As a coffee retail startup that came to the fore following the success of Luckin Coffee in China, Indonesia’s Kopi Kenangan is often said to have merely imitated the tried and tested model of its Beijing-based counterpart in search of similar glory.
While Kopi Kenangan accepts that there are similarities with Luckin, it says that there are fundamental differences in the way the two companies operate, particularly in terms of their approach to business.
“You can say we are the profitable version of Luckin Coffee. We don’t believe in burning cash for growth. We want to have high growth, but in a sustainable way,” said Kopi Kenangan co-founder and CEO Edward Tirtanata, whose company recently raised a $20-million investment from Sequoia India.
Luckin, which in May listed its shares on Nasdaq, employs a cash-burning strategy which has resulted in accelerated growth, giving it an implied market value of roughly $4 billion at the time of its $651-million IPO.
However, a week after its Nasdaq debut, Luckin’s stock plunged 39 per cent as investors questioned the company’s sacrificing profits in favour of growth at the same time as the rocky China-US trade relationship weighs on global markets.
Unlike Luckin, Tirtanata said Kopi Kenangan has been profitable since its inception driven by the high volume of coffee sold at its outlets spread across eight cities in Indonesia.
It has also saved additional costs by deciding to tackle the challenge of logistics by partnering with third-party services instead of rolling out its own delivery service, which Tirtanta says “does not make much sense”.
“Why would we need to make our own ecosystem by throwing in a lot of money when we can’t even be certain that it will work?” he said.
Edited excerpts of an interview:
How did you first get into the food and beverage (F&B) industry?
Before I got into F&B, I was in the coal industry, but when there was a crisis in the industry, I decided to jump ship to another industry. I like to do business where the market is big but still has very few players. I saw that there were a lot of cafes but none were focusing on tea. That’s why I started Lewis and Carroll Tea. So far it’s going well. I think we are the biggest premium tea house chain in Indonesia right now with the most outlets.
What made you think there was an opportunity in coffee?
When I was at Lewis and Carroll, I thought that there was a ceiling. Premium, by definition, is limited to the high-end market, so it’s difficult to scale. I don’t see Lewis and Caroll opening in Sabang or Depok and other smaller cities. Therefore, I tried to make something that is more mass affordable and that is Kopi Kenangan. It is now in eight different cities, and in each of those cities, they are all running well with good traction. So there is no ceiling, we are available outside of Jakarta. We are in Depok, Surabaya, Malang, Batu and Sidoarjo. I can see Kopi Kenangan gaining traction in those areas.
What would your response be to people that say Kopi Kenangan is a copycat of Luckin Coffee?
With Luckin, we have similarities but also dissimilarities. You can say we are the profitable version of Luckin Coffee. We don’t believe in burning cash for growth. We want to have high growth, but in a sustainable way. One of the differences is that we don’t do delivery. All our delivery is done through aggregators like Go-Food and GrabFood.
The second difference is that our products are localized for Southeast Asia and Indonesia. We have Kopi Susu, Thai tea and Teh Tarik. Luckin copies Starbucks; they even have the same menus. We feel that differentiation is the key to any business, and one of our ways of differentiating is making our products hyperlocal.
How ready do you think Indonesia is for new retail?
In essence, new retail is the seamless integration between online and offline. One of the elements of new retail is delivery. We see in Indonesia that Go-Food and GrabFood are very dominant and I think there are very few countries in the world where the penetration of the food delivery ecosystem is so high, that’s why I think Indonesia is ready for the new retail concept.
In terms of purchases through apps, it is no longer a foreign concept in Indonesia. We are a mobile-first country, so I think we are used to buying things through apps.
In what ways does Kopi Kenangan leverage technology for its products and services?
Our vision is that we will eventually automate all the processes at Kopi Kenangan. For example, in terms of inventory management, we must be able to track our inventory from upstream to downstream, and all the way to the point it reaches the customer.
We also need to track defective goods, so we can take them out because even 0.5 per cent [of defects] would matter to us. Then there is the matter of expiry date – we need to know which goods are close to expiry, so we can ship them to outlets that are more fast-moving.
We also want to automate the process not just in terms of software but also hardware. We want to have 1,000 outlets and its hard to find 1,000 good baristas. So if we automate everything and buy the right machines for automation, then we can have 1,000 baristas through automation. So there’s a lot of things we can do through technology at Kopi Kenangan.
Is the high penetration of the food delivery services of GOJEK and Grab the reason why you don’t have your own delivery service?
