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85。C Cafe Challenges Starbucks

Ordinary Joe Versus the Yuppie


Ordinary Joe Versus the Yuppie

Source:Chieh-Ying Chiu

With a 30 percent market share of the Taiwanese coffeehouse/bakery industry, three-year-old 85C is putting the squeeze on Starbucks. What winning elements hide behind its shiny corner-windows?



Ordinary Joe Versus the Yuppie

By Sherry Lee
From CommonWealth Magazine (vol. 363 )

Chain-store superstar Wu Cheng-hsueh, president and general manager of 85C Cafe, has recently become the combined target of attack in Taiwan’s bakery and coffeehouse industries.

In January, 85C will open a store in Terminal Two of Taoyuan International Airport, and Wu is contemplating upping prices at the airport branch. “Oh, I just don’t know. A cup of green tea at 85C sells for NT$20, while any no-name store at the airport sells theirs at NT$70 a pop. If I don’t make any adjustments, I may never hear the end of it.” Over the past year Wu, who made his fortune in Taichung, has been treading the thin line between competition and market harmony.

Since its establishment in 2004, 85C has become the largest business in the local coffeehouse/bakery industry, producing 46 million cups of coffee and other beverages, as well as 50 million slices of cake a year. That’s an average of two beverages and two slices of cake per capita.

Last year, over 500 traditional bakeries closed island-wide, due not only to the sales of baked goods by supermarkets, but also to the fresh baked goods provided by 85C.

Sales Exceed 3 Billion

85C’s performance is even putting the squeeze on Starbucks.

At the end of 2006, total retail sales for 85C exceeded NT$3.1 billion, a short distance behind Starbucks’ total sales. 85C also holds a 30 percent market share, exceeding Starbucks’ 23 percent.

A battle has begun between the local militia and the foreign invader, and for the past three years, the 85C guerrillas have been trying to defeat Commander Starbucks.

Walking into Wu’s office on Taichung’s Industrial Park 23 Rd., one sees a complete lack of decor.

He has just finished doing an online analysis of Starbucks’ business performance over the past few years. “They earned about NT$200 million with the canned drinks they put out on the market this year, and if we don’t count that, we come out ahead,” says Wu, balance book in hand.

This war will eventually spill over to Shanghai and Pudong.

At the moment, Starbucks has 96 stores in China. However, in a few months, 85C will team up with the instant noodle manufacturer Master Kong to create a franchise in China. The 39 year-old Wu is a bit nervous as well as excited. “If we get over 1,000 stores there, we’ll have surpassed Starbucks. It’s going to be hard work, very hard, and that means absolute conviction. I’m in it to win.”

Many believe that the man behind this store that both global chains and traditional businesses love to hate must be a man with an impressive academic and international background. But the truth turns the common understanding of “winning elements” on its head.

Born and raised in a farming family in Yunlin County, Wu is a man of unimpressive stature and mature exterior. He dropped out of technical college, and his English is far from fluent. But he did become an entrepreneur early in life. He’s owned a hair salon and a shoe plant; in the early 1990s, he helped manage the popular beverage franchise chain Easy Way; he also founded Hot to Home, a chain store delivering pizzas for NT$50.

Without a spectacular family or academic background, Wu relies on his knowledge of common people to grasp the popular market. From pearl milk tea to pizza, coffee and cake, he has zeroed in on the “economy of the ordinary Joe.”

Walk into any 85C, and you’ll see a perpetual line by the floor-to-ceiling corner windows. Grandmothers and their grandchildren pointing at the cake display, old men smoking and drinking coffee in their sandals, groups of young students holed up in the shop, chatting away… and all of them feeling quite at home.

“If Starbucks is ‘yuppie,’ then 85C is ‘commoner-centric,’” says Associate Professor Kong-Fah Cheng of National Chung Cheng University’s Department of Business Administration.

Facing a quick-growing start-up like 85C, Starbucks Taiwan president John Hsu asserts, “We don’t just sell coffee – we sell space. And in that, there is no competition.” Hsu tells us that he has been to an 85C, which was quite uncomfortable in summer.

The clientele at 85C, with men and women of all ages and classes, is a good representation of the Taiwanese population. Wu, who says he always goes with his gut when doing business, has successfully attracted the non-coffee-drinking consumer.

His management strategy is a classic example of Harvard Business School professor Clayton Christensen’s Disruptive-Innovation Theory – he takes an inexpensive product, enhances it, and uses it to take over a lower-tier market, paralyzing the leading brand.

Wu sets his coffee at NT$35 a cup. That’s less than half the price of a Starbucks cafe latte. Wu has done the math – at the cost of NT$10 a cup, there is a 65 percent profit margin, even if he uses the best LavAzza coffee.

In order to lower the cost of opening a store and to raise efficiency, each store is set on a street corner with two walls of floor-to-ceiling windows, serving approximately a neighborhood of 50,000. Inside the shop, the small number of tables (often only four to five) encourages high customer turnover.

With its consideration for location, space, and decor, 85C’s average cost of NT$3 million per storefront is only half that of a Starbucks.

The take-out ratio for an 85C shop is also as high as 90 percent, while Starbucks’ is around 10 percent.

Countryside Conquest

The making of the 85C brand was a beautiful accident, taking over the surrounding countryside before hitting the city.

The lucrative 85C business has attracted the attention of many small-capital entrepreneurs. With 500-600 inquiries a month, around 90 percent of stores are franchised, and it takes an average of only 16 months to recoup the cost of opening a store.

