In the past, people were used to drinking instant coffee. This was before the advent of specialty coffee shops in the country. Today, coffee shops are a common sight especially in the Manila metropolis. Specialty coffee refers to the highest-quality green coffee beans roasted to their greatest flavor potential by true craftspeople and then properly brewed to well-established standards (Specialty Coffee Association of America (SCAA)). The SCAA further explained that specialty coffee tastes better than instant or mass-produced coffee because it is made from coffee beans grown only in ideal climates and prepared according to exacting standards.
Also, specialty coffee possesses a richer and more balanced flavor. HISTORY Specialty coffee shops trace their roots from the coffee shops of Europe in the 16th and 17th century upon the introduction of coffee which became a popular drink. In the United States, specialty coffee shops are said to have been popularized by Starbucks Coffee. Starbucks Coffee was established in 1971 by Gordon Bowker, Jerry Baldwin, and Zev Siegl originally to sell coffee beans only.
The company’s current business of retailing coffee beverages came about when then marketing person Howard Schultz (currently Chairman) got interested in selling espresso by the cup after visiting Italy. Initially, the company tested the new business model in one of its outlets and became an instant hit. Despite of this success, however, one of the owners opposed Schultz’s idea of expanding the concept to all of its stores. In 1985, Schultz left Starbucks and opened his own specialty coffee shop called Il Giornale.
By 1987, the owners of Starbucks decided to sell the company to focus on a 1983 acquisition Peet’s Coffee and & Tea, which was Starbuck’s coffee bean supplier. Schultz, together with other investors, purchased Starbucks for US$3. 7 million.
Schultz eventually changed II Giornale’s name to Starbucks Coffee Company. Starbucks currently has more than 10,000 outlets worldwide, with 93 located in the Philippines operated by its franchisee Rustan Coffee Corporation. In the Philippines, even before Starbucks came in 1997, there were enterprising Filipinos who had the foresight to put-up specialty coffee shops. The pioneers in the local industry are Figaro Coffee Company and The Coffee Experience, both established in early 1993.
Figaro Coffee Company was set up by a group headed by Pacita Juan, the company’s president and chief executive officer. Its first outlet was a small kiosk located at the Glorietta mall in Makati. The outlet was initially called the F store. The Coffee Experience, meanwhile, started in the same mall in Makati, also under a different name – Coffee X. It now has 24 outlets located mainly in Metro Manila. PRODUCTS The main product is specialty coffee. Differentiation is made through the various coffee concoctions and variants.
Companies also offer other beverages such as tea and juices, complementing products such as breads, cakes, and pastries which are produced in the operators’ own commissary plant, supplied by an affiliate or purchased from third party suppliers. Some even serve breakfast, lunch, and dinner. MARKET AND PLAYERS The market for specialty coffee shops was estimated to be at least P2. 6 billion in 2004 (Figure 1). Foreign brands accounted for 69 percent of the market; the rest are local brands. Figure 1. Estimated Market Shares by Brand Type, 2004 Figure 1 Source: SEC, Interviews with Key Players, February-March 2006.
As of February 2006, the Philippine specialty coffee shop industry consisted of at least 15 major players – 10 are foreign and five are local brands. The foreign brands include Cafe Nescafe, The Coffee Bean & Tea Leaf, Dome Cafe, Gloria Jean’s Coffees, McCafe, San Francisco Coffee Co. , Seattle’s Best Coffee, Segafredo Zanetti Espresso, Starbuck’s Coffee and UCC Coffee (Table 1). Local companies have managed to get the master franchise for the operation of these foreign specialty coffee shops in the country. Some of the outlets are owned and operated by other companies through sub-franchising offered by the master franchise holders.
The local brands, meanwhile, are Bo’s Coffee Club, Figaro Coffee Company, Mocha Blends, and The Coffee Beanery. Other local specialty coffee shops that have recently sprouted in Metro Manila include Baang Coffee, Libreria, and Coffee Republic, with less than five outlets each. Meanwhile, the total number of specialty coffee shop outlets or branches has reached more than 300 as of February 2006. The outlets are located mainly in Metro Manila and in key cities such as Baguio, Cebu, and Davao. The large number of outlets is attributed mainly to the growing specialty coffee shop chains. Table 1.
