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Caffébene: Master Brewer of Growth and Global Ambition 1
Caffébene: Master Brewer of Growth and Global Ambition David Y. Choi, College of Business, Loyola Marymount University Byungoh Kang, Department of Entrepreneurship, Chung-Ang University Fred Kiesner, College of Business, Loyola Marymount University
Copyright © 2013 by the Case Research Journal and by David Y. Choi, Byungoh Kang, and Fred Kiesner.
On the morning of January 13, 2011, Sun Kwon Kim, founder and CEO of the specialty coffeehouse franchisor Caffébene, sat in his office in Seoul, South Korea, monitoring Internet news on his laptop. To his chagrin, Kim noticed headlines describing Caffébene’s recent missteps with its first overseas store opening in New York City (NYC)—perhaps a downside of being one of the most highly profiled companies in the country over the last two years.
Kim had launched Caffébene in South Korea in April 2008, with capital of 1 bil- lion Won, or about $1 million USD. Considering the hyper-competitive landscape of the coffeehouse industry, nobody expected that newcomer Caffébene would become the number one brand in terms of store locations after only three years in existence. More than twenty rival brands, including Starbucks, had been competing fiercely in this arena at the time. By the end of 2010, however, Caffébene had surpassed Star- bucks as the company with the largest number of store locations: 410 versus 336.1
Although the past three years of remarkable growth had presented Kim plenty of excitement and headaches, the newest dilemma with the NYC flagship store was par- ticularly agonizing. Several months ago, Kim had worked hard to convince his execu- tives and the board that the best way to expand globally was to make a splash in the U.S. Kim committed to a $6 million investment (a large percent of the company’s cash balance) in a flagship store in the heart of NYC’s Times Square with the idea that its success would fuel name recognition and attract franchisees across the country and the world. However, after signing a multi-year lease for more than $100,000 a month, he learned that the store did not have the necessary permits needed for operation. Kim was told that the approval process could take at least six months but as long as two years, during which time Caffébene was responsible for the lease payments. With the finan- cial commitment already made, this situation meant that Kim’s plan for Caffébene’s rapid growth through globalization could significantly slow.
The company’s attorney advised Kim to sue the landlord and try to get out of the contract, and perhaps find a new location. For Kim and his executives, however, the issue at hand was much more than what to do about the contract. Kim could not help but ask whether he had made the right decision: Should he have entered China first instead of the U.S.? Was it a wrong decision to risk so much money on Caffébene’s flagship store in the heart of Manhattan? Should he now stay the course or make a drastic change?
NA0215
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This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
2 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
The hisTory and GrowTh of Caffébene
The name “Caffébene” was derived from the Italian words “caffè” (meaning coffee or coffeehouse) and “bene” (meaning good). Therefore, the literal translation was “good coffee,” or “good coffeehouse.” Kim created Caffébene with the intent of providing cus- tomers with a comfortable and stylish place to relax and meet other people. Caffébene was known mainly for its espresso coffees made with high-quality Arabica coffee beans, “home-made” Belgian Liége waffles, and Italian gelato ice creams.
Caffébene opened its 100th store in late 2009, only twenty months after the launch of its first store. In September 2010, the 300th store was opened. By the end of 2010, two and a half years after its launch, Caffébene had become the number one brand in the Korean coffeehouse market with more than 400 stores (See Exhibit 1).
Exhibit 1: Growth of Caffébene Stores 2008 through 2010
1 7 10 16 50
70 100
170
240
300
410
0
50
100
150
200
250
300
350
400
450
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Source: Caffébene’s internal records.
The total sales for Caffébene headquarters (the franchisor) was approximately $20 million USD in 2009 and $100 million USD in 2010 (See Exhibit 2 for financial data). The company’s revenue was projected to increase by about 70 percent in 2011. Its 2010 operating profits and net profits were about $15 million USD and $11 mil- lion USD, respectively. The company had spent about $10 million in advertising costs (or more than $25,000 per store) in 2010 and was planning to almost double that amount in 2011.
For the exclusive use of L. Ye, 2018.
This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
Caffébene: Master Brewer of Growth and Global Ambition 3
Exhibit 2: Caffébene Financials 2010
Income Statement–2010 (million Won)
2010 (Jan 1–Dec 31) 2009 (Jan 1–Dec 31) Sales 101,018 22,396 Cost of Sales 65,542 14,351 Gross Profit 35,476 8,045 SG & A 20,902 7,550 Other Operating Revenue 491 86 Other Operating Expenses 308 147 Operating Profit 14,756 495 Financial Income 274 82 Financial Expenses 724 73 Income before Income Taxes 14,321 434 Corporate Tax 3,480 92 Net Profit 10,841 343
(Note: 1,000 Won is approximately $1 USD)
Balance Sheet–Dec 31, 2010 (million Won)
Dec 31, 2010 Dec 31, 2009 Assets Current Assets 32,376 2,944 Fixed Assets (Long-term Assets) 23,281 6,545 Total Assets 55,657 9,488 Liabilities Current Liabilities 34,795 5,583 Fixed Liabilities 6,408 Total Liabilities 41,203 5,583 Capital Capital Stock 3,200 3,200 Capital Surplus 358 358 Other Accumulated Income 1 0 Earned Surplus 10,895 347 Total Capital 14,454 3,905 Total Capital and Liabilities 55,657 9,488
(Note 1,000 Won is approximately $1 USD)
With success came recognition: Caffébene was named “The Most Trusted Brand” in 2010 by Chosun Ilbo (leading newspaper) and “Korea’s Best Brand” in 2010 from Dong-a Ilbo (the number 3 daily newspaper). Kim was named “The Best Korean Eco- nomic Leader” in 2010 by Joongang Ilbo (the number 2 daily newspaper).
