A Rising Coffee Empire
Louisa Coffee Takes Aim at Starbucks
Launched as a small coffee-to-go store, Louisa Coffee has since evolved into one of the nation’s major coffee chains, looking to take on market leaders Starbucks and 85C. How did founder and General Manager Chris Huang turn his passion for coffee into a successful business?
Louisa Coffee Takes Aim at StarbucksBy Ming-ling Hsieh
From CommonWealth Magazine (vol. 644 )
It is 9 a.m., and the 1,500-square meter Louisa Coffee distribution center in New Taipei City’s Sanchong District is teeming with activity. Drivers in black uniforms are busy loading cartons and boxes into their vehicles for delivery to the chain's outlets. Last year, Louisa Coffee relocated its distribution center from Wugu to Sanchong to meet the needs of its expanding business. Not only has its staff doubled and its space tripled, the new distribution center also boasts new equipment such as electronic labels in order to realize first-in, first-out inventory management.
At the other end in Wugu, staff at the new food factory, which went into operation less than a month ago, prepare vacuum-packed hamburger patties for delivery. The company originally sourced the hamburger patties, used in so-called Mexican hamburgers, from external suppliers. Now, however, it has begun to experiment with its own recipes. Taking seasoning, production and delivery into its own hands, Louisa Coffee aims to create trademark food items with unique flavors.
“Our core concept is to provide coffee lovers with an all-round service for their everyday needs,” says Huang. Therefore, the company is investing more in the food sector. Huang has poured NT$60 million into the new food factory, including land lease fees and equipment costs.
In mid-January, Louisa Coffee launched a black virtual discount VIP card, which can be obtained by registering via Messenger. Registered customers will get a discount if they show their virtual VIP card on their smartphone during payment. Presently 300,000 people are already participating in the scheme, boosting coffee sales alone by 20 percent.
Over the past two years, Louisa Coffee has evolved into a force to be reckoned with in the local coffee chain market. The company has decided to further strengthen its position and reputation in Taiwan, and might open outlets in Thailand as soon as this year.
In the twelve years since its founding, the coffee chain has grown to 340 outlets. By the end of this year, that number is expected to hit 400, which puts Louisa Coffee in third place, right behind leading coffee chains 85C and Starbucks (see Table). Huang reveals that the franchise expansion plan was deliberately slowed down temporarily as the company recently implemented a rebranding strategy. However, even during that period, he still got at least 200 phone calls from prospective franchisees who were keen to join the Louisa Coffee network.
When Huang, who is now 40, founded his business in 2006, he merged his passion, expertise and skills into a successful career.
Coffee Aficionado Turned Expert
As a youngster, Huang was not what would be deemed a good student. After failing half of his subjects in senior high school, he barely escaped expulsion.
But Huang’s slumbering talents were awakened when he was studying at university. He developed a fascination with coffee and began to research the beverage, buying books, studying related materials, frequenting coffee shops, and eventually taking a job with Starbucks to learn the trade. At the time, Huang spent 12 to 16 hours a day learning about coffee.
“In my fourth and fifth year at university, I would be reading books about coffee in bookstores if I was not working at Starbucks. If I wasn’t reading books about coffee, I was researching coffee beans at home. If I wasn’t researching coffee beans, I was on my way to a coffee shop,” notes Huang in summing up his student life.
At 27, he left his job selling coffee beans and opened a small coffee-to-go shop in an alley opposite of The Sherwood Taipei. Since the first Louisa Coffee stores were not located on main streets, the rent was not high. Focusing on excellent flavor for a low price, Huang’s stores found a niche in the competitive coffee-to-go market.
“Compared to competitors offering the same quality, his prices were inexpensive, but in comparison with similarly priced products, his quality was better,” observes Wu Shih-hao, professor of marketing and distribution management at Kaohsiung First University of Science and Technology, adding that Louisa Coffee’s success owes to Huang’s finding and successfully exploiting a market niche.
Today, Huang is still fired by passion as he continues his mission to make exquisite coffees affordable. Louisa Coffee outlets offer premium coffees that typically sell at NT$200 to NT$300 a cup in individual coffeehouses at markedly lower prices.
Although Huang turned his passion into his profession, the past 12 years were not always smooth sailing. Over time, he learned a few memorable life lessons the hard way before gradually coming to understand how to manage a brand and a company.