List of Key Players in the Philippine Specialty Coffee Shop Industry, 2006 Brand Company Year Established Number of Outlets Affiliates (Food Businesses) FOREIGN The Coffee Bean & Tea Leaf The Coffee Bean & Tea Leaf Philippines Inc. 2003 10 – Gloria Jean’s Coffees Specialty Beans Philippines Inc. and various companies 2003 19 Chef Donatello / Wetzel Pretzels Segafredo Zanetti Espresso Liberty Ventures Inc. 2002 3 – Cafe Nescafe La Barista Inc. 2001 5 Le Coure de France San Francisco Coffee Co. Coffee Partners Inc. / Hot Business Ventures Inc. 2001 6 – Seattle’s Best Coffee Coffee Masters Inc.
2000 20 Kenny Rogers Roasters / Popeye’s Chicken and Biscuits UCC Coffee Blue Mountain Coffee Ventures Coffee Brewmasters Inc. 2000 7 Sakae Sushi / Crepes and Cream Dome Cafe Dome Cafe Franchise Corporation 1997 4 – Starbucks Coffee Rustan Coffee Corporation 1997 93 Hi-Lo Cafe / Bon Appetit / Yum-Yum Tree / Char-Q McCafe Golden Arches Development Corporation NA 4 McDonald’s LOCAL Mocha Blends Mocha Blends Corporation and various companies 2002 39 – Bo’s Coffee Club Coffee Centrale The Bean Co. Inc. /
Bo’s Coffee Franchise Corporation 1996 23 – Figaro Coffee Company Figaro Coffee Co. Inc.and various companies 1993 49* – The Coffee Beanery Cravings Food Svcs Inc. 1993 7 Cravings Restaurants The Coffee Experience CX Food Enterprises Inc. and various companies 1993 24 Potato Corner Kiosks As of February 2006 NA = not available * = excluding three outlets overseas Source: Securities and Exchange Commission (SEC) / Interviews with Key Players, February 2006 Gloria Jean’s Coffees International explained that the specialty coffee shop industry is moving to chains because of their advantages in purchasing power, focused advertising, product innovations, management control systems, and specialized training.
Across brands, Starbucks Coffee accounted for nearly half of the market in 2004 (Figure 2). Local brand Figaro Coffee Company followed with 15 percent, then Mocha Blends (9%), Gloria Jean’s Coffees (7%), and UCC Coffee (4%). The others cornered the remaining 16 percent of the market. Local and foreign key players estimated growth at an average of 10 percent to 20 percent per year since 2002. The financial statements of industry leader Starbucks Coffee even showed a higher growth of nearly 23 percent per year over the same period. Figure 2. Estimated Market Shares by Brand, 2004 Figure 2.
Source: SEC; Interviews with Key Players, February-March 2006 PRICING A comparison of retail prices of selected foreign and local brands for Cafe Latte revealed that foreign brands generally charge higher prices compared to local brands (Table 2). The cheapest Cafe Latte in small cup from foreign brands costs P7. 00 higher than the most expensive among local brands. The same price difference is observed in the medium cup but increases to P11. 00 on the large cup. Table 2. Comparative Retail Prices of Cafe Latte from Selected Brands Product/Brand Price (In Php) / Size SMALL MEDIUM LARGE.
Foreign The Coffee Bean & Tea Leaf 85 100 115 Gloria Jean’s Coffees 85 95 110 Starbuck’s Coffee 85 95 110 Seattle’s Best Coffee 82 92 107 Local Bo’s Coffee Club 75 85 na Mocha Blends* 70 85 na Figaro Coffee 69 na 89 The Coffee Beanery 60 78 na The Coffee Experience 60 na 70 Small = 8oz / medium = 12oz / large = 16oz * medium size is 14oz na = not applicable Source: Specialty Coffee Shop survey (April 2006) SOURCES OF SUPPLY The main raw materials used are coffee beans; espresso machines; fresh milk; whipped cream; and packaging materials (Table 3). Table 3.
Sources of Main Inputs Brand Beans (mainly Arabica type) Espresso Machines Brand FOREIGN BRANDS Cafe Nescafe 100% from Nestle (from foreign affiliates) 100% from Nestle (from foreign affiliates) Gloria Jean’s Coffees 100% from Gloria Jean’s Coffees – International (Australia) Astoria (Italy) from local distributor Seattle’s Best Coffee 100% from Seattle’s Best (Japan) Rafaello / Michaelangelo (Italy) from local distributor Starbucks Coffee 100% from Starbucks Coffee (USA) Granarcoso (Italy) from local distributor UCC Coffee 100% from UCC Coffee (Japan) Not Applicable (Uses siphon machine) LOCAL BRANDS
Figaro Coffee 100% local / own farm Astoria (Italy) from local distributor Mocha Blends 90% Imported from Australia (Mocha Coffee); 10% local Elektra (Italy) from Australia The Coffee Beanery 100% local (1 supplier only) San Marino Expresso (Italy) from local distributor The Coffee Experience 100% local (1 supplier only) Unic (France) from local distributor Table 3. Sources of Main Inputs Brand Fresh Milk Whipped Cream Packaging Materials FOREIGN BRANDS.