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4 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
The enTrepreneur
Sun Kwon Kim was born in 1968, seventh of nine children in a poor rural town in the province of Jeollanam-Do, South Korea. Kim lost his father when he was seven years old, and his mother struggled as a farmer to raise Kim and his siblings on her own. After graduating from high school, Kim opted not to attend college, but rather to move to Seoul in order to earn money and support his mother. He recalled:
When I was young, I used to see my mother go out to work in the fields in the rain without a raincoat. Watching her struggle all those years is what led me to decide that I needed to make money so that I could buy her a raincoat.
In 1993, when Kim was twenty-five, he started a small restaurant business along with an acquaintance. With severely limited working capital, the restaurant closed after only one year, leaving him with a personal debt of about $30,000 USD.
Determined to overcome poverty, Kim borrowed some money from his brothers, and opened a home electronics distributorship for Samsung Electronics products out- side Seoul. He soon became the number one ranked salesman among distributors in Gyeonggi Province. During this time, Kim paid back his debts, saved money, and married.
After getting a taste of success, Kim quit the distributorship and embarked on a new venture. He carefully observed a video arcade located near his electronics business. He was amazed by the crowds of children that filled the shop. He researched the video game market in both Korea and Japan and founded a video arcade franchise business in 1997. A few months later, the Asian Financial Crisis reached Korea. Over the next two years, nearly 40,000 companies went out of business2 and real GDP declined 6.9 percent year to year.3 Nevertheless, during this time, Kim’s franchise operation grew to 300 video arcades. Kim made substantial income from the franchise fees, interior construction, and sales of machines, but closed his business in 2003 when he was no longer able to recruit new franchisees willing to pay royalties.
In 2000, Kim turned his interest to food service franchising from which he could make perpetual income by supplying food to franchisees. He decided on a Gamjatang (Korean traditional soup) restaurant franchise. However, he discovered that food ser- vice was a far more complex business to run than a video arcade. Standardizing food tastes and cooking processes proved difficult. Kim researched and experimented with the cooking process for an entire year before launching the business. Eventually, he conceived of a method for supplying half-finished foods to his franchisees. Kim grew this business successfully to over 200 stores at its peak. At the end of 2010, the business was still in operation with 150 stores although much of the ownership had been passed onto Kim’s brother-in-law.
Experiencing such success in business gave Kim the hope that he could run a global company. He noticed during business trips abroad that there were no Korean brands or stores in the food sector. To be successful globally, he concluded that he needed to start a new business from scratch. Kim explained:
In 2007, when I was thinking of starting a new business that could become a global company one day, I decided that I needed to work with a food item that had global appeal, such as chicken, pizza, coffee, burgers, or ice cream.
Kim’s business ambitions also gave him a thirst for knowledge. In 2006, at the age of thirty-eight, he enrolled in an online program, receiving a bachelor’s degree in
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This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
Caffébene: Master Brewer of Growth and Global Ambition 5
business administration in 2010. He soon enrolled in a part-time MBA program (not online) at the same university.
The Coffee MarkeT
By 2010, South Korea had a population of about 48 million people and the 14th largest GDP (PPP) in the world.3 The Korean economy had experienced remarkable growth over the past 50 years; from per capita GDP (PPP) of around $73 USD in 1962 to $31,753 USD in 2011. As of January 2011, the Korean specialty coffeehouse industry was estimated to be more than $1B USD and growing.4 The top five brands were Caffébene, Angel-in-us, Starbucks, Holly’s, and Tom n Toms. Incorporating all published projections, the industry was expected to grow to a combined total of over 2,300 stores by the end of 2011 (See Exhibit 3).
The growth rate of coffee consumption per capita in Korea was relatively higher than that of the EU, U.S., and Japan, as displayed in Exhibit 4. Interestingly, the share of premium coffee consumption in Korea was remarkably smaller. As of 2007, instant coffee consumption in Korea accounted for 80 percent of all coffee consumption, while only 20 percent was espresso or drip coffee consumption. In comparison, espresso coffee or drip coffee consumption accounted for 85 percent of coffee con- sumption in the U.S. and 62 percent in Japan (Exhibit 5). However, appreciation for premium coffee was steadily increasing in Korea.
Exhibit 3: Growth of Stores of Top 8 Brands in Korea (2008–2011)
Sources: “Brands’ Stores 2000—Coffeehouse ‘Golden Age’,” Kookmin Ilbo, Jan 18, 2011. “Twosome Place, Enters into Office Area,” EBN, Dec 20, 1020. “Coffeehouse’s Temptation ‘Come to Work or Meet’,” The Hankyoreh, July 20, 2010. “Pascussi, Speed Up for Franchising,” Consumers Economy, May 13, 2010. “Starbucks and Coffee Bean versus Local Brand, Coffee War 2nd Round,” Seoul Shinmun, Dec 10, 2009.
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This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
6 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
Exhibit 4: Annual Coffee Consumption Per Capita
(units in kilograms)
2003 2005 2007 2009 CAGR Korea 1.65 1.75 1.78 1.93 2.6% EU 4.90 4.82 4.95 4.67 −0.80% USA 4.12 4.20 4.09 4.09 −0.12% Japan 3.18 3.39 3.43 3.36 0.92%
Source: International Coffee Organization, Monthly Coffee Market Report, Dec 2010 and Nov 2007.
Exhibit 5: Comparison of Coffee Consumption by Countries
Source: International Coffee Organization Note: Espresso coffee and drip coffee are sold mainly only in coffeehouses. Others are can coffee, instant coffee, mix coffee and so on. These are sold mainly in marts or convenience stores.
For most of the past decade, Starbucks Korea had maintained the number one spot in the specialty coffeehouse market in Korea. Starbucks Korea was a joint venture between Starbucks and Shinsegae, a multi-billion dollar retail enterprise formerly affil- iated with Samsung. It had first entered the market in 1999 and gained tremendous popularity by bringing premium coffee in a luxurious ambience to Korean consumers. By 2002, Starbucks and Coffee Bean & Tea Leaf together owned 70–80 percent of the specialty coffeehouse market share in Korea in terms of the number of stores.5 Star- bucks was considered to be the market standard. Both the Korean conglomerates’ cof- fee brands, like Angel-in-us and Twosome Place, and European brands, like Pascucci, seemed to face an uphill battle going up against Starbucks.
