Indonesia’s game-changing coffee startups must prove to be more than just F&B fad

Huda Firmansyah, a 31-year-old entrepreneur from Bogor, West Java, sips his coffee after a short queue at a nearby grab-and-go coffee chain outlet.

“I used to like instant coffees, but now that I drink real coffee, I can’t stand them anymore,” he says with a chuckle.

Firmansyah, who averages 5 purchases of coffee a week, is one of many Indonesians who have shifted their coffee drinking habit, from instant premix powder coffee to freshly-grounded coffee, a trend brought about by the proliferation of small coffee chain outlets in and around the capital.

These coffee brands, popularly referred to as “es kopi susu” or iced coffee milk, are characterized by their innovative ice coffee products sold at affordable prices and the grab-and-go model, which entails the use of compact kiosks as physical outlets with little or no seating for drink-ins.

The immense popularity of these coffee chains, which bridges a wide gap between instant coffee – largely considered a lower-class beverage – and high-end brewers like Starbucks, has culminated in two of the major coffee players being poured a combined total of around $38 million of investment in multiple rounds within a single year, with others enjoying steady organic growth.

While this represents exciting times for the Indonesian coffee market, which has the lowest coffee consumption per capita in the region despite being the world’s fourth-largest coffee exporter, some in the industry do not believe it will last for too long.

“I feel that this is just a temporary trend. It is similar to the buzz around “es kepal milo” and “ayam geprek” and others like it,” said Syafrudin, chairman of the Indonesian Specialty Coffee Association, making reference to a much-frenzied crushed ice treat and battered fried chicken with sambal delicacy, which have started to lose their popularity of late.

Syafrudin’s sentiment may be a common view among veterans in the specialty coffee industry, but those involved in the grab-and-go coffee businesses would certainly beg to differ – none more so than the investors injecting millions of dollars into the ventures.

Among the venture capital firms betting on coffee in Indonesia are Alpha JWC, which backed the $8.5 million seed round of Kopi Kenangan in September last year, as well as East Ventures, SMDV, Pavilion Capital, Agaeti Venture Capital and Insignia Ventures Partners, which teamed up to back the $9.5 million Series A round in Fore Coffee in April.

The latest to join the coffee party is global VC giant Sequoia Capital, pumping $20 million of growth funding into Kopi Kenangan last month.

While outsiders may be left bewildered by the level of interest in the coffee business from seasoned tech investors, those in the VC circle understand the rationale behind these bets.

“I think coffee is the only category that mimics the margin structure of a technology company, especially the grab and go model – it is very asset-light. One of the largest cost structure in building out a coffee chain is of course real estate, so with the grab and go model, that cost is eliminated,” said Raditya Pramana of Indonesian VC Venturra Discovery.

“At the same time, the high margin structure of each purchase is incredibly high. And then the purchase rate of coffee is almost daily – at least once a week. So, all this on top of a very large market, which is currently shifting from the instant coffee consumption to proper coffee, makes it very interesting,” he added.

Despite pitted as competitors against each other, Kopi Kenangan and Fore Coffee have notable differences. In terms of products, Kopi Kenangan takes on a classic Indonesian iced coffee recipe, using locally-sourced ingredients, such as organic palm sugar, which gives it a distinctly fresh taste and aroma, while Fore Coffee mainly serves Starbucks style Cafe Latte and premium TWG teas.

Fore Coffee’s pricing point is at Rp 35,000 per cup, which is considerably lower than that of Starbucks, but higher than Kopi Kenangan which sets its regular price at Rp 18,000 per cup. However, Fore Coffee customers rarely pay the full price given the abundant discounts.

Furthermore, Kopi Kenangan, which declares itself a profitable company, sticks to simple branding and keeps operating cost low, whereas Fore uses higher quality cups, premium machines and looks to invest more in the interior of its outlets which sport a green and futuristic look.

However, what both have in common is an emphasis on tech, brought about undoubtedly by its venture capital investors eager to implement an exciting new business model referred to as “new retail” – commonly understood as a strategy that seamlessly combines offline, online, and logistics experiences, powered by technology.

Kopi Kenangan, which is founded by an experienced F&B entrepreneur, doubled down on the new retail concept following the investment by Alpha JWC. Its technology enables customers to order their coffee to pick up through the Kopi Kenangan app, to avoid long queues or have their coffee delivered by food delivery players such as GrabFood and Go-Food.