The first blow came only one year into the company’s founding, when convenience store chain 7-Eleven announced it would launch City Café coffee to go. Louisa Coffee’s revenue immediately declined by a third. When the chain had grown to around 15 outlets, the price for coffee beans tripled, leaving Huang with a dilemma. He did not want to switch to cheaper, lower quality beans, but neither could he raise prices due to the competition from convenience stores with their cheap coffee to go. Gritting his teeth, he decided to absorb the costs, even borrowing money from his father to keep the business afloat.
Although the coffee futures price subsequently came down again, Huang increasingly had the feeling that, due to the day-to-day management of the company, he was no longer able to simply do the kind of work about which he was passionate. He often felt the pressure of building a brand as well as the responsibility for the livelihood of his franchisees.
One day, the pressure and anxiety built up so much that he developed a fever. After taking medication, Huang slept for three entire days. He had to take medicine for another two years to cope with the pressure and overcome his mental issues.
The latest storm hit last year when Louisa Coffee announced that it would switch its procurement source for its fresh milk from its original supplier, Kuang Chuan Dairy Co., to Wei Chuan Foods Corp., whose former chairman was found guilty of fraud last year in connection with an adulterated cooking oil scandal. The decision triggered a public outcry, and netizens called for a boycott of the coffee chain, with market analysts warning that the company was risking “brand suicide.” Faced with a possible consumer boycott, Louisa Coffee was forced to return to Kuang Chuan, and it also began to cooperate with smaller independent dairy farms.
“This incident has reminded us that we've become a brand society pays attention to, and we have to consider society’s expectations in every move we make,” says Huang.
Having braved several storms, the company last year again entered a new stage in its corporate development: It now endeavors to evolve from a coffee chain into an all-around lifestyle brand.
The relocation of the distribution center, the construction of the new food factory, and the extension and remodeling of existing outlets all serve only one purpose: Offering sufficient food and beverage items, seats and socket-outlets so that customers can sit there all day. The distribution center and the central factory play the role of backend warehouse, freeing up space in the outlets for additional seating.
Huang’s idea is to make it “easy” for customers to get their cup of coffee, while other needs they might have aside from drinking coffee can also be taken care of. Only then will consumers have a motive for choosing Louisa Coffee.
In selected stores such as the one near the Sun Yat-sen Memorial Hall in Taipei, long library reading tables with multiple power outlets have been placed to signal to students and office workers that they are welcome to sit down and read or work on their laptops. The logic is that students and mobile workers will congregate at these shared desks instead of occupying entire tables that could seat two to four people. If the seating is arranged sensibly, seat turnover will naturally increase.
As the coffee chain continues to grow rapidly, it needs to address several challenges.
Low Prices Squeeze Margins
Absolute figures illustrate Louisa Coffee’s conundrum. Although main rivals 85C and Starbucks have each only some 100 more outlets, they post two and five times as much revenue as Louisa Coffee, respectively. While the “high quality, low price” brand positioning strategy worked in that it secured a niche market, it might now prove to hamper revenue growth and constrict margins.
“If everything must be good value for money, the stores will find it hard to turn a profit,” notes one company insider, pointing out that, in terms of brand strength, Louisa Coffee cannot compare with Starbucks, which can charge premium prices because consumers feel the brand is worth it. However, with a “low price, good stuff” strategy stores have little flexibility when it comes to cost increases. When fixed costs such as hourly wages rise, stores will face strong cost pressure in their day-to-day business.
The second challenge stems from the company’s rapid growth. In 2015, Louisa Coffee had just over 100 outlets, but by the end of 2016, the coffee chain had mushroomed to 300 stores, which means some 200 stores were opened in just 18 months. Although Huang has since throttled the speed of expansion, as much as 85 percent of all outlets are franchises and not company-run stores. Therefore, the major challenge in the future will be managing this network effectively to ensure that headquarters and the franchises are on the same page.
Having turned his hobby into a business, Huang notes that he initially dreamed of owning a coffee roastery that could turn out enough coffee beans to supply 50 coffee shops. “My dream was then (when he had a coffee roaster that could supply roasted coffee for 50 outlets) fulfilled. But from a business management perspective, my dream is to put Louisa Coffee onto the international stage, to make young people’s dreams come true and let a Taiwanese brand shine all around the world,” says Huang.
Translated from the Chinese by Susanne Ganz