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This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
Caffébene: Master Brewer of Growth and Global Ambition 7
franChisinG in korea
The franchising concept was introduced to the South Korean market in the late 1970s with the entry of Lotteria, a fast food brand launched by Lotte, a large Korean-run corporation headquartered in Japan.6 Over the next two decades, such global brands as McDonald’s, KFC and Pizza Hut entered Korea. The franchising business model expe- rienced sudden growth following the Asian Financial Crisis of 1997 when, for the first time in its modern history, the country experienced large-scale layoffs and early retire- ments of corporate employees. Many of the laid-off and retired professionals sought financial stability by becoming franchisees, thus spurring the growth of the franchising business. As of 2010, there were more than 2,500 franchising systems registered with the Korea Fair Trade Commission (Exhibit 6).
With the growth of the franchising model, the competition amongst franchi- sors became stiffer over time. Even some of the best-known global franchisors in the chicken, fast food, and pizza markets withdrew from the Korean market, while others lost their leading positions to new brands. For instance, Pizza Hut, which had entered the Korean market in 1985, had to yield its top spot (in terms of number of locations) to Mr. Pizza, a local brand that launched in 1990. Similarly, McDonald’s fell to second place in the fast food industry behind Lotteria.
Coffeehouse franchising sparked the interest of many individuals interested in starting their own business or making investments in small businesses. Many of these people were highly educated, not interested in physical labor, and wanted to own a stylish business that was easy to operate. The specialty coffeehouse was the perfect fit for this population, but starting up an independent coffee shop was not as easy as often perceived. The business called for such specialties as buying fine coffee beans and developing complementary menu items.
The existing brands did not offer sufficient franchising opportunities despite the strong interest by prospective franchisees. Starbucks and Coffee Bean were company- owned store systems, which made it impossible for individuals to own their stores. While Angel-in-us offered a number of franchising opportunities, most other brands were not successful enough to attract franchisees. Moreover, because most of the brands were perceived as imitators of Starbucks and Coffee Bean, they lacked the excitement and allure sought by prospective franchisees.
For the exclusive use of L. Ye, 2018.
This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
8 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
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For the exclusive use of L. Ye, 2018.
This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
Caffébene: Master Brewer of Growth and Global Ambition 9
breakinG inTo The Coffee business
Kim recalled his 2005 visit to Vancouver, Canada. The downtown area boasted an abundance of coffeehouses, with stores on every corner filled with customers. When he observed the kitchens of the coffeehouses, they seemed fairly easy to operate. Kim knew that simplicity of kitchen operation was a key success factor in the franchise business.
When Kim revealed his interest in entering the coffee business, his friends advised him against the idea. They reminded Kim that the industry was crowded and that Starbucks was too well run. However, Kim believed that Starbucks, as well as the other brands, were not fully addressing the needs of the consumers. He observed that because all the leading players were copying Starbucks, they had all become homo- geneous. Considering the fast changing tastes of the Korean people, even Starbucks seemed a little stale and outdated.
In Korea, people tended to regard a coffeehouse not as a place to enjoy coffee, but rather as a place to meet and enjoy conversations with friends and dates. This tendency seemed to be rooted in old customs peculiar to Korea. Over several hundred years, Sarangbang (room inside a house used by men for studying and writing) had functioned as a suitable place for meeting, conversation and relaxation. In the more recent past (1960–1980s), both Korean men and women frequented old-fashioned cafes (Dabang) that served coffee and provided a comfortable stay for an extended period of time. It seemed to Kim that Starbucks and other retailers were missing a valuable opportunity by not serving a more complete food menu to Korean customers, who were typically sitting and talking with people for hours at a time.
forMaTion of a new ConCepT
Kim started formulating a new concept for a coffee shop that would be most ideal for the Korean market. Overall, he felt that the European style café would be more suit- able, which was a cross between the existing coffeehouse model that focused mostly on coffee (like Starbucks) and the casual restaurant that served hot meals. This concept would place more emphasis on foods, including desserts and light brunch, while serv- ing quality coffee. Kim thought that this café concept could create a new value propo- sition that many existing brands, including Starbucks, were not providing to Korean consumers. He also thought that the “café” concept could increase the per customer transaction volume in comparison to a typical coffeehouse. This was critical, as lease prices in Seoul were high—comparable to those of Manhattan or Tokyo, often taking up to 30 percent of store revenues.
The new concept opened up the possibility of attracting a new segment of custom- ers, such as the customers of casual restaurants, where people don’t feel at ease staying for a long time because of uncomfortable chairs and cheap ambience. The new café concept was also different from that of the dessert cafés in existence in Korea at the time, such as Twosome Place, Pascucci, and Beans and Berries. These existing dessert cafés had unfocused dessert menus, which did not seem to complement coffee. Also, too many menu items increased labor and equipment investment costs. Moreover, operational complexity arising from a larger menu caused long wait times for custom- ers. Kim excluded such food items as soup, sandwiches and others that required a cooking process and interfered with the aroma of coffee.
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This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
10 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
Menu seleCTion
Kim decided to focus on only a few desserts that harmonized with coffee. One food item he chose was the waffle. It was a popular snack among young consumers in their twenties to thirties. Many would buy and eat waffles at street kiosks and inside waffle stores. Interestingly enough, no coffeehouse offered the waffle as a featured item on its menu. Serving waffles meant ease-of-operation for store owners because they were easy to make: The process simply required placing prepared baking dough in a waffle machine. Ice cream was another suitable item for his dessert menu because it was a popular refreshment amongst young Korean women. Moreover, it seemed to go well with waffles and coffee. There was especially high ice cream consumption during the warm summer months.