Fore Coffee, meanwhile, which started off as a project incubated within early-stage venture capital firm East Ventures, seems to leverage more heavily on tech, taking advantage of the ecosystem under East Ventures and its partners.

The company uses a mix of technology, self-built mobile app and existing built technology such as MokaPOS to track and monitor the payment, Member.id for loyalty platform, and GO-FOOD, GrabFood, and TravelokaEats for distribution platform.

While there are older players in the market such as Tuku Kopi, believed to be a pioneer, and Kedai Kopi Kulo, which has over 300 stores, the two VC-backed companies are expected to outgrow the others, equipped with millions of dollars and aided by the technology at their disposal.

Today, less than a year since it launched, Kopi Kenangan boasts a chain of 80 stores in eight cities and serves close to one million cups of coffee each month. Following the fresh funding, it targets to open 150 outlets by the end of this year and expand to 1,000 stores across Indonesia by 2021.

“They will be the two biggest, but there are several other players trying to get VC funding. Most of them are newcomers that are already in operation but with still less than 10 outlets or so,” said Pramana, whose VC firm invests in seed-stage companies, including those in the F&B sector.

The interest in these coffee chains owes much to the rise of Luckin Coffee in China.

Employing the grab-and-go model and leveraging app-based ordering, e-money payment and AI technology to analyze customer behaviour, Luckin attracted enormous VC interest from the moment it started to serve coffee to China’s masses.

Over the space of only three years, the company amassed around $550 million in funding, which, through aggressive promotions and expansion strategy, helped it scale rapidly and propelled it to the level of coffee chain giant Starbucks.

Its hopes of displacing Starbucks as China’s number one coffee retailer was boosted when the company raised up to $650.8 million in an upsized IPO on the Nasdaq two months ago.

Amid increasing pressure from Luckin, Starbucks China in May rolled out an online ordering feature, which allows customers to order and pay cashlessly through its app, be given an estimated pick-up time and choose a nearby outlet for pickup –very much the same way Luckin customers buy their coffee for the last three years.

In Indonesia, Starbucks, which runs as a subsidiary General Atlantic-backed MAP Boga Adiperkasa (MAPB), is also starting to feel the effects of new competitors.

Independent research company Smartkarma highlighted in a report that MAPB’s 1Q19 results show that the company’s revenues are still growing at a robust 17% YoY growth, but given a steeper increase in selling (+17% YoY) and G&A expenses (+32% YoY), its EBIT has declined by 24% YoY.

It also noted that MAPB’s EBIT margin of 5% in 1Q19 is half of what the annual figure was five years ago, down 160bps YoY.

“We can attribute some of this underperformance to the rising competition in the coffee business. Both Kopi Kenangan and Fore Coffee raised a total of USD36.5mn in the past year, which is equivalent to five times MAPB’s annual profits. As its profitability is slipping, we will need to see firm strategies by the company to justify its 39x annualized PE,” the report states.

In an interaction with DEALSTREETASIA, Starbucks Indonesia, which currently boasts 400 stores in the country and plans to add another 55 by the end of 2019, explains that it is aware of conditions of the global market and understands the demands for technological enhancement. However, it did not specify whether it has plans to roll out any new technological features or add to its already live membership-based app, in order to improve customer experience.

“We see that not only on coffee players that technology is becoming part of the customer’s experience but many other retail businesses as well. Starbucks does adjust to certain market demand whilst still ensuring that it does not compromise with customer experience,” said MAPB director Fetty Kwartati.

Given the different segments targeted by Starbucks and its grab-and-go counterparts, it would not be a surprise to actually seem them coexisting to serve the growing coffee retail market in Indonesia. However, given the direction in which the youthful Indonesian market is heading, technology-enabled customer experience could be the deciding factor between winning or losing.

According to Fore Coffee co-founder Elisa Suteja, the instant culture that GOJEK and Grab have helped built has majorly affected Indonesia customer purchase pattern. The digital ecosystem has always been aimed to increase the country efficiency, on-demand consumption is one of it.

With the combination of coffee and seamless technology proving to be such a hit with customers, not mentioning the endless discounts and promotions that the huge investments have allowed it to offer, it is difficult to foresee these businesses dying down any time soon.

“We don’t envision coffee to be just another temporary drinks trend but rather, a key commodity that can drive the domestic economy and can be enjoyed as a lifestyle of Indonesian people for a long time,” Suteja said.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.