A The Coffee store in São Paulo, Brazil | Photo credit: The Coffee
A new wave of coffee shop start-ups is making waves in the international branded coffee shop market. Young and rapidly growing chains, such as China’s Luckin Coffee, Indonesia’s Kopi Kenangan, Singapore’s Flash Coffee, Blue Tokai in India, US-based Blank Street, 5 to go in Romania, and The Coffee in Brazil, have set themselves apart by catering to growing demand for premium coffee combined with affordability and speed of service.
These slick operators have successfully deployed technology to streamline operations through automation, app-based transactions and savvy social media marketing.
Many also have a markedly less precious approach to serving coffee, prioritising consistency and efficiency through smaller-format outlets, pick-up and delivery over high-dwell time stores.
It is a strategy that chimes with a new generation of relatively affluent younger consumers, especially in developing markets, many of whom have grown up with globalised branded café culture but until now may not have been customers themselves.
Global investment firms have also taken note, with hundreds of millions of dollars invested in digital-first coffee chains over the last 18 months.
It’s a fast coffee world
Felipe Cabrera is Founder and CEO of Ad Astra Coffee Consulting, a Shanghai-based consultancy specialising in coffee business development across China. The Colombian native and licensed Q grader has witnessed the boom in ‘new retail’ coffee chains in China and the wider East Asia region first-hand.
He credits the rise of China’s Luckin Coffee, which recently reached 10,000 outlets, with providing the template for a surge of fast-growing digital-first coffee chains.
“I recognise many similarities between these local chains and Luckin. They all probably looked at what was happening in China and saw a niche opportunity,” he says.
Luckin, Cabrera says, remains the leading example of a ‘fast coffee’ company, a term that in China refers to quick and convenient coffee consumption, often associated with on-the-go lifestyles and busy schedules.
Founded in late-2017, Luckin secured significant funding early on, attracting investors with its digital-first approach, convenient store locations and aggressive discounting. It also positioned itself as a ‘home-grown’ coffee chain by incorporating Chinese culture and beverage preferences, such as cream cheese topped tea, into its menu and branding.
“Big data is a key differentiating factor that gives investors numbers and intel to create forecasts”
Felipe Cabrera, Founder and CEO, Ad Astra Coffee Consulting
Luckin implemented a sophisticated data analytics system with all transactions conducted via its app, enabling personalised promotions based on individual preferences. Its strategy also focused on strategically locating its stores in densely populated areas, such as business districts and office complexes.
A convenient delivery-only or pick-up model with little or no in-store seating further streamlined operations and reduced property costs, enabling the company to maintain competitive pricing 20% lower than its largest competitor, Starbucks.
By 2019 Luckin had reached a peak valuation of $12bn and overtook Starbucks’ then 4,300 store portfolio that had taken nearly two decades to establish.
A now infamous $300m sales fraud scandal in 2020, compounded by Covid and subsequent bankruptcy, was almost the end of Luckin.
However, under new leadership Luckin is once again thriving in post-pandemic China. After securing a further $250m for investors to restructure in 2021, the Xiamen-based coffee chain is now profitable and opened its first international stores in Singapore in 2023.
Despite Luckin’s sizeable market lead in China, competition has become fierce. Starbucks currently operates more than 6,000 stores across the country and has reaffirmed its ambition to reach 9,000 stores by 2025.
A Blank Street Coffee store in London, UK Photo credit: Blank Street Coffee
Meanwhile, Cotti Coffee (from the Italian biscotti, or cookies) is also reaping the benefits of Luckin’s strategy. Led by former Luckin CEO Jenny Qian and COO Charles Lu, Cotti Coffee has opened more than 2,000 stores in less than seven months since launching in October 2022.
With a registered capital of US$200m, Cotti announced plans to reach 10,000 stores across China by the end of 2025, following a growth blueprint with many similarities to Luckin.
Even the brand’s marketing material highlights ties between the companies, cheerfully promoting ‘Cotti, from the former Luckin founder, building a new brand upgrade’.
There is, however, a fundamental difference between how Luckin and Cotti have expanded. From the outset, Cotti’s growth has been fuelled by franchises, as the company has received little external investment – perhaps unsurprising given its founders’ background with the Luckin Coffee sales scandal.
Cotti deploys a ‘full joint venture’ model with no self-operated stores in order to prevent conflicts of interest. Whereas Luckin Coffee has more recently focused on franchising, approximately two thirds of its 10,000 locations are company operated.
While the global premium café segment continues to be dominated by prominent international brands with a global presence, the market is on the cusp of significant change. For Matthew Barry, Insights Manager of Food & Beverage at Euromonitor, the success of new these new coffee chains indicates a shift in out-of-home coffee consumption.
He believes many branded coffee chains are shifting their focus away from cafés designed for socialising towards operations focused on convenience and on-the-go trade.
“Looking ahead the segment’s future will be defined by speed, technology, and customisation, requiring a high degree of digitalisation, which these newer chains heavily emphasise.”