Kim postulated that coffee should make up about 50 percent of the total store sales and that waffles, ice cream and other beverages should make up the other 50 percent. Kim settled on Belgian Liége waffles, which had a plain taste that harmonized with coffee, and Italian gelato ice cream—which was lower in butterfat content, and there- fore more appealing to his female customer base. Kim also envisioned a cozy ambience with comfortable chairs and enough distance between tables for an added element of intimacy. The prices of coffee drinks would be similar to those of Starbucks, which would give Caffébene its high-end positioning (See Exhibit 7). Kim described this strategy with the use of an English word coined by Silverstein and Fiske (2003)— “masstige”—meaning “premium but affordable.”7
Exhibit 7: Key Menu Items and Pricing (in Won) in 2010
Americano 3,800 Espresso 3,500 Caramel Macchiato 4,800 Café Latte 4,300 Mocha Frappeno 5,500 Waffle (1 each) 2,500 Strawberry Cream Waffle (1 each) 4,000 Plain Yogurt Smoothie 5,500 Gelato (1 scoop) 2,500
Source: Caffébene’s internal records (Note: 1,000 Won is approximately $1 USD)
laCklusTer openinG
When Kim believed he had finalized the concept in his mind, he formed a corporation with $1 million USD of personal investment. In April 2008, Kim opened the first company-owned Caffébene store (totaling 1,420 sq. ft.) in Cheonhodong, a neigh- borhood in the south east part of Seoul. The shop was located in a commercial area near a subway station with high foot traffic consisting of office workers, students, and housewives.
For the first six months that Caffébene was open, few customers visited the com- pany-owned store or the eleven franchised stores Kim had authorized. The average
For the exclusive use of L. Ye, 2018.
This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
Caffébene: Master Brewer of Growth and Global Ambition 11
monthly sales of the Caffébene stores were about half that of a Starbucks store, and about two-thirds of the sales of the other major brands. Kim hosted various events and promotions, but based on an analysis of Caffébene membership card transactions, there were few repeat customers. Kim realized that consumers did not feel that there was anything special about Caffébene and, therefore, continued to choose the more familiar brands. Most visitors seemed satisfied with the combination of coffee, waffles, and gelato, but neither the quality of the menu nor the ambience was resonating with them. Wanting to fulfill his dream of building a coffeehouse with hundreds of loca- tions one day, Kim felt the necessity to shake things up.
suCCessful re-launCh
Inspired by a trip to Europe in December 2008, Kim decided to drastically change Caffébene’s interior. By February 2009, major changes were underway in a newly con- ceived flagship store on Rodeo Street in Apgujeongdong—perhaps the most famous and trendsetting street in Seoul. The new Caffébene store would mirror the feeling of an antique European outdoor café, while incorporating a comfortable vintage style that would attract the younger generation. The new interiors would be decorated with a hardwood floor for a warm, cozy ambience. Kim also brought a 6½ foot old round steel enamel clock from France, and hung it in the new company-owned store. He would eventually have imitations of the clock in all Caffébene stores, now a trademark symbol of Caffébene (Exhibit 8).
Exhibit 8: Sample Exteriors and Interiors of Caffébene
Source: Caffébene internal marketing material, June 15, 2010.
For the exclusive use of L. Ye, 2018.
This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
12 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
Kim decided to experiment with a “book café” concept where visitors could drink coffee and feel comfortable reading or studying. This was something Koreans had not felt comfortable doing at coffee shops. He adorned a wall with a hardwood bookshelf containing novels, essays, and books (Exhibit 9). Kim explained, “I intended for stu- dent customers to feel as if they were in a library, reading books, and writing their reports.”
Exhibit 9: Sample Interiors of Caffébene (Book Café)
Source: Caffébene internal marketing material.
Kim also upgraded Caffébene’s menu. He added healthy drinks using traditional Korean ingredients, such as a five-grain Benesto and Red Ginseng Latte. Other inven- tive and unique menu items such as a tea blended with fruits and herbs were added as well (Exhibit 10).
A new product strategy helped improve quality and consistency of the foods in fran- chised stores. For instance, instead of delivering frozen dough, Caffébene headquarters decided to deliver fresh dough to franchisees every morning. Similarly, rather than depending on each franchisee to churn gelato mixture for hours every day, Caffébene staff would deliver freshly pre-made gelato to stores each day. To execute this plan, Kim upgraded Caffébene’s manufacturing facility and increased its delivery staff.
Upon opening, the new flagship store received wildly positive comments from visi- tors and critics. The interior design and ambience of the store proved to be in accord with the target segment’s taste. Young women flocked to the store, and many took pictures of the interior and posted them on their social media websites. Their com- mentaries praised the store’s “pretty” and “cozy” interior. Just as Kim had hoped, many visitors came to the store to read books while drinking coffee, whereas others brought their notebook computers to work. Finally, Kim believed the new concept was poised for aggressive franchising and marketing.
For the exclusive use of L. Ye, 2018.
This document is authorized for use only by Longxia Ye in Managing Growing Ventures Fall 2018 taught by ANASTASIA BAILEY, The Ohio State University from Sep 2018 to Dec 2018.
Caffébene: Master Brewer of Growth and Global Ambition 13
Exhibit 10: Korean Localized Menus of Caffébene
Source: Caffébene internal marketing material.
proMoTional sTraTeGy
Kim wanted to launch a marketing program that no one in the coffeehouse or fran- chising business had ever done. Kim called on iHQ, one of the biggest talent agen- cies in Korea. iHQ, an affiliate of the SK Group (a large Korean conglomerate), was managing about 150 top-notch artistic talents. There was much doubt, even amongst Caffébene executives, that a large enterprise like iHQ would be interested in working with a fledgling startup like Caffébene. However, as coincidence would have it, the CEO of iHQ, Hoon Tak Jeong, had the personal experience of running a coffeehouse and failing. The CEO’s background turned out to be instrumental in convincing iHQ to sign a strategic partnership agreement that involved iHQ receiving a small share of Caffébene’s revenues.
