Five-Star Indulgence Just Around the Corner--85°C

Taipei's venerable Lungshan Temple sees an uninterrupted stream of visitors all year round. But the 85°C coffee shop across the way, located in the corner storefront on Kuangchou Street, is by no means far behind. Many elderly people or housewives just coming from worship, as well as office workers and young lovers, gather in this tiny shop of only 35 square meters' floorspace to buy coffee that goes for a mere NT$35 (just over US$1) a cup, slices of cake that sell for about the same, and-a recent innovation at some of the company's directly-operated shops-all kinds of oven-fresh breads and pastries.

Priding itself on "five-star indulgence at everyday prices," 85°C has firmly grasped the psychology of urban office workers. With richly textured cakes at inexpensive prices, no wonder business is booming.

Corner storefronts, top chefs

It is not only the Kuangchou Street shop of 85°C, now Taiwan's biggest food and beverage chain, that is packed with people. The other 26 directly operated shops and 285 franchises are all turning profits. What's the secret?

The answer is simple. 85°C has wooed to its kitchens four of the biggest names in Taiwan's culinary world: Henry Cheng, former head pastry chef at the Agora Garden Taipei; Danniel Ni, formerly head chef at the Far Eastern Plaza Hotel and China Pacific Catering Services; Chili Yin, formerly head pastry chef at the Grand Hyatt; and Kevin Wu, the only person of Chinese ancestry ever to win the top prize in the Japan Meijikinenkan Sugar Art Contest. They have created elegant cakes to back up the claim of "five-star indulgence at everyday prices," thereby hooking securely into the propensity of urban office workers to "pamper oneself with a little taste of luxury now and then."

In addition, 85°C has also adopted the successful strategy of utilizing only corner storefronts. As president Wu Cheng-hsueh, who created the 85°C brand name single-handedly, explains: "My original idea was very straightforward. If you open a shop, it has to have high visibility. There are always lots of people going past storefronts at street intersections, so they have to be more economically productive than ordinary storefronts."

85°C insists that all its cakes be "semi-hand-made." The "French layer cakes" that Danniel Ni, manager of the Cake and Pastry Division, is holding up have 18 different layers.

Junior-high CEO

To hear Wu Cheng-hsueh expostulating on management concepts, you would think that he had a strong academic background or international business experience. But this native of rural Kouhu Township in Yunlin County never even finished technical high school; his highest academic degree is junior high. His approaches to founding and running his business have all been learned in the "school of hard knocks."

Wu, who just turned 40 this year, is very down to earth. His home environment as a child was not what you would call good, so he started to dream from an early age of getting rich one day, and he took any job that he could get. After finishing his compulsory military service, he worked as an inventory clerk in a tennis racquet factory, opened a hair styling salon, started a marble goods factory, and even invested in a shoe manufacturing operation in China.

Eleven years ago, he went to Taichung to visit an old army buddy, who happened to be Kuo Wen-ho, founder of the Easy Way Bubble Tea House chain. When Wu saw the long lines of customers at the Easy Way near Tunghai University, he got his inspiration. He opened seven or eight Easy Way franchises in the commercial district around Feng Chia University, and was so successful that he was even invited to join the top management at headquarters.

Thanks to the high profit margins in the bubble tea business, Wu quickly accumulated capital. But as Easy Way continued to expand, differences of opinion arose among the shareholders, and he decided to set out on his own. He first founded the "Hot to Home" pizza shops, launching the trend for NT$50 (US$1.50) personal pizzas. But the pizza fad faded as quickly as it had started, and anyway too many imitators had entered the market, so business dropped sharply after a few months and most of the outlets closed.

Wu carefully analyzed the failure of Hot to Home. One factor that stood out was that by subcontracting the making of the pizza shells out to a food-processing firm, he could not control quality very strictly, and he could not prevent the firm from selling the same product to his competitors. This experience taught him the importance of maintaining a firm grip on the main ingredients of your product.

Unlike most bakeries, which only have one batch in the morning and one in the afternoon, 85°C offers oven-fresh bread every hour. The photo shows Chili Yin, top chef for baked goods.

The founding of 85°C

Given Wu's knack for commerce, the eventual creation of a brand like 85°C was predictable, perhaps even inevitable. Yet it was also somewhat serendipitous. As pizza grew cold, and Wu was weighing his future options, he once went to a nice hotel with his colleagues for a meal. He found the cakes served in the hotel to be exquisite-refined yet richly textured-but rather on the expensive side for most folks, since they cost at least NT$100 (about US$3) per slice. He remembered that during the SARS crisis, when business in public gathering places plummeted, the big hotels had to swallow their pride and sell boxed takeaways, which turned out to be a big hit. An idea suddenly surfaced in his brain: "If you get the pastry chef from a five-star hotel to figure out how to make low-cost cakes, you'd have a real attraction!" It took him only a short time to turn this notion into action.