Big coffee data
The vast majority of successful coffee start-ups have been through several venture-capital-backed funding rounds to scale their businesses and invest in product development. Investors are often attracted by opportunities for profitability and scalability generated by cost-effective digitalised business models.
These ambitious coffee start-ups frequently leverage automation and technology apps to streamline operations and reduce reliance on staff. This includes deploying self-ordering kiosks, mobile apps for convenient transactions and automated coffee machines.
Swiss super-automatic espresso machine manufacturer Eversys supplies many of these new coffee chains, including US-based Blank Street and Roasting Plant and India’s Blue Tokai and Third Wave Coffee, enabling further operational telemetry to be captured. In China, Luckin Coffee deploys WMF super-automatic machines to generate realtime operational data.
Enhancing speed of service, consistency and efficiency to support scalability is the key outcome, to the extent that Ad Astra’s Cabrera says many coffee chain start-ups are now created first and foremost as tech companies.
“Big data is a key differentiating factor that gives investors numbers and intel to create forecasts, thus bringing the appeal of a faster break-even of the investment. It’s a distinct game compared to the larger international chains – they also get money from investors, but the results arrive slower. This has become the coffee chain game now.”
India, as is the case with China, has traditionally been a tea-drinking nation. However, with disposable incomes rising, Indian consumers are seeking out and are embracing international branded coffee shop culture as never before, says Dhruv Kapoor, a venture capital consultant from Anicut Capital, based in Chennai.
“Technology plays an absolute role from an investment perspective, as it provides leverage in managing operations efficiently while capturing customer journeys through multiple touchpoints,” he says.
Anicut backs Blue Tokai Coffee Roasters, a fast-growing specialty coffee chain and roaster based in India, a market that is rapidly becoming a global hotspot for coffee chain growth.
With 68 stores and four coffee roasteries, Blue Tokai began as a small-scale operation in 2013 focusing on direct trade relationships with coffee farmers in India. Since then, Blue Tokai has gradually expanded, securing a total of $40m after a 2023 series B funding round to open 200 new stores across India and internationally.
This investment is the largest in the Indian specialty coffee industry to-date and highlights growing opportunities for branded coffee chains in the vast country.
“As investors, we are bullish on the specialty coffee revolution in India”, adds Kapoor.
The fast and the luxurious
Ad Astra’s Cabrera says China’s remarkable ascent on the global coffee stage can in part be attributed to an expanding middle-class who grew up during the economic liberalisation in the 1990s and were the first generation exposed to premium international brands and products, including coffee.
Blue Tokai is introducing a new generation of Indian consumers to home-grown specialty coffee | Photo credit: Blue Tokai
As in the West, frequenting a branded coffee chain in China has become a symbol of status, affluence, and cosmopolitanism for younger millennials and Gen Z consumers.
Today, a similar phenomenon is occurring in India, where international chains such as Starbucks, Costa Coffee, Tim Hortons and Pret A Manger are all vying for a share of the increasingly opportune premium hospitality market.
India’s home-grown chains have also weighed in and are utilising their local market knowledge to catalyse demand and growth.
“Our target customer resides in larger-tier cities and understands the difference between commodity and specialty coffee,” Matt Chitharanjan, Co-Founder and CEO of Blue Tokai, told 5THWAVE.
Cabrera also notes how coffee chains in emerging markets have been keen to promote aspirational café culture to a new generation of tech-savvy young consumers and maintain their loyalty through familiar social media channels and in-house ecosystems of app-based transactions.
“Specialty coffee operators have begun to adopt small areas of automation to improve consistency”
Giovanna Milano, Head of Retail and Co-founder, The Coffee
“These cafés are for individuals that want to grab a coffee, take a photo and put it on social media. It is no coincidence that the layout and design orientation of these stores is so ‘Instagrammable’.”
“That’s the new global market. Older people will not change their consuming ways, but the younger ones are even more attached to digital operations and tech. This will be ever more present for the customers of tomorrow,” believes Cabrera.
Yet, this new wave of coffee shop commerce isn’t confined to emerging markets. Faced with record inflation, reduced consumer spending power and growing competition, even established global brands such as Starbucks, Dunkin’, Costa Coffee and Tim Hortons are tapping into app-enabled convenience formats including self-serve, delivery, drive-thru and smaller takeaway-focused stores.
Blank Street Coffee is a New York-based coffee chain with more than 50 coffee shops across the US and 20 in UK. Founded as a coffee cart business in 2020, Blank Street has since raised nearly $94m from some 20 investors and is another premium coffee business combining consistency and speed of service to attract discerning coffee consumers.
“We don’t need to be the most amazing cup of coffee you’ve ever had. We want to be the really good cup of coffee that you drink twice a day, every day”, said Blank Street co-founder Issam Freiha in an interview with the The New York Times.
While scaling a consistent premium coffee offer is nothing new among branded chains, larger brands are now delving into the digital playbook to drive greater convenience and transaction frequency.