As a start, Caffébene entered into a one-year contract with Ye Seul Han, a popular Korean actress under iHQ’s management, for about $400,000 USD. Together they produced a TV commercial with a budget of about $200,000 USD. Kim’s plan was to broadcast this commercial on three major TV channels for three months, but his management team became concerned. Sun Ki Kim, Kim’s older brother as well as board member and the head of the company-owned stores business unit at Caffébene,
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14 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
was particularly worried. He showed his younger brother the financials of two larger rivals and asked him, “Are you sure you want to spend so much money on commer- cials? If you look at the financials, even the larger and more established companies in our industry are not making enough to cover the kind of advertising expenses you are thinking about.” The younger Kim replied, “When I look at the financial statements of Starbucks, I can see they make a lot of money. My goal is to surpass Starbucks and create a global brand.”
In late March 2009, the first TV campaign of Caffébene with Han went on the air. As the first coffeehouse to advertise on TV with a celebrity endorsement, Caffébene received an overwhelming customer response. Understanding that young Korean women liked to watch TV dramas (similar to American daytime soap operas), Caffébene began to place its brand (showing its stores) on TV shows. Before beginning product placement in July 2009, Caffébene had opened or signed up fifty stores, but by December of the same year, the number doubled to 100.
Throughout 2009, while large Korean corporations were reducing their market- ing expenditures due to the ongoing global financial crisis, Caffébene continued to run its TV ads. The commercials aired every evening on major channels right before the prime time news show. This pricey prime time slot had usually been reserved for only the largest corporations, but because the demand for airtime had dropped by 70 percent, Caffébene was able to broadcast its commercials cheaply. With the economy’s strong recovery beginning the end of 2009, customers poured into the stores as did inquiries about Caffébene franchising opportunities.
buildinG The reTail infrasTruCTure
With the launch of TV commercials, Caffébene started receiving about 600 inquiries and seventy applications for franchise contracts each month. With the large number of inquiries and applications, the biggest challenge was securing enough counseling staff and store locations. Kim reduced paperwork (e.g., nonessential reports between employees and divisions) and instructed his entire management staff to make quick decisions. Kim assigned his most capable employees to handle the franchisee counsel- ing and store development work. He hired ten real estate specialists and granted them discretionary powers to negotiate leasing contracts. Finding large spaces in prime loca- tions proved very difficult. He believed the company’s quick decision making and hard work helped Caffébene secure locations and grow faster than competitors operating in more bureaucratic organizations.
Chull Jeung Kim (not related to the founder), who as executive assistant had worked with the Caffébene founder for many years, described his decision-making style:
Sun Kwon Kim is the kind of person who makes quick decisions about a certain issue without dragging his feet . . . His quick decision-making style, of course, can result in mistakes. But he also corrects his errors very quickly when something goes wrong. He is willing to accept other people’s advice and suggestions.
With the increasing number of franchisees, Caffébene was able to achieve econo- mies of scale effects in production, distribution, franchisee management, and market- ing. Counting on higher profitability in the future, Kim reinvested almost all of the company’s profits into the company (he still owned a majority of the company’s shares).
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Caffébene: Master Brewer of Growth and Global Ambition 15
invesTinG in The CorporaTe infrasTruCTure
In September 2010, Caffébene built a roasting facility that had the capacity to produce 1,000 tons of coffee per year and installed new roasters imported from Germany. The green beans from each country of origin were roasted individually to maximize their own features, and then blended afterward. Although this method was more complex and costly, Kim believed this investment could benefit both the customers and the franchisees.
To ensure an adequate supply of high quality coffee beans, Caffébene entered into a Farm to Table (FTT) contract with Ipanema, the largest single coffee plantation in Brazil. Caffébene became the first Korean coffeehouse to have a direct contract with a foreign coffee farm, from which Caffébene planned to import 220 tons of beans every year. As franchisees and product sales increased, Caffébene was able to reduce produc- tion cost, supplying coffee beans to its franchisees at a price about 20 percent lower ($23 versus $28 per kilogram of beans) than other franchisors charged their franchisees.
In November 2010, Kim established Bene Cup Coffee College, a barista training center near the headquarters of Caffébene in Seoul. He created the training center as a place to cultivate talented individuals for both the coffeehouse operation and franchise development. Similar to McDonald’s Hamburger University, it served as a means to continuously nurture young talent. The training facility offered a barista training program, coffeehouse start-up education program, and coffee-making classes for both employees and hobbyists. It spanned 11,000 sq.ft., had four separate floors, and accommodated 100 trainees at a time.
buildinG The orGanizaTion
Caffébene’s HQ, under Kim’s direction, aimed to create a corporate culture that instilled a sense of pride and loyalty. Every Monday at 8:00 a.m., the executive team held a video conference meeting that was open to all employees. In the meeting, Kim received reports, shared information, and decided on any issues needing immediate attention.
Caffébene instituted programs that encouraged employees to offer their opinions and often implemented their suggestions. A program, named the 365 Days of Idea Contest, empowered employees (also customers and franchisees) to post their ideas, comments, and concerns about Caffébene at any time through the company’s web- page. Kim personally read all the posted comments and asked the entire management team to do the same.
Employee benefits programs were introduced to ensure employees feel respected. All employees working for the Caffébene corporate headquarters (including interior designers, accountants, and other employees working in company-owned stores) were eligible for housing loans up to about $500,000 USD (depending on their position). Each corporate employee was offered access to a vacation facility located outside Seoul for a minimal fee. Employees received seven days of paid summer vacation as well as monetary bonuses to be used for vacations. Employees who worked at Caffébene for three or more years were to be given five additional days of vacation and an extra $1,000 of vacation bonus. In addition, Caffébene authorized each employee a “welfare card” worth $300 USD that could be used for self-improvement activities, such as classes, books, and spa services. It also deposited around $100 USD into employees’ parents’ bank accounts on a monthly basis.
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16 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
As early as one year after its launch, Caffébene allowed its employees an opportunity to buy company stock. More than 50 percent of the company’s employees participated. These policies were designed to intensify internal unity and support rapid growth.
