Coffee Wars – Branding in Taiwan

by | Aug 24, 2020 | Branding | 0 comments

If you enjoy a good cup of coffee, this might be of interest to you.  In this article we explore fresh-brew or specialty Coffee Chain stores in Taiwan, how they vied for market position through the years, and how Branding has affected the outcome.  We might even mention some of your favorite stores from the past.

 

The early bean – Coffee, Tea or Gukeng?

Coffee has a long history in Taiwan, going as far back as the 1620s, when the Dutch worked with local farmers to plant coffee in Taiwan’s rich tropical latitudes, particularly in a township of South Taiwan called “Gukeng”.  The Japanese also influenced the coffee landscape re-invigorating coffee production during the 50-year occupation (1895-1945).  But Taiwan has long been a steadfast tea drinking country and though interest in coffee has come and gone a few times, it never really gained traction … until decades later.

 

The fresh-brew coffee culture – the Starbucks effect.

Dante Logo

During the 1990s, we saw the emergence of fresh-brew coffee in Taiwan.  By 1997, there were already several coffee chains, notably Doutor (1990), Dante Café (1993), Ikari Coffee (1994), and Barista Café (1997).  They were, all four, reintroducing coffee with an obvious bent for western culture, like coffee served up with sandwiches, pasta, salads, waffles, scrambled eggs, and alike.

 

Starbucks LogoBut the game-changer, as most would agree, was the advent of Starbucks in 1998, bringing an even more refined and interesting “coffee experience” with it.   You’d think that it would have been bad news for the earlier arrivals, but they actually benefited immensely from the rise of Starbucks and the wave of coffee phenomena that followed.

After Starbucks, there was “IS Coffee” with the unmistakable green-red-white logo, and Mr. Brown who not only had stores but were also known for their shelf products, like coffee packets and brewed coffee-in-a-can.

Mr Brown and IS Coffee Logos

 

Cheap, coffee-to-go shakes up the industry

ECoffee Logo

In 2002, ECoffee really shook things up with a jaw-dropping $35NT coffee-to-go. In no time, these small take-out stalls and booths were conveniently everywhere, collectively raking in sales from 20 million cups per year and helping to introduce the idea of a daily morning cup of coffee to the Taiwan culture.  Their logo was conspicuously circular, green and white much like another brand we all know.

 

Café 85°C – Cake with your Coffee?  Yes please.

Cafe 85 Logo

In 2004, Café 85°C opened its first stores, selling low priced, fresh-brew coffee, along with their signature cakes and pastries.  In fact, when you walk by their stores today, it’s hard to tell if they are a bakery or a café.   Their inside seating areas can be sometimes confined and rather plain – they seem to focus more on street-side or open-air seating, similar to some European cafes. They employed a powerful franchise business model and quickly became a powerhouse in the industry.

 

Coffee-to-go revisited – Convenience Stores.

City Cafe 7-11Whether you were selling a meal or pastries with your coffee, it was the beverage that was making a huge impact on revenues.  And everyone knew it, especially the ubiquitous convenience stores that were already in place to serve up on-the-go, low-priced, fresh brewed coffee.

In 2004, 7-11 introduced their rebranded City Café brand.  In 2007 Family Mart showcased their own Let’s Café.  Like ECoffee several years ago, these convenience store brands burst on the scene and scooped up a significant market share for the passer-by consumer and cemented the idea of coffee as a daily morning routine.

 

What’s the big fuss over coffee?

Costco House BlendIt’s only a cup of coffee, not a cell phone, a car or real estate. So why the big fuss?

Over 2 billion cups of coffee are sold every year in Taiwan. If you do the math at $60NT/cup, it adds up big.  Let me show you how cheap it is to make a cup of coffee and why chain stores are keen on the profits.

If you (personally) buy a 1.13 kg bag of House Blend beans at Costco for $400NT, and brew your own coffee every morning, you could make 50 cups (a very conservative estimate).  Divide that (50 cups) into the cost of a bag ($400NT) and it comes out to be $8NT per cup – compare that to a $60NT per cup of a medium Americano at a Dante Café and you get the picture.  You’ll never buy another cup of coffee again (LOL).

Of course, if you own a Café, you have to deduct rent, wages, espresso machines and other expenses.  But if you are a chain with lots of stores, there are economies of scale, and you will have the advantage of huge quanitity breaks for buying large volumes of beans.  And it’s not hard to make a cup of coffee – I do it every morning (i.e. low training and operation costs).