Yes, because the ecosystem is already up and running through Go-Food and GrabFood. Why would we need to make our own ecosystem by throwing in a lot of money when we can’t even be certain that it will work? It’s better to use third-party platforms which have their own ecosystem, and that’s why we decide to go with Go-Food and GrabFood for delivery, unlike Luckin and other competitors. Having your own delivery in Indonesia where logistics is a big challenge both for the government and businesses, in our view, doesn’t make too much sense.
Would you consider established conventional coffee chains like Starbucks a competitor?
I would like to consider all coffee retail players as friends as the penetration of coffee retail chains in Indonesia is the lowest in Southeast Asia. The per capita spending on coffee retail is only $1 compared to the Philippines and Thailand where its 5-7 times higher. And this is not because Indonesia does not drink coffee, but it’s because 93 per cent of Indonesia drinks pre-grinded coffee or instant coffee. So that is why we say the market is still big and all coffee retail players should educate the market together to start consuming freshly grounded coffee.
You said Kopi Kenangan is already profitable. When were you able to start booking profits?
We have been profitable since inception.
How do you manage to be profitable with such affordable prices?
Volume. We do a million cups from eighty stores. We do so many cups, so we play by volume. In business, you can either aim for a high profit margin or aim for quantity and volume. In our case, we aim for volume.
In the two funding rounds, you raised an incredible amount of money. Could you explain why a coffee retail startup would need so much capital?
It is mainly for capex and technology. Why? Because this is a capex-intensive industry. There are even some coffee brands backed by PE players. All retail chains, old or new, need money for growth through capex, so that we can stay ahead of our growth curve and eventually get somewhere really big.
One of the most common misconceptions in the VC world is that VCs only invest in technology, which is not true. If we look at Sequoia, they have invested in [Indian beer brand] Bira91. So investing in new retail is a new thing in the VC world, and it seems like VCs are more open to investing in this new business model. Even if we look at co-working spaces, there are lots of offline elements inside it, but it doesn’t mean it’s not good business. Even the likes of Amazon and Alibaba are investing in these offline businesses. So new retail is the next thing going forward for retail.
Do you think this new retail model can work with other F&B goods?
I think convenient stores and supermarkets can also be new retail but it’s not done yet in Indonesia. I heard about China now trying to make new retail convenience stores. It’s actually a very interesting business model going forward. And I can see VCs investing in something like this. We have seen it in furniture with Fabelio, which seems to be doing very well with their new retail concept.
As you push for faster growth, will there be more cash burn going forward?
We want to continue to be prudent in terms of opex but in terms of capex, we need to burn as much as possible, because it is something that will generate returns. So when it comes to capex, we will keep on spending until we hit the ceiling.
Will it affect your profitability?
For us, when it comes to profitability, what is most important is positive EBITDA, which means your operation is doing very well. We are also profitable in terms of net income but with the expansion and big capex, the net income is small. But it’s good because our EBITDA is really good for our industry. Any healthy growing business would have good EBITDA but low net income.
The word on the streets is that Kopi Kenangan’s valuation in the last funding round was $120 million…
I cannot confirm or deny.
How did you get Sequoia on board?
It was maybe due to our seed funder [Alpha JWC]. Sequoia is always looking for deals, and Indonesia is one of the more attractive countries to look for deals. Because of that, Sequoia engages in a lot of communication with the portfolio companies of Alpha JWC.
Alpha would tell its portfolio to just go and meet with Sequoia even if they were not fundraising just to chat about their companies. For us, it was two hours of conversation over coffee, and we were given the term sheet that night itself. It was good. We were not fundraising, but we showed them our numbers and they liked what they saw and gave us a term sheet.
Do you think Kopi Kenangan would perform well in third-tier cities?
We do well in second-tier cities. Depok, for example, is our biggest city after Jakarta. We have not tried third-tier cities, but with the price we offer, we should be able to do well.
If we look at KFC, for example, they sell well in third-tier cities because there is not much entertainment in those cities, so having a KFC makes them happy. So I hope we can also be like that because I think people who can afford KFC can afford us too because we are mass affordable.
You’ve talked about plans to expand to regional markets. Do you have a timeline for this?
We should be looking to open the first store outside of Indonesia Q4 this year or Q1 next year. We can’t name the country but it will be in Southeast Asia.
When you do open up in another market, will you adopt local flavours in the market or stick with Indonesian flavours?
It will still have our (Indonesian) flavours because we are proud to be an Indonesian company using all Indonesian ingredients, so why not showcase Indonesia coffee and palm sugar to the world?