CusToMer relaTions
Kim believed that open communication with customers and franchisees was key to creating value for Caffébene and the best source of continuous innovation. Kim used “Responsible Communication with Customers” as a company slogan. “Responsible” was added to stress that communication had to make financial sense as well. “Custom- ers” meant both consumers and franchisees.
Caffébene made efforts to ensure that its customers felt appreciated. It encouraged all stores to let customers borrow notebook computers and umbrellas free-of-charge. A mystery shopper program employed thirty service evaluators to visit stores and test for consistent service quality across all franchise operations.
“Beppy’s Granting Customer Wishes” was becoming a popular program well-known amongst customers. Beppy was the company’s mascot. Any customer could submit his or her wish on the Caffébene website, and Caffébene would select thirty wishes to grant each month. When the program launched in December 2010, more than 100 applications were received immediately (Exhibit 11). Caffébene spent $100,000 USD for the program in 2010, and allocated about $300,000 USD for 2011.
Exhibit 11: Beppy’s Granting Customer’s Wishes Events
(1) “Beppy’s Granting Customer’s Wishes” staff members. (2) Staff giving financial support to an applicant who had innate impairment with her ears.
Source: Caffébene internal marketing material, October 15, 2010.
Even with all its efforts to appeal to customers, Caffébene was sometimes the target of customer complaints. The most common were about Caffébene’s bland and incon- sistent coffee taste. Kim responded to this complaint.
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Caffébene: Master Brewer of Growth and Global Ambition 17
I know there are some people complaining about our coffee. The fact is that most Koreans do not favor the strong taste Starbucks offers. To tackle any issues with incon- sistency, we have intensified our educational program. We send our supervisors to each franchise to control for quality. This costs us an additional 2 billion Won a year, but we are determined to show how good our coffee is.
franChisee relaTions
The key terms of Caffébene’s franchising agreement were as follows:
1. Franchising fee: 10 million Won (about $10,000 USD). 2. Royalty: 3.5 percent of store sales. 3. Required investment (for build-out, inventory, working capital): 500 million
Won (about $500,000 USD) on average.
Additionally, the franchisees had to agree to receive interior construction and other supplies from the franchisor. Franchisees also had to purchase virtually all food related items such as coffee beans, waffle dough, gelato, and cups from Caffébene. The margin on such goods for the franchisor was about 30 percent. Caffébene did not impose any advertising or promotion expenses on franchisees—all marketing costs were born by the franchisor. A typical franchisee earned a profit of about 100 million Won (about $100,000 USD) per store per year.
Caffébene attempted to maintain a friendly relationship with its franchisees by listening to their feedback. For instance, in June 2010, a franchisee suggested that Caffébene broadcast music to all its stores. In response, Kim placed a broadcasting studio inside Caffébene headquarters, the only one of its kind in the industry. The channel was set up so that customers could call in and talk directly to a disc jockey, who then would play requested songs and have on-air conversations with callers. This program allowed for a more consistent atmosphere, and seemed to further differentiate Caffébene from its competitors.
franChisee TraininG proGraM and issues
Like most other franchisors, Caffébene worked hard to maintain a consistent level of product and service quality in the stores, but achieving it was easier said than done. Kim periodically invited all franchisees to a four-star hotel for workshops, but found that few of them had time to attend. Kim knew that Starbucks did not have this kind of attendance problem, because it owned all its stores. It dawned on Kim that he needed a different approach to unify the management practices of franchisee stores.
Although Caffébene had already had a team of supervisors that visited stores and monitored franchisees, Kim felt that he needed to offer even more training and sup- port. In October 2010, he launched a special training program to train franchisees and their employees onsite in their stores. A new team comprising forty expert trainers, each with more than five years of work experience in both the coffee industry and the franchising business, went out in the field. Each trainer visited franchised stores and worked alongside the employees to demonstrate the proper methods for such activi- ties as greeting customers, operating the espresso machines, and cleaning the floors. Franchisees seemed to respond favorably to this program because of the professional- ism and devotion of the experts. The trainers also performed the role of a messenger,
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18 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
relaying franchisees’ issues and challenges back to Caffébene headquarters. To execute this program, Caffébene allocated an annual budget of about $3M USD for 2011.
In spite of these efforts, there were rumors in the media of rancor between Caffébene and displeased franchisees, including lawsuits. The company reported that in fact, no lawsuits had been filed by a franchisee. There was a lawsuit filed by an interior design agency, but Caffébene was eventually acquitted of all charges. Fast growth with hundreds of new franchisees did result in all sorts of issues Caffébene’s managers dealt with every day, e.g., interior design, machine operation, or inventory management. Kim hoped that the training, support programs, and proactive communication would alleviate most of their concerns.
Global aMbiTions
The South Korean coffee market was becoming increasingly dynamic and competitive. In September 2010, an investment firm associated with Starbucks Korea approached Kim and asked if he would be willing to sell the business. Kim turned down the offer and did not even bother to meet with the firm. Around this time, a Korean conglomer- ate also approached Kim and asked if he would be willing to sell Caffébene for about $170 million USD. Kim again declined. By the end of 2010, several brands started to imitate Caffébene’s various strategies. For example, Twosome Place began using a popular actor as a spokesperson. Others began offering waffles on their menu.
With the competition becoming increasingly fierce, Kim felt compelled to look abroad for growth—something that he wanted to do from the very beginning anyway. His newest goal for the business was to build a global franchising enterprise that would have one trillion Won (or about $1 billion USD) of annual sales in five years and ulti- mately reach ten trillion Won (about $10 billion USD) of annual sales. All executives and directors agreed that Caffébene should expand abroad, but there were differing views on when, where, and how to go about it.
