At a time when the COVID-19 crisis is looming large over the F&B sector, Indonesia’s grab-and-go coffee chain Kopi Kenangan’s shift in strategy to tap street-side locations has helped it stay afloat and cater to its consumers.
The company recently made headlines for raising $109 million in a fresh funding round led by existing investor Sequoia Capital, with the participation of new investors including B Capital, Horizons Ventures, Verlinvest, Kunlun and Sofina, besides existing backer Alpha JWC Ventures.
“Obviously not every F&B chain, small or big, will survive this crisis, that’s just the reality. So, whoever comes out of this, will come out of this stronger,” said Kopi Kenangan co-founder and CEO Edward Tirtanata in an interview with DealStreetAsia.
According to Tirtanata, things could have been worse for the company, had it not been for a slight adjustment in its expansion strategy that was made just a few months prior to the COVID-19 outbreak.
By the end of 2019, Kopi Kenangan started opening stores in gas stations and shophouses. “During corona, those locations have seen revenue increase by more than 50 per cent, because people are still drinking coffee even in the pandemic,” said Tirtanata.
“In the last week of March revenue dropped 25 per cent, while in April 2020 the revenue dropped further totalling to around 40 per cent drop due to COVID-19,” he explained.
“However, the revenue from those delivery-heavy location has actually spiked up, which compensates the loss of the walk-in revenue.”
Kopi Kenangan’s decision to expand to street-side locations has turned out to be an inspired move, as not only does it generate more revenue, it has also proven to be less costly for the company. At the moment, the company says street-side outlets make up less than 20 per cent of its total of 324 stores.
And, going forward, the company plans to ramp up its focus on opening more of such stores as the pandemic has put a halt to its international expansion plans. “In Jabodetabek alone, we have identified around 21 subdistricts where Kopi Kenangan has little or no presence at all…we realized that there are lots of market share that we have not been able to capture because of a lack of presence in that area,” said Tirtanata.
“That is why we decided to open, even during corona, one store per day. We were initially planning to open 50 per month, but we decided to moderate our expansion strategy to 30 per month,” he added.
According to recent research by mPos startup Moka, F&B has been one of the worst affected sectors in the COVID-19 pandemic, with businesses across numerous cities witnessing a plunge in their earnings. About three weeks, Indonesia had witnessed the shutting down of an F&B supply chain startup, STOQO, which had been in the market to raise its Series B funding.
Edited excerpts of the interview:-
2019 was an eventful year for Kopi Kenangan. You had two funding rounds and fast-paced growth. How would you sum up the year?
2019 was obviously a rocket ship. We started with 26 stores and ended the year with 223 stores, because of which, we can finally call ourselves a coffee chain with scale. That growth, whilst being able to maintain profitability, is definitely an encouraging point.
Was it all as smooth as it looked? What challenges did you face?
The challenge for us was obviously operation and tech. Managing 223 stores is very different from managing 26 stores. There will be inconsistencies, more operational errors because, at the end of the day, you have a lot of people working for you, around 2500 people at the time. So obviously it gets more complicated. But we were able to somehow execute properly, without receiving too many complaints.
According to our market research, Kopi Kenangan’s brand equity is now closer to the number 1 coffee player in Indonesia. It’s definitely a testament to the good product and service that we have given to our customers, which hopefully we can maintain for many years to come.
Given the rapid growth, was the supply chain ever an issue?
The supply chain was an issue in mid-2019 because we had 81 stores but only had supply for 40 stores. Somehow, we were able to close in the supply chain gap, and I think by the end of 2019, there were no more supply chain issues because frankly Indonesia is the 4th biggest coffee bean supplier in the world, so it is not too hard for us to source coffee beans.
Are you not concerned that you may be growing too fast too soon?
When we were doing our brand equity research, one of the things we ask people is why they don’t buy Kopi Kenangan. Apparently, according to our data, 62% of respondents said they don’t purchase Kopi Kenangan because it’s not close enough to their home. For coffee, convenience is just as important as taste and value. If you like Kopi Kenangan, but its 10 km away, I myself will not purchase it.
