the exit of global chains in various countries in the region.
how was it that amongst this admittedly hard time, these new coffee chains not only managed to attract capital, but also grow at break-neck speed?
A different beast
The coffee business is unique, with respect to both customer habits as well as its business model.
Most F&B establishments see repeat usage from loyal customers, maybe once or twice a week at max. However, coffee commands a different kind of loyalty and repeat usage, going up to almost every day.
Moreover, despite a surging café culture, Southeast Asia has also become accustomed to a “grab and go” model, popularized by China chains like Luckin Coffee and Starbucks. Therefore, demand was still present, but it just shifted from in-store consumption to takeaway/delivery.
Tech-enabled new age chains like Kopi Kenangan and Flash Coffee capitalized on this and prepared for it from day 1.
This also resulted in these chains demonstrating almost SaaS-like characteristics. High repeat ratios, customer upsell, and scalability are some of these. Moreover, although margins are not quite SaaS-like, they can be attractive compared to traditional F&B. Kopi Kenangan and Flash both claim to operate at gross margins of 35-40%.
This has certainly caught the eye of VCs, with an eye watering amount of capital being poured in recent years. Investors have pumped more than US$400 million in leading SEA chains in the last four years, with over US$250 million of that since the pandemic hit.
However, this brings about another question. Is this another sector benefitting from the pandemic and excess liquidity, or one primed for long term success?
A consumer favourite
As they say, writers turn coffee into words, mathematicians turn coffee into theorems, and programmers turn coffee into code. No matter what you do and where you are in the world, caffeine’s many variations seem to be indispensable to modern life.
This is no different in Southeast Asia.
According to a Euromonitor International report, retail coffee sales reached $6.3 billion USD in 2020 in South East Asia.
This had obviously caught the eye of global incumbents ages ago.
Starbucks, which entered in South East Asia in 2003, was the market leader for many years. However, there were always a few gaps.
Firstly, affordability was a big concern for customers. Options available to consumers were either at a premium end i.e. US$ 6.40 per cup of coffee or at the lower end of spectrum i.e. US $ 0.07 per cup for a poor quality instant coffee.
There were not enough options available in the affordable segment for a good cup of coffee.
Secondly, the localisation component was missing. Starbucks brought its standard menu and did not until recent years curate its menu for local preferences.
Thirdly, the coffee value chain was not well utilized locally. Whenever people consider the source of their coffee, countries like Brazil and Ethiopia come to mind. Surprisingly, Asia produces almost a third of the world’s supply.
In Southeast Asia, Indonesia leads in producing Arabica coffee, whereas Vietnam leads the way with Robusta coffee.
Erstwhile, all the good quality beans were exported and poor quality beans were available for consumption in the domestic market.
In one of the fast growing coffee consumption region, these gaps were good enough for local players to set up and attack.
These tech enabled coffee chains addressed all the pain points mentioned above. Then when the pandemic hit, their investment in tech truly assisted them to thrive during tough times.
ho are these chains, and how fast are they actually growing?
The leading chains
Undoubtedly, the biggest VC-backed chain is Kopi Kenangan, which was founded in 2017 by Edward Tirtanata, James Prananto, and Cynthia Chaerunnisa. It created an app where users can order coffee and opt to pick up their drinks at the company’s stores or have their beverages delivered directly.
The coffee chain currently has over 600 stores in 45 cities in Indonesia and a 3,000-member workforce. In the last 12 months, the company claims to have doubled its store count and revenue. It has served 40 million cups of coffee and expects to serve 5.5 million cups per month by Q1 2022.
In order to attract loyal customers, its app provides lucrative benefits to members such as vouchers, pre-orders, cashback points and free birthday drinks to ensure consistent engagement and high repeat ratio.
They have a clear strategy of rewarding high revenue generating customers.
It has also expanded its offerings by introducing bread brand Cerita Roti, chicken-based snack brand Chigo, and soft-cookie brand Kenangan Manis.
In totality, the startup has raised more than US$300 million from array of investors and has plans to take this brand in other countries.
Similar to Kopi Kenangan, there is another Singapore based tech led coffee chain which is on an expansion spree called ‘Flash Coffee’.
Flash, a Rocket-internet investee company, as name suggests takes pride in speed. It was launched in 2019 and opened 23 stores by December 2020 and currently, its store count is more than 200 stores.
Flash’s staggering growth rate of 1-2 new outlets a day resulted in an operating loss of US$2.2 million in Q4 2021 alone. However, the strategy seems clear – grow and gain market share first.
Moreover, unlike Kopi Kenangan, Flash Coffee aimed to be a region-wide player from day one, demanding faster store openings.
What lies ahead
However, despite the rapid growth, there are some concerns and red flags to be careful of.
In particular, is the comparable of China’s Luckin Coffee. At one point of time, it wanted to dethrone Starbucks from China, leading to a US listing.
However, the promise of rapid growth came at a huge cost. It was eventually found to be fraudulently inflating sales figures and was delisted within a year of its IPO.
This is something SEA chains have to be careful of, both claiming similar value propositions to Luckin.
Moreover, hey have positioned themselves as the cheaper Starbucks alternatives offering good quality coffee. However, there is a reason Starbucks has been around so long and is a US$130 billion behemoth. It does not show any signs of slowing down in the region and for good reason.
Therefore, there is room to grow for these chains but also imperative that they remain disciplined and stick to their value proposition.
The Luckin incident left a bad taste for coffee in the mouths of public market investors. There is no doubt that the same scrutiny will apply to local SEA chains.
However, these companies seem to be cognizant of this, also keeping one eye on eventual operating store level profitability.
As demand for coffee rises in the region, coffee tech startups in Southeast Asia will evolve to meet their customers’ needs.
Better service delivery, greater investment, and improvements in coffee brew quality will determine which companies will thrive.
Whether they achieve success in new markets and become the next Starbucks for Southeast Asia, only time will tell.
However, they have certainly taken steps towards ensuring that this ambition is not too farfetched.