In terms of market entry strategies, several directors suggested that Caffébene find a master franchisee in each country or sell the license outright to a local partner, especially for large and complex countries like China. Around the time of these dis- cussions, wealthy individuals and companies offered to invest in Caffébene’s overseas expansion for partial ownership. All such deals offered to reduce Caffébene’s financial risk of going abroad. However, Kim expressed his concerns:
Many world famous brands like Starbucks are already in all the countries. There are also competitive local brands in every market. We can’t just sell licenses and expect our local partners would survive the fierce competition. We need to be hands-on and help build the business in each market.
I also have concerns working with certain investors. Some wealthy people only see Caffébene’s achievement, but ignore the process or the pains and difficulties behind the scenes. They think if you just inject capital in the business, utilize their personal network, everything will work out . . . There are too many moving parts in food service franchising. It is a very hard business.
China versus The u.s.
There was significant discussion about whether the first foreign market should be China or the U.S. Suran Kim (not related to the founder), a board member and the
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Caffébene: Master Brewer of Growth and Global Ambition 19
Chief of R&D at Caffébene, insisted that the U.S., specifically NYC, should be the first target location. She argued that NYC was the epicenter of the coffee shop industry or any consumer brands for that matter. Moreover, she said that once Caffébene was successful in the U.S., it would be easier to expand into other countries, as Starbucks had demonstrated.
Most other executives and directors had a different view. They reasoned that the U.S. was located too far from Korea and would be difficult to manage. Sun Ki Kim, the founder’s older brother and board member, pointed to the vast difference in busi- ness culture and consumer behavior between U.S. and Korean customers, and argued that therefore there was a chance of making significant missteps.
These executives proposed to go first to China, a growing economy where the South Korea brand is very strong because of the popularity of Korean music (“K-pop”) and television shows. They also pointed out that stores could even be more profitable in China, which offered high population density, similarly high coffee prices, and lower labor costs. They insisted that Beijing should be the site of Caffébene’s first international location. In fact, Caffébene was receiving ten inquiries a month for franchising rights for China. See Exhibit 12 for a summary of market factors for China and the U.S.
Exhibit 12: China and U.S. Key Market Facts
China U.S. Population (2011)1 1.347 billion 312 million GDP (PPP)1 $11.3 trillion (2nd) $15.1 trillion (1st) GDP Growth Rate (2010)2 10.4% 3.0% GDP per Capita (PPP)1 $8,382 (90th) $48,386 (6th) Coffee Consumption per Capita3 0.02 kg 4.2 kg Number of Starbucks Stores4 220 company operated stores 6,707 company operated stores Price of Starbucks Coffee (mid-sized drinks)5
$3.80–5.00 $3.00–4.50
Sources: (1) Wikipedia; (2) The World Bank; Countries by coffee consumption per capita. World Re- source Institute. 2008; (3) International Trade Commission 2009; (4) Starbucks 2010 annual state- ment—does not include licensing arrangements; (5) WantChinaTimes Jan 5, 2011.
Several executives contended that if Caffébene failed in NYC, the company could lose significant capital and damage its brand. If Caffébene were to enter the U.S., it should have its first location in Los Angeles’ Koreatown where there would be a base of friendly customers.
Kim carefully listened to the arguments on both sides for months in the board meetings and sought additional expert advice from employees and consultants. One business advisor recommended to Kim that he not shy away from taking on a difficult challenge, such as entering the U.S. Most of Caffébene’s financial investors opposed expanding into the U.S. After much contemplation, Kim made the decision to open the first foreign store in NYC. He explained his thought process:
Should we take the safer path? If we follow conventional wisdom, we will never create a global brand. China seems safer from both cultural and logistics perspectives. Entering the U.S. through Los Angeles’ Koreatown seems safer, but that defeats the purpose of
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going global . . . Wherever we open our first international store, we would work equally hard to be successful—to develop a new menu, research consumers, and design the interior. We would commit to the same level of effort. Therefore, I made the decision to open our store in a place that can bring the biggest success. I chose New York which is the center of the world’s economy and culture.
The biG apple
Kim and his team devised their NYC market entry strategy. Just like Caffébene suc- ceeded in Korea by launching a flagship store on Rodeo Street in Seoul, the country’s fashion capital, they thought that they should make a splash in the most influential place in NYC. Kim believed that the right location was Times Square, often iconified as “The Crossroads of the World.” Right in the heart of New York City, it was known as the world’s busiest pedestrian streets and a major center of the world’s entertainment industry. Times Square was one of the world’s most visited tourist attractions, with over 39 million annual visitors.
A small team was dispatched in Fall 2010 to investigate the option of opening the first U.S. store in Times Square. The team found many potential store locations, but most of them seemed too small for a flagship store. Eventually, the team identified a 7,100 sq. ft. store on the first floor of the Crowne Plaza Hotel in Times Square, at the intersection of 49th Street and Broadway. It was a location with high foot traffic and visibility. The downside was the cost. Kim’s team estimated that it would cost the company $6 million to properly launch the new concept, a significant amount consid- ering that it was a large portion of the company’s total cash balance. The monthly lease would cost more than $100,000 after an initial five-month grace period reserved for remodeling. Kim visited the place, made an offer, and then followed up with a large down payment of $1.35M USD a few months later. This first store outside of Korea would become the most expensive store within Caffébene’s entire network.
Exhibit 13: Starbucks versus Caffébene Comparisons
Starbucks Caffébene Sales (USD)1 $10.7 billion2 $101 million3
Current Assets including Cash $2.76 billion2 $32 million3
Number of Stores in Korea 315 (licensed)2 4103
Number of Stores in U.S, 6,707 0
Business Model in Korea Company owned stores (with local partners as needed)
Franchising model with some corporate-owned flagship stores
Business Model in U.S. or China Company owned stores and local partnerships
Seeking franchisees and master franchisees
Average Sales per Store in Korea $690,0004 $500,000 Average Sales per Store in the U.S. $106 million5 N/A
Sources: (1) Using approximate currency exchange rate of $1 USD = 1000 Won; (2) Annual state- ment 2010 (fiscal year ends in October) ; (3) Caffébene internal info, Dec. 2010; (4) 2011 Industry Report KB Financial Group Research Center; (5) The QSR 50 Report 2010, Aug 2010.
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Caffébene: Master Brewer of Growth and Global Ambition 21
Some of the executives still recommended a different strategy, i.e., starting small in a less profiled location and fine-tuning the company’s U.S. concept over time. Oth- ers were concerned about going head to head against Starbucks, a battle many other coffee chains seemed to have shied away from. (See Exhibit 13 for a Starbucks versus Caffébene comparison.) Starbucks appeared to dominate the coffee shop market in Times Square.
Kim was optimistic about the flagship store’s potential. He believed that if Caffébene implemented its popular store concept combined with a localized menu, it could be competitive in New York. As he reflected on Caffébene’s success, he was reminded that the reason Caffébene outperformed Starbucks in Korea was that it met customer needs better than Starbucks did. (See Exhibit 14 for Caffébene’s time line of key events.) Thus, Kim was determined to understand and meet the preferences of New Yorkers. Kim explained:
Some of our investors are worried about our plan. But if we can pull it off in New York, we will be even more successful in other Asian markets . . . Our policy is to totally local- ize. We will have a totally different menu, but keep our interior design, and facilities such as computer room and book café . . . Several executives are worried about going head to head against Starbucks in Manhattan. Actually, I am puzzled that other coffee chains have been reluctant to challenge Starbuck’s dominance in Manhattan. I think most people in New York would want an alternative to Starbucks.
Exhibit 14: Timeline of Key Events
April 2008
October 2008
February 2009
March 2009
September 2009
December 2009
May 2010
September 2010
December 2010
Caffébene opens its first store.
Signs up eleven franchise stores.
Opens the flagship store in Rodeo Street.
First television commercial goes on air.
Builds a roasting facility with capacity of 1000 tons/year.
Signs up 100th franchisee.
Number of stores reaches 240.
Number of stores reaches 300 locations. Kim sends an exploration team to NYC.
Number of stores reaches 410. Signs lease agreement for Times Square location.
Caffébene’s plan for entering the U.S. market was met with significant media atten- tion in South Korea. Most newspapers carried favorable articles about Kim’s ambition. Upon hearing the news, actress Han’s mother who resided in Los Angeles requested a franchise, which Kim gladly granted. In fact, Kim decided that the Los Angeles store would be Caffébene’s second or third franchise location in the U.S. The initial discus- sions with prospective franchisees from China, Vietnam, and the Philippines indicated that they were more interested in Caffébene because of the NYC location.
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22 Case Research Journal • Volume 33 • Issue 1 • Winter 2013
At the same time, there was worrisome news. Kim was informed that Starbucks, perhaps concerned about Caffébene’s large physical presence, was preparing to expand its store from 1,780 sq. ft. to 7,000–8,000 sq. ft., only fifty yards from Caffébene. Then, in January 2011, Kim’s U.S. expansion plan hit its first major snag. Caffébene’s task force sent to NYC found that the previous tenant had been operating its restau- rant without the needed permits. This meant that Caffébene had to apply for permits from the city government, which was notorious for being difficult. Kim was advised that this permit process in NYC could take anywhere from six months to two years. In short, Caffébene could be down millions of dollars in lease payments before the store ever opened. Perhaps even more important, its growth plan for the U.S. and even other countries could stall for an unpredictable period of time.
Kim asked the landlord to extend the five-month grace period to deal with the per- mitting process. The landlord refused. In response, Caffébene’s attorney recommended taking legal action against the landlord. He said that Kim could seek compensation for damages (including $1.5 million USD paid for down payment and other business expenses incurred until then) and try to find another location.
But there seemed a downside to the attorney’s advice in Kim’s mind. Finding a new, good location in Times Square was difficult. It was unclear how long the lawsuit would take and how much it would cost in total. Depending on the court ruling, Caffébene could be stuck with two lease payments and locations. Another alternative for Kim was to make a bold about-face move, and fold the U.S. operation. Perhaps the problem with the lease was an indication of Caffébene’s lack of preparedness for such a complex market.
Meanwhile, news started leaking about Caffébene’s permit problem and delayed opening of its NYC store. The investors and directors who opposed the idea of enter- ing the U.S. in the first place started becoming more vocal. Kim carefully listened to the opinions of investors, directors, and executives and reflected on what course of actions he should pursue. Was this a bump in the road or a sign of the wrong path to his global goals?
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Caffébene: Master Brewer of Growth and Global Ambition 23
noTes
1. Kim, Duk Han. “Even Starbucks Went Down to the 3rd Place.” Chosun Ilbo, January 13, 2011. http://biz.chosun.com/site/data/html_dir/2011/01/ 13/2011011300113.html (accessed May 12, 2011).
2. Kim, Seo Young. “The Cause and the Route of the Financial Crisis in 1997 and 2008.” The Korean Financial Supervisory Service Official Blog, September 3, 2010. http://blog.naver.com/fss2009?Redirect=Log&logNo=140114047776 (accessed May 13, 2011).
3. Explore Korea through Statistics 2010. National Statistics Office. http://kostat. go.kr/portal/english/resources/2/1/1/index.static (accessed January 8, 2013).
4. You, Hyun Hee. “768 Coffeehouses Opened This Year.” The Financial News, December 21, 2012. http:// news.naver.com/main/read.nhn?mode=LSD&mi d=sec&sid1=101&oid=014&aid =0002568477 (accessed March 14, 2012).
5. Kim, Hoi Kweon. “Cooling Starbucks and Coffee Bean, Hot attack of Korean Local Brands.” Sisa Press, November 18, 2009. http://www.sisapress.com/news/ articleView.html?idxno=50652# (accessed May 26, 2011).
6. Park, Ju Kwan. “For Making Money, the Best way is Franchising.” Nexus Books, 1st Edition, November 25, 2003.
7. Silverstein, Michael J., and Fiske, Neil. “Luxury for the Masses.” Harvard Busi- ness Review, April 1, 2003. Prod. #: R0304C-PDF-ENG.
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