According to our research, in Jabodetabek alone, we have identified around 21 subdistricts where Kopi Kenangan has little or no presence at all. From that data, we realized that there are lots of market share that we have not been able to capture because of a lack of presence in that area. That is why we decided to open, even during corona, one store per day. We were initially planning to open 50 per month, but we decided to moderate our expansion strategy to 30 per month.
If you are opening stores in the sub-district, does that mean you are no longer focusing solely on commercial spaces like malls and offices?
In Q4 2019 and Q1 2020, we had started opening stores in gas stations and shophouses, because we realize that, if we open in commercial spaces or office, it is harder for us to do delivery as it is not convenient for motorcycle drivers. That is why we decided to open at gas stations and shophouses.
We saw that during corona, those locations have seen revenue increase by more than 50% because people are still drinking coffee even in the pandemic.
How many of the total number of stores are street-side stores currently?
We have 30 stores in Ruko (shophouse) and 33 in gas stations. So 63 out of the existing 327 stores, and we expect this number to increase significantly in 2020.
Street-side stores also mean less capex to burn?
Both capex and opex actually. As everyone knows, renting space in a mall is expensive, whereas shophouses are quite cheap and gas stations even cheaper. That is why we are looking at those two types of locations as delivery revenue is much higher at a lower capex/opex. It just makes sense.
Gas stations love to have us as a tenant as well because we obviously bring Ojol (on-demand motorcycle taxis), and Ojol needs to refuel, so there is a synergy between Kopi Kenangan and the landlords.
So will opening up stores in gas stations and shophouses be the focus going forward?
During the pandemic, we will only be focusing on the delivery-friendly locations, because obviously walk-in (orders) is not as high. Meanwhile, the delivery revenue has spiked up quite significantly. Going forward, until the pandemic ends, which we expect will be until Q4 2020, we will only be opening in those locations that are delivery friendly, using our heatmap methodology.
But this will put you more up against incumbents like Tuku and many others? Not just competing on the demand side, but also for space and landlord.
I think in terms of demand, coffee is not a zero-sum game. It’s different from ride-hailing or e-commerce. I think two-three coffee shops can co-exist together in one subdistrict because some might like one better than the other. It’s a taste-driven business.
In terms of the landlord, thankfully I think we are currently the only ones that are still expanding. We noticed that the rent has gone down, while the supply of locations has gone up across all segments including office, malls, shophouses and gas stations. As of today, it’s a nice time to expand our locations.
How do you handle people and finance management issues that come with such a sharp growth?
We plan to use the money raised (funding round) to train employees as they are the ones serving the customers, so they must be empowered. That’s why we want to allocate a big budget for training. In fact, we have also built Kopi Kenangan Academy, where we train people every day on food safety, service and coffee knowledge with SCA (Specialty Coffee Association) standard. Obviously, it does not mean there will not be issues, but we believe that by investing a lot in training, we can actually mitigate people risks.
How long does it take for Kopi Kenangan to open a new store?
The fastest that we have done, from signing all the way to the opening, is three weeks. But, in general, it takes us two months after signing.
Do you leverage some kind of data technology when opening up new stores?
In our company, we have a heatmap. From all the delivery data, we know where our customers are and so we open our locations based on that.
For example, from our data, we know that the subdistrict of Bojong Gede does not have Kopi Kenangan presence in the area, while we notice that there are lots of orders from that area. And an adjacent area, Sawangan, has lots of orders as well. It will be good for us to open a store over there. That is the data-driven approach we are using, together with a heatmap to show where we have and don’t have a presence.
How many of your stores are profitable? And how long does it generally take for a store to breakeven?
As of December 2019, every single store is actually profitable, except for the ones that were opened in December, because they obviously haven’t had a full month of revenue. To break even it takes around four to eight months on average.
You had previously said that revenue had fallen 35% due to coronavirus. So the bulk of the revenue is currently coming from street-side stores?
In the last week of March, revenue dropped 25%, while in April 2020 the revenue dropped further totaling to around 40% drop due to COVID-19.
However, the revenue from those delivery-heavy locations has actually spiked up, which compensates for the loss of the walk-in revenue.