Upon returning home to Tainan, Yeh Yi Lan, founder of the online food and lifestyle forum Yilan, was surprised at the number of 85C shops, and their success. In the past, she relates, Tainan City and County’s small, high-quality coffee shops and bakeries have made it very difficult for chains to break into the local market.

After eight years of operation in Taiwan, Starbucks has ten stores in Tainan, while fifteen 85C have opened there in just 30 months.

Starbucks Taiwan’s John Hsu, who has a keen eye on the market, says of 85C’s distribution strategy: “They avoid confrontation. At the moment, less than five 85C directly compete with Starbucks.”

Aside from their low price, 85C also reverses the rules of the coffee industry game with its bakery concept.

“Selling five-star quality at mainstream prices” is another profitable strategy that Wu has seized.

Recruiting Five-star Chefs

Devoid of cooking or baking experience, Wu looked for talent elsewhere, hiring head chefs from Agora Garden and the Grand Hyatt for their abundant experience in international competition and their abilities to develop new products.

Knowing that many chefs would like to open their own stores, Wu lured talent using shares and the concept of entrepreneurship.

One of four head chefs at 85C, Henry Cheng was head chef at the Grand Hyatt and Agora Garden, as well as a winner of international cooking competitions in Singapore and other countries. Many industry professionals were shocked that Cheng would leave his hotel positions to work for a coffeehouse chain.

The reason Cheng did it was to pass on what he learned from hotels to traditional bakeries.

“Before, no matter where you looked, there were only three or four different types of ingredients in breads and pastries; now, five-star ingredients such as chocolate have joined the mix.” Revolution in management and material is the contribution that the head chefs have brought to the traditional bakery industry.

Like a science experiment, 85C has successfully combined the bakery and coffeehouse industries, and paired them with low prices. This has not only started a low-price revolution, but also cultivated in the public the habit of eating sweets.

Baked goods accounted for half of 85C’s NT$3.1 billion in revenues in 2006, but for less than 20 percent of Starbucks Taiwan’s total revenues.

Hsu has quietly taken note of the opportunity for profit in baked goods and sweets—Starbucks began selling birthday cakes not long ago.

It took Wu to bring about the seemingly simple concept of quality cakes at low prices.

Kong-Fah Cheng of Chung Cheng University considers this to be a management blind spot. “Because quality can be sold at a high price, many people are loath to spoil it by selling low.”

The strong commercial model utilized by 85C has again proven Wu’s place as a chain-store superstar. But many ask: will success this time around be as fleeting as his past successes in chain stores?

Wu’s ups and downs over the past 20 years have all been linked to his “fair price strategy,” which has consistently been imitated and ruined by competition. People in the industry have even accused him of playing “hit and run,” and only looking to gobble up the franchise fees.

Having accumulated much experience in failure, Wu has become more thoughtful and cautious, as well as contemplative of sustainable operations.

“Why is it that Taiwan has only imported chain stores like McDonald’s, Starbucks and KFC, while local brands hardly ever make it international?” Wu believes 85C has great potential for export.

And he intends to take 85C global. “If I were to do the safe thing and only make money, I should just create a second or third brand in Taiwan, because I understand Taiwanese consumer habits.”

To prevent history from repeating itself, Wu has learned to control personnel and technology. With 350 chefs in R&D and a NT$350 million central bakery facility to ensure quality, he is also strengthening his abilities to expand the franchise, with precise statistics that afford a better grasp of market changes.

Focusing all his energy and efforts on the chain, Wu is working towards a larger market.

In 2006, Wu began selling franchise rights in Australia, and will begin operations there himself this year. He is also preparing to set up shop in China, the first homegrown Taiwanese coffee-and-pastry chain to do so.

But Wu also faces challenges from a variety of angles.

The open spaces at 85C bring in the crowds, but also make management more difficult. Police give out tickets for double-parking at the storefront and pedestrians complain about the misappropriation of sidewalk space. These are things over which the owner and franchisee cannot have total control. Also, discrepancies in quality are unavoidable in a franchise, and imitators using the same decor and pricing scheme are confusing brand recognition by consumers.

Associate Professor Cheng indicates the core of the problem: a chain store that cannot provide a uniform product and service standard cannot be called a chain. Differences in service breed consumer confusion, which means a spending risk that will cause the consumer to hesitate, and eventually abandon the brand.

At less than three years of age, 85C is growing at an amazing rate.

When asked about his thoughts on branding, Wu says, “I believe big is beautiful.”

But to Starbucks, the leader of all coffee brands, a brand is an all-round experience that extends to products, culture, service, and other details.

Shortcomings in Chain Store Management

Having watched the rise and fall of brands such as Easy Way and eCoffee over the past eight years, John Hsu realizes that franchising may be an easy way to make money, but insists that Starbucks will not become a franchise, for the simple reason of consistency and careful brand management.

Chain service requires sustainable management. The chain must not only grow large, but also have a uniform line of products and management culture along the way. Wu clearly understands his own weak point.

“I didn’t go far in school, and that might be the reason why we are much weaker in the establishment of culture,” Wu tells us of his personal worry. “In that respect, Starbucks is much, much stronger.”

But Wu is also eager to amend 85C’s shortcomings. This year, he will become the Taiwan agent for a Japanese izakaya (a traditional food and drink establishment), and hopes to use the experience of managing a Japanese brand to buttress his management skills.

On this chessboard of the coffee industry, 85C and Starbucks have distinguished themselves as market giants.

This year, these giants will come face to face as growth for both brands speeds up. Who will arise victorious will depend on their respective strengths and the sustainability of their brands.

Translated from the Chinese by Ellen Wieman