Their Cup Runneth Over Coffee Shop Chains Conquer Taiwan

According to market research, every time a branch of a coffee shop chain opens on street corner, four to five individually owned coffee shops soon close down nearby. In a short few years, coffee shops that offered a huge variety of flavors, decor and atmosphere have disappeared in droves. Coffee drinkers are polarized in their reaction to this dramatic change.

Mr. Wu, who works for an advertising agency, finds it intolerable that even the taste of coffee has to be standardized all over the world. Robbed of the right to drink coffee brewed according to the different moods of different coffee shop owners, he says in frustration that since he cannot get through the day without his coffee, even he has had to surrender to the coffee shop chains.

But another coffee drinker, freelance writer Chen Mei-tsen, welcomes the ubiquitous chains. Chen, who has sampled the wares of virtually all Taiwan's coffee shop chains, says that "habit" is the main factor in her choice of coffee shop.

"After a while, you discover which coffee shop and which coffee you like best. If you can find that coffee shop everywhere, isn't that just so convenient?" Also, all Taiwan's coffee shop chains have pretty good decor, and some are quite spacious. Early in the morning, when hardly any customers are about, is the best time to sit there and work.

Two cups between eight

"Space" is a characteristic feature of Taiwan's coffee shop chains, and one of the main reasons why they have conquered the market so quickly.

"Providing 'space' is the biggest function of Taiwan's coffee shop chains," says Victor You of Barista Coffee Roasting Company. John Hsu, president of President Coffee Corporation, Starbucks' Taiwanese licensee, also subscribes to this view.

"The different peak business hours in coffee shops in the US and in Taiwan reveal the difference between our two coffee cultures," says Hsu. In the US, Starbucks branches are at their busiest in the mornings, because coffee is an important breakfast drink for Americans. But in Taiwan, trade is briskest in the afternoon, because what people here need is a place to socialize or talk business. Drinking coffee is just an accessory to this.

If you check out the coffee shops in Hsimenting or the commercial districts of eastern Taipei, you will find many young people gathered in these English-named establishments. Ask, and they will tell you that these places are chic and cheap, and perfect for chatting and killing time. That is why it is quite common to see seven or eight young people with only a couple of cups of coffee between them occupying a table for an hour or more, or young women worn out from bargain hunting who don't order coffee, but simply drink the free water and rest a while before getting back to the boutiques.

The coffee shop chains have stolen the hearts of consumers of all ages. Chen Mei-tsen recounts that her nephew, a junior high school student, used to hang out in fast-food restaurants. But now he and his friends have switched to coffee shops. "They buy the cheaper 'regular customer' vouchers, and give the shops secret names that only they know. These are the new places where they misspend their youth," she laughs.

Endless variety

Most of the chain coffee shops to be found every few paces along Taipei's streets are located on busy corners. Some share premises with other businesses, and each has its own strategy.

In Taiwan today there are close to 20 well known coffee shop chains. They include franchise operations that have been established for five years or more, such as Doutor, Dante, Manabe, and Ikari; the recently introduced American chain Starbucks; local companies such as Barista and IS Coffee; and even brands such as Mr. Brown and UCC which started out selling canned coffee. But despite this dazzling variety of brands, in the different "spaces" they provide and their different styles of serving coffee, one can still see clearly how the coffee market is segmented, and how each segment of the market is being developed in different ways.

Doutor, Ikari, and Dante all advertise their coffee at the budget price of NT$35, and this is how they managed to survive the market shakedown of 1998 and continue to develop steadily.

Doutor, which was introduced from Japan, has been established in Taiwan for a full decade, and today has 32 branches. Chairman Cheng Hsi-tsun states that from the beginning they have targeted office workers as their consumers. "Cheap but good coffee, sandwiches, and a place where it is convenient to talk business-we have mostly chosen locations in urban office districts." Cheng says that partly in response to the demand for quick service in today's industrial society, they do not brew their coffee one cup at a time in the American style, because in busy periods customers would have to wait too long. Instead, patrons are served immediately from large pots of coffee.

Segmentation vs. zero-sum competition

Barista and Manabe, on the other hand, emphasize comfortable premises and a diverse range of quality coffees. Victor You, operations department manager at locally founded and run Barista, says that initially the company imported its coffee beans directly from the US chain Seattle Best Coffee. But because of the long shipping times to Taiwan the flavor often deteriorated en route. So they decided to set up their own roasting company in Taiwan, in order to supply the freshest beans.

"We also put a lot of stress on providing a comfortable environment. For instance, we separate off the smoking section completely with glass panels." Victor You says it is this refined approach that distinguishes Barista most clearly from its strongest competitors, Starbucks and IS.

But the area of competition which attracts most attention is between the "unsegmented" chains, with their one-size-fits-all approach. The main contenders are the US-style Starbucks and the home-grown IS Coffee.