Right now, our focus is getting through the crisis. This is the biggest existential crisis in the hospitality industry, whether it be hotels, restaurants and others. But, we believe we can navigate through this crisis and come out of it when it’s over. Obviously not every F&B chain, small or big, will survive this crisis, that’s just the reality. So whoever comes out of this will come out of this stronger. With the amount of capital raised, I think we can definitely survive this pandemic.
How are consumers consuming coffee differently during COVID? What changes are you seeing?
What we see really changing is where they order the coffee. One thing we realize is that the biggest drop is coming from locations like SCBD and Sudirman or where the offices are because no one is working. They are all working from home. Meanwhile, the big increase in revenue is from the Bodetabek area (outskirts of Jakarta), because these are the places people live and they are all ordering from home. It is important for us to notice this behaviour changes, and that is why we are now opening more stores in the suburbs.
You have put your regional expansion plans on hold. Was this due to the virus outbreak, or was it decided prior to the pandemic?
It’s because of COVID. For one thing, obviously the team members cannot travel. That’s why it has been postponed indefinitely until the pandemic has ended. It is likely we will return to this again in 2021.
We had targeted 1,000 stores by 2021. Obviously, many things have been adjusted because of COVID. Our focus currently is solely domestic dominance because we already have a foothold in the domestic market. But then of course if we do want to go IPO, we will only go IPO if we are already an international or regional player, not just an Indonesia-based coffee chain.
When you do start to foray abroad, would you be trying to maintain the current growth rate in Indonesia?
It really depends on demand. For example, in Shanghai alone, I think there are 1,000 Starbucks [outlets]. So I think the number of stores that we can open in Indonesia is really high. Based on that, I don’t think we are going to slow down the rate of expansion in Indonesia. We will maintain the number of stores opened per month until there are no more customers to grab and no more area that needs Kopi Kenangan to be present there. Convenience is the key to any coffee player. If you look at any market research, convenience is actually placed higher than taste. That’s why opening in lots of locations is very very important for us.
How will Kopi Kenangan in other markets be different from the Kopi Kenangan we know in Indonesia?
We have done research and market study with a top tier consulting firm, and from that study, it seems that our next markets which are Malaysia, the Philippines and Thailand are very receptive to the grab-and-go business model. That is why we have decided to enter those three markets. If you look at companies like McDonald’s, how they did it is through localization, and that is exactly what we are going to do as well when we enter those new countries.
Is a franchise model something you have considered?
In key markets, we will hopefully own all our outlets. But if there are legal issues that does not allow us to open ourselves then we may look for JV. But definitely not a franchise.
Can you tell us how you managed to rope in global investors? Jay-Z’s firm for example.
Roc Nation has been a big fan of Sequoia. They invested in Zilingo and others. So when we got invested by Sequoia, they approached us. When we met virtually, I shared our data, business plan, and vision. They liked it, and they invested in us. It’s the same with B Capital and Horizons Ventures – they approached us after Sequoia’s $20-million round.
Was the latest round impacted by COVID in any way?
The round started before COVID, but I think the investors saw the resilience of the business and that’s why they decided to continue with the investment.
What made you raise such a huge round? How are you planning to allocate the money?
It was an oversubscribed round. Initially, we were not aiming to raise such a big amount. We realized that we have big plans ahead, not just in terms of opening stores, but also in international expansion, new product lines, cloud kitchen and other businesses. That’s why we accepted the additional amount from the investors.
Companies at your stage, particularly those that have raised such big funding, usually start to consider inorganic growth through M&As. Is this something you are looking at too?
We are definitely open to it [M&A], but right now there are no targets in our minds. Obviously, it has to have synergy. If an opportunity does come, we are definitely open to M&A.
Can you share with us what your valuations are based on? Is it based on revenue multiples?
We are unable to disclose this.
You had mentioned about IPO. Do you have a timeline for this?
Due to the pandemic, I think the timeline is uncertain. Hopefully, after the pandemic has ended, we will get more clarity. But as for now, we don’t have any commitments yet.
But are you eyeing an Indonesia IPO?
We will decide when the time comes.