Cafe Nescafe 100% from Nestle 100% from Nestle Local suppliers Gloria Jean’s Coffees Two farms in Laguna province Imported brand from local distributors Local suppliers / Gloria Jean’s International (Australia) Seattle’s Best Coffee Local supplier Imported brand from local distributors Seattle’s Best (USA) Starbucks Coffee One farm in Batangas province Imported brand from local distributors Local suppliers UCC Coffee Uses cream – 100% from UCC Coffee (Japan) Imported brand from local distributors Local suppliers LOCAL BRANDS.
Figaro Coffee Imported brand from local distributors / local suppliers Imported brand from local distributors Local suppliers Mocha Blends Local supplier Imported brand from local distributors Local suppliers The Coffee Beanery Imported brand from local distributors Imported brand from local distributors Local suppliers The Coffee Experience Local supplier Imported brand from local distributors Local suppliers Source: Interviews with Key Players, February-March 2006 According to players foreign and local alike, it is easy to get suppliers for their major inputs.
The prevalence of suppliers – which normally cater to restaurants, hotels and other institutional clients – has led to a situation wherein the suppliers themselves approach the companies to offer their products. The critical factor among players is the coffee bean roasting “formula” because it is at this stage where the coffee bean releases its fullest flavor potential. Poorly roasted beans would yield poor-tasting coffee drink. As such, every player treats his proprietary roasting techniques and recipe as highly confidential.
Nearly all of the foreign brands interviewed say their coffee beans – prepared and packed – are supplied by their parent company overseas, which does the purchasing and roasting of beans bought from many popular coffee-growing areas like Indonesia, East Africa, and Latin America. In terms of variety, the foreign brands mainly use the Arabica coffee bean types. The local brands, meanwhile, are known to use mostly local coffee beans including the famous Kapeng Barako (Liberica beans).
Because of this practice, the local players are seen as major supporters of the local coffee industry. Further, their use of Kapeng Barako sets them apart from their foreign counterparts because the beans are said to have the following characteristics: (a) particularly strong taste, (b) powerful body, and (c) a distinctly pungent odor which the popular Arabica beans do not have. For espresso machines, majority of the foreign and local players use Italian brands which they acquire through local distributors. For fresh milk, the players buy from various sources.
Many purchase from well-known milk suppliers such as Alaska Milk Corporation, Consolidated Dairy and Frozen Food Corporation, Nestle Philippines, New Zealand Milk (Philippines) Inc. , and San Miguel Corporation. However, players like Starbucks Coffee and Gloria Jean’s Coffees have opted to source from dairy farms in Batangas and Laguna. Both players provide technical assistance to the farm-suppliers so that they could meet the quality standards set by their parent companies. For whipped cream, nearly all players use imported brands distributed by local companies in the country.
Lastly, packaging materials are either sourced from affiliates overseas or from local packaging companies. Interestingly, Starbucks Coffee being the industry leader requires exclusivity from its suppliers. In other words, their suppliers are not allowed to cater to other specialty coffee shops. They can, however, still service hotels, restaurants and other foodservice outlets. While the other players do not require their suppliers to be exclusive, they do not allow them to sell to other specialty coffee shops exactly the same products (e.g. breads, cakes, and pastries) as some of the recipes are proprietary.
INDUSTRY ASSOCIATIONS Some of the major players meet and discuss as members of the private sector-led National Coffee Development Board (NCDB), which aims to promote and save the local coffee industry from declining production and area planted. The group incidentally started as the government’s National Task Force on Coffee Rehabilitation which was sworn into office by President Gloria Macapagal-Arroyo in May 2002.
One of NCDB’s programs is the Kape Isla Cooperative Marketing whose objective is to develop loyalty to Philippine coffee, reduce imports, increase domestic production, and create new jobs. The Program’s Kape Isla seal is intended for the use of the different players in the industry as a Philippine coffee quality seal. The Program’s members are specialty coffee retail shops such as Bo’s Coffee Club, Coffee Experience, The Coffee Beanery, Figaro Coffee Company, Mocha Blends, Starbucks, and Seattle’s Best