“Our target customer resides in larger tier cities and understands the difference between commodity and specialty coffee”
Matt Chitharanjan, Co-Founder and CEO, Blue Tokai
In 2020, Starbucks kickstarted a significant pivot towards a digital-first strategy. The Seattle-based coffee chain’s domestic and international expansion has recently reduced the emphasis on high dwell-time stores, to focus instead on optimising outlets for pick-up orders, drive-thru and delivery to meet growing demand for mobile ordering while streamlining operations.
“When we think about our opportunity in the future, it’s how do we leverage our portfolio to unlock capacity but also in a way that best meets the customer needs and demands… that’s going to be different versions of drive-thru stores. It’s going to be delivery-only stores, as well as different versions of pick-up stores,” Starbucks’ Chief Financial Officer Rachel Ruggeri told the TD Cowen Future of the Consumer Conference in June 2023.
“My local Starbucks outlet does not even have seating any more, which once would have been unthinkable, but that is where the market is going,” observes Euromonitor’s Barry.
Next stop, specialty?
Offering local flavours, menu items and design motifs is a key strategy deployed by many start-up coffee chains in Asia to gain favour among their domestic consumers, enabling them to build brand loyalty and stand out against larger international competitors.
This strategy is designed to create a sense of local pride and familiarity, particularly in coffee-producing countries. In Indonesia, Kopi Kenangan, Flash Coffee and Jago are giving many consumers their first taste of affordable premium coffee produced in their own country.
A small-format Luckin Coffee store in Wuhan, China | Photo credit: via Shutterstock
“Recognising the market sensitivities early on, our focus has been to cater to the larger coffee-loving population, no matter where they are in their respective consumer journeys,” says Blue Tokai’s Chitharanjan.
For Blue Tokai, this has meant developing products that are preferred by quality-conscious home brewers and customers looking for hassle-free, premium out-of-home coffee experiences.
“Our depth of offerings is one of the key factors that sets us apart,” Chitharanjan adds.
Blue Tokai recently opened its first international roastery in Japan, marking the beginning of its global journey.
“We initiated our operations with online and B2B channels, which gave us a steady head start as the only specialty coffee brand in Japan that finds its roots in a coffee-producing country. We worked with local partners to build a strong offline presence through several pop-ups before we opened our dedicated roastery a year later, in 2022, Chitharanjan explains.
“As investors, we are bullish on the specialty coffee revolution in India”
Dhruv Kapoor, venture capital consultant, Anicut Capital
Founded in 2017, The Coffee is a Brazilian specialty coffee chain based in Curitiba with nearly 200 stores across Latin America, Europe and Japan. For the brand’s Head of Retail and Co-founder, Giovanna Milano, encouraging consumers to make the jump to premium-priced beverages has been a hugely successful strategy for the brand.
“When they try specialty coffee, customers tend to delve further,” she says.
Sourcing 100% high-quality local coffee is a crucial component of Blue Tokai and The Coffee’s brands. However, in India and Brazil there is a need to educate and convince customers about the value of quality coffee and to justify its higher price tag.
A The Coffee store in Paris, France | Photo credit: The Coffee
Unlike many new coffee chains around the world, both brands have opted for larger boutique stores to showcase their premium products. However, both Milano and Chitharanjan agree using tech and automated solutions enables staff to concentrate on delivering exceptional customer service and create opportunities for upselling higher-margin products.
“The role of the barista in this journey is crucial as they serve as mentors by guiding customers”, says Milano, adding that automation enables baristas to deliver greater quality and consistency over its large store portfolio.
“Specialty coffee operators have begun to adopt small areas of automation to improve consistency, investing in incredible technology that ensures all areas of espresso extraction are perfect and controls the heat to get the perfect cappuccino foam.”
Changing with the times
There can be no doubt that the established global chains have played a pivotal role in popularising higher quality espresso-based beverages and premium café experiences around the world. However, it is evident that a new crop of agile, digital-first and amply funded start-ups is beginning to set the pace of innovation for a new generation of coffee consumers.
Younger individuals in developing markets are marching with their feet to choose coffee chains that align with their increasingly online lifestyles and desire for value and convenience. The evolution of technology has made this quiet revolution possible. The rapid pace of super-automatic machine development over the last decade by the likes of Eversys, WMF and Thermoplan, means operators can achieve barista-quality coffee and deploy automation for more cost effective and consistent store operations.
Greater access to telemetry and through IoT-enabled (internet of things) devices and app data is also generating operational efficiencies and crucial consumer insights, providing ever more intricate datasets and compelling growth prospects for potential investors.
One thing is for sure; investors around the world clearly see ample opportunity for growth and profitability in digital-first coffee start-ups, particularly in relatively untapped and emerging branded coffee shop markets across Asia.
However, with rising costs and growing competition presenting obstacles to growth in developed coffee shop markets, there is ample impetus for established operators across Europe and the US to embrace these new business models and reinvent the café experience as we know it.
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