But it's no mean feat to get a five-star chef to go back to square one. Wu seized on a key point in their psychology: the desire to be independently creative which is blocked by a lack of capital. He offered them equity in the company in exchange for their expertise, and-exercising the same legendary persistence that Liu Bei, as portrayed in The Romance of the Three Kingdoms, showed in repeatedly asking Zhuge Liang to become his minister until Zhuge finally agreed-Wu finally persuaded several top chefs to join his operation.

Wu Cheng-hsueh, who founded 85°C single-handed, is a demon for managing chain stores. Ironically, he admits to no particular fondness for coffee, and says that his wife was the one who originally dreamed of opening a coffee-and-cake shop.

It's the coffee beans, stupid!

Besides securing culinary expertise, Wu also sought out high-grade coffee beans. He flew to Guatemala to learn about different coffee varieties, and ultimately chose beans grown on the volcanoes around the city of Antigua as the foundation beans for his java. Keeping in mind the lesson he learned at Hot to Home, Wu decided to avoid getting the beans through a general trading company, but signed an exclusive contract with the Taiwan sales agent for those beans, under which the agent could sell only to 85°C and big hotels.

The quality of the beans opened a gap between 85°C and competitors in the same price range. Meanwhile, at only NT$35 for the basic cup of coffee, his prices were only half or even less of those charged by the international pacesetter Starbucks. 85°C was immediately popular in the market, and now sells 75 million cups of coffee annually.

Ironically, Wu himself doesn't like coffee very much. "In fact, it's my wife who really loves it, and she always wanted to open a shop selling coffee, cakes, and baked goods," he says, looking a bit sheepish. "She is even the one who came up with the name 85°C, because coffee tastes best at that temperature!"

Some directly operated 85°C outlets are now selling breads and will soon begin offering Asian pastries like miniature pineapple cakes, dorayaki, and moon cakes.

It's a piece of cake

There is usually a trade-off between price and quality, but 85°C has struck a balance that has allowed them to enjoy steady growth in sales since opening three years ago.

The raw materials that 85°C uses are all comparable to those used in five-star hotels. For example, they use President brand cream imported from France, while their chocolate comes from a manufacturer in Belgium. Danniel Ni, manager of the Cake and Pastry Division, takes as an example their bestseller, Black Forest Gateau. Most bakeries in Taiwan just make a chocolate cake with black cherries in it, but 85°C follows the authentic German recipe, using red sour cherries, which cost twice as much as black cherries. This adds a tartness to the sweetness, and enriches the texture, so consumers never seem to tire of it.

But using high-priced ingredients while selling at low prices to the consumer seems like a recipe for losing money. 85°C's solution is high volume. "For example, in one month we use about 35,000 kilos of flour and 4500 kilos of butter. No five-star hotel will ever need such amounts, so naturally our import prices are much lower. Also, hotels need to invest in extraneous costs like decor, marketing, and personnel, so naturally they charge a lot more for their cakes. But we don't have that much overhead, so its enough for us to have a profit margin of only 15% or so on each piece of cake, and that's how we can sell them so inexpensively," explains Ni.

The trick to quality control in the 85°C system is mass production through centralized kitchens. At present there is one central kitchen in Taipei and one in Taichung. The hundreds of employees in the kitchens use fully standardized actions-from mixing to baking to applying butter-to produce cakes of various sizes. It looks a lot like a production line in a clean room where silicon wafers are manufactured. These semi-finished cakes from the central kitchens are then shipped in freezer trucks to individual stores where they are decorated and put out for sale.

Lu Ching-tu, formerly the head pastry chef at the Grand Formosa Regent Taipei and now head R&D chef at 85°C, laughs as he says: "When I was the head chef in a hotel, making cakes was an art form, and we could follow any impulse or inspiration. But here, the products have to all have identically good taste and appearance, they have to be easy to make, and they have to stand up to low-temperature delivery; this kind of standardization is actually a lot tougher."

Sniffing out new markets

Besides the cakes and coffee, 85°C is now also selling breads and will soon come out with Asian pastries like miniature pineapple cakes, dorayaki, and moon cakes. Because the Taiwanese market is saturated with outlets, 85°C has started to go international. They opened their first overseas store in Sydney, Australia in 2006, as well as two branches in Shanghai in December of 2007, and expect to open their first US store in California in March 2008. The parent corporation of 85°C, Meishih Tajen, will formally hang out its shingle on the stock market in 2009.

Wu's next plan is to cross over into other food and beverage business. He is working with the listed Japanese company Sanko to establish a joint firm that will open izakaya (Japanese-style bar-and-grills) in busy, easily accessible areas. The first outlet is expected to open for business in Taipei or Taichung in March of 2008.

Described by his employees as a "hunting dog" with a nose for money, Wu Cheng-hsueh is leading his intrepid band ever forward. Will they be able to create more business miracles at home and abroad? Time will tell the tale.