What are the actually profit margins?  It depends on a lot of things, especially the volatile price of beans, the location/rent and even the duration that someone sits in your café.  A ballpark figure before fixed costs (e.g. rent, light, heat) is an attractive 34% in profit margins.

Add in fixed cost and the margins will plummet to 10%.  But 10% of $60NT/cup for 2 billion cups/year still comes to $12,000,000,000NT per year and that’s no small potatoes.

 

Who is top dog coffee chain?

Who’s the top dog?

I was surprised to see Dante and Ikari named as the 2nd and 3rd largest coffee chains in 2009 behind Starbucks, according to an article in Taiwan Today  (Taiwan Today – Publication Date August 25, 2009)

But by 2010, we were already witnessing the mercurial rise of Café 85°C.  Pretty soon there seemed to be a Café 85°C on every corner.  In a 2010 brand poll, Café 85°C and Starbucks were the most recognized coffee brands in the Taiwan market.

Brand Recognition 2010

How Innovation Transforms a Defeated Product into a Success — a Case Study of CITY CAFÉ (Chung-Cheng Tu, Su-Mei Chiu, Hue-Mei Liang)

Closing in on today (2020), Starbucks and Café 85°C still rule in the top 3 coffee chains in Taiwan, with a another burgeoning chain called Louisa making the third.

 

The Vicious Price Wars

Brewed coffee is a commodity item. Anyone can make it. The entry barrier is low and everyone boasts the best quality coffee. In fact, if I blindfolded a few average consumers and asked them to taste coffee from three popular brands, I’d wager that they couldn’t tell which coffee was which.

Commodity also means price sensitivity. When City Café (7-11) came onto the market in 2004 with cheap coffee-to-go, there were immediate reverberations in the industry.  One major chain even experienced a 1/3 drop in sales.

Here are the prices of a cup of Medium Americano Coffee (mostly from menus on their websites)

Low Price High Price
  • Louisa Medium Americano $55NT
  • E-Coffee Medium $35NT
  • Dante Coffee Blend Medium $60NT
  • IKari coffee Americano $70NT
  • Café 85°C Americano Medium $55NT
  • Cama Americano Medium $45NT
  • City Café medium Americano (7-11) $35NT
  • Starbucks Tall  Americano $85NT
  • Barista Medium Americano $100NT

 

So the lowest price wins, right? Wait a minute. Why is a Starbucks Americano $85NT and how has it stayed on top in Taiwan? I thought this was a commodity market ruled by low prices.

 

Through the years, who’s still standing?  A Mermaid.

Mermaid still standingI’ve mentioned a lot of Coffee Chain stores.  Except for a few of the more recent entries, most of the others are lingering, have faded, or are fading.

But curiously, there is one store that has stood tall from the beginning.  In 1998, Starbucks entered the Taiwan coffee scene and has remained, end-to-end, the top coffee chain in Taiwan.  And oddly, they have kept their prices high, even with all the low-price options coming at them.  They’ve maintained their relevance and still attract a vibrant crowd of artists, old and young professionals, and even students.  How do they do it?

 

Starbucks Brand Magic

I have a friend who refers to Brand as “The Magic”.  This Magic is the main reason Starbucks is still standing. You see, Starbucks doesn’t compete in the low-price coffee market, where customers tend to be frugal and always eager to jump to the next low-priced coffee fad.

Low Price vs Brand

The Starbucks market segment is drawn by the “experience”, the experience of being inspired with every visit.  In fact, if you look at the Starbuck’s mission statement …

Nurture the human spirit, one person at a time, one cup at a time, one neighborhood at a time.

… it says nothing about the best quality coffee, the best this or best that – isn’t that interesting?

While other stores are selling cups of coffee at low prices, Starbucks is selling “a cup of happiness”.  Which would you buy?

But it’s not really magic.  It is a carefully orchestrated strategy to fulfill a promise of improving lifestyles, changing cultures and even nudging the world.

See how an an example of branding at Starbucks works here: WHAT IS BRAND, REALLY? BRAND PRIMER PART 1

 

New kid on the block – Louisa Café – Watch out Starbucks?

Louisa Coffee Logo

I haven’t forgotten about Louisa Coffee.  They’ve been around since 2006, but only recently rebranded and exploded onto the scene with a new look.  They are now considered in the top 3 with Starbucks and Café 85°C.   With a light-food menu, pleasant décor, comfortable seating and power outlets, it’s very similar to the “experience” of Starbucks, the so-called third-place (away from office and home) where you can work, study or meet.  The big difference is that you can get a Louisa Americano for $45NT compared to a Starbucks for $85NT.