Both make every cup of coffee individually, but neither offers much in the way of variety, and although each has a few small take-away outlets, they are mainly represented by large, spacious premises. On Taipei's main streets it is by no means unusual to see branches of the two chains facing each other down on opposite sides of a crossroads. At present, Starbucks has 68 branches and IS almost 50, both mainly in and around Taipei.

Competition between Starbucks and IS is a zero-sum game. One difference between them is that prices at IS are around NT$20 cheaper than at Starbucks. Because Starbucks is a global chain, its coffee beans are purchased and roasted centrally in the US, and even the decor of its premises is more or less identical worldwide. IS Coffee is owned by the local company Pacific Acme Coffee and Foods Corporation, and it handles its own coffee bean purchasing and roasting. It uses dark, cool colors in its decor, and also serves simple Chinese and Western-style pasta and rice dishes, and sandwiches. Thus IS offers greater choice than Starbucks, but the flipside of this is slower service.

Expand to survive

The rapid rise of the coffee shop chains in a short number of years has shown the amazing potential of Taiwan's coffee market. Yet the coffee shop chains are feeling the effects of the economic downturn to some degree. A senior manager at one chain reveals that behind their glitzy exterior, many are finding the going very tough. For instance, he notes, IS Coffee has closed more than ten outlets this year.

Victor You of Barista also says that since the current slowdown began in September last year, the total market has shrunk by 10 to 30%. But overall, coffee shops still show the strongest potential of any of Taiwan's chain store businesses, and in keeping with the principle that in bad times one should do the opposite of what the herd is doing, all the chains are still opening more branches. "In the chain store market, if you stop expanding you're dead," he says.

However, opening more outlets when the economy is sluggish requires extra caution. Barista aims to become a "national chain," but to achieve this they first seek to build up brand awareness in each new locality before increasing the number of branches there. To reduce its initial capital outlay, Barista has adopted the approach of first opening outlets inside department stores. Furthermore, opening new branches simply by negotiating with department stores saves the company a great deal in terms of personnel and time.

Starbucks licensee President Coffee Corporation, which is backed by the huge President Group, states that it has been "barely affected" by the economic downturn. President Coffee's president, John Hsu, says that for a large group like Starbucks, maintaining the soundness of its corporate structure and business model is the key to riding out the ups and downs of the business cycle, and the road to long-term success. President Coffee's initial contract with Starbucks includes a plan to open 90 branches in Taiwan within five years. After three years in operation the chain already has 68 branches. "Every branch is making money, and we're on track to meet the target of 90 branches in five years." A relaxed John Hsu says confidently that none of his competitors is a match for Starbucks. "People open branches next to us, and we open branches next to them." But this is just a survival strategy, he avers-calling it cutthroat competition would be going too far.

But there is still a need for caution when opening new branches. Drawing on President's experience in expanding its 7-Eleven franchise, Hsu says that of course one has to go for nationwide coverage, but at the same time one must build on a solid base. For instance, there are now two Starbucks branches in Kaohsiung and one in the much smaller Tainan. But the market in Tainan seems much stronger, so in fact they may expand there more quickly. As for eastern Taiwan, Hsu says with a smile that even 7-Eleven has ventured there only in the last few years; naturally Starbucks will not rush in blindly.

Distribution war

Has the sluggish economy hit the business of budget coffee shops in the NT$35 range? Cheng Hsi-tsun, chairman of Doutor, which also operates the Olive Tree restaurant chain, says the slowdown affects the entire catering industry, but because of Doutor's strategy of mainly targeting office workers, a bigger problem the chain faces is the shift in leisure patterns throughout society. "Since the introduction of the two-day weekend we've lost the whole Saturday trade in office districts, and that used to be the busiest day of the week." Cheng says that the company's response to the changes in consumption is to expand into locations where there is an overlap of at least two out of three of office, commercial and residential districts.

Chains have to keep on opening outlets, but can their business keep growing too?

"This is a battle between distribution channels. It takes planning, vision, and a strong company. But once your brand is established and consumers are in the habit of coming into your stores, they'll buy whatever you're selling!" Thirty-year-old Victor You of Barista oozes confidence.

Taiwan is a fast-changing market in which fad products come and go with very short life cycles. Portuguese egg tarts are the classic example. But the coffee shop chains hope that coffee, which has become something that Taiwanese, with their ever more westernized tastes, cannot do without, will be the key to a lasting marketing miracle.

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Bright, modern decor and a diverse range of products to suit mass tastes have allowed coffee shop chains to take Taiwan's market by storm in just a few short years. Pictured here is the Starbucks branch on Sungshou Road in eastern Taipei.

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From early till late, the IS Coffee and Starbucks branches that stand within hailing distance of each other in Taipei's Kungkuan area attract young scholars to meet and study there.

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The wide choice of quality coffees on which Barista Coffee has built its reputation causes many customers to linger long at the counter, struggling to make up their minds.