In the last few years, Louisa has seen astonishing growth through their franchise business model. That’s also how Café 85°C stores exploded onto the scene. Today, the number of Louisa stores (489) outnumber Café 85°C (400) and also Starbucks (470).

Starbucks does not franchise and there’s a good reason why.  They believe that their focus on delivering the “experience” would be compromised by farming out their stores to franchises.  In effect, the Brand would suffer greatly.

(“You Can’t Buy a Starbucks Franchise: Here’s Why and What You Can Do Instead” – Entrepeneur, Asia Pacific by Mathew McCreary).

 

The more stores, the better?  Not necessarily.

Having more stores doesn’t mean you are winning the race.

Here is the breakdown of number of stores, accumulated from recent web articles and actual store websites.

  • Louisa 489 stores
  • Starbucks 480 stores
  • Café 85°C 400 stores
  • Cama 110 stores
  • Dante 68 stores
  • Mr Brown 39 stores
  • Ikari 30 stores
  • Barista 19 stores

Louisa currently boasts the most stores, but their lower prices puts a squeeze on margins and profits, especially for franchise stores with heavy initial outlays (interior design, royalty and licensing fees) and operating costs (employees/store and light food menu).

Café 85°C stores (in Taiwan) also have low coffee prices and also share the same challenges, but from the outside looking in, it seems that they have less employees per shift and aside from their cakes, they have no hot food items to worry about.  (note that Café 85°C also has stores in China and US)

As for Starbucks, I imagine their operating costs are comparable to Louisa (employees/shift and light food menu).  However, their Brand has allowed them to maintain higher prices through the years and that means enjoying higher profits.  And that’s what has kept Starbucks at the top for so many years.

 

What about the future of fresh-brew coffee in Taiwan?

Who will win the coffee wars?It’s not easy to compare these coffee chains side-by-side because of moderate differences in their store offerings, so I’ve categorized them into really 3 different markets:

  • low-price take-out convenience stores
  • low-price sit-down cafes
  • brand cafes (Starbucks)

The low-price market segments, both convenience stores and sit-down cafes, are always a gladiator’s arena.  Unless demand is greater than supply, nobody really wins and nobody loses.  It will be an ongoing slugfest of location wars, price wars, new competitors, and marketing activities (e.g. buy 1 get 1 free).  All these chain stores do have a brand however, but they aren’t strong if your customers bounce around looking for convenience, low-prices or special deals.

Starbucks, on the other hand, has stayed out of that fray for years.  However, it’s not to say they aren’t affected by the low-price market, especially in these difficult times (global economy and Covid-19).  Yes, Starbucks does close and open stores, like any chain.  But because of their solid brand position, Starbuck’s will always maintain a significant portion of loyal customers and continue to stay on top, as they’ve done for over 20 years.

Louisa is an interesting development.  Aside from franchising, they have adapted a café store style similar to Starbuck’s.  However, Louisa prices are low and so it seems they are straddling both segments (low-price café & brand cafe).  The question remains though – will Louisa establish its own unique Brand identity and develop a loyal customer base?  Without a solid brand, any store is destined to languish in low-price, commodity markets, vulnerable to the next fad competitor.

 

Honorable mention

Cama Cafe LogoOne company that deserves some credit is Cama Café.  They have established their own brand identity of a unique specialty coffee house.  That is, coffee that’s not only fresh-brewed, but roasted at the store.  The romanticism of drinking the freshest cup of coffee in Taiwan is appealing to the connoisseur, who spreads the word that Cama coffee is really good – Is it really better though?  I’m not sure, but it doesn’t matter.  It’s all about perception, and that is what brand is about.  Independent Cafés can learn from Cama’s Brand strategy – Establish a unique brand identity that will attract a “viable small market” that can sustain and even help you grow your business.

 

So who wins in the long run?

Companies that build an awesome world that people can experience … that is, companies with a solid Brand, of course, like Starbucks and Cama Coffee.

What is your favorite Coffee Chain Brand?  Or do you have a favorite Independent Coffee store?  Or would you rather brew it yourself?  Leave a comment and let us know.

 

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Sam Nada | Founder of C2Believe Productions | www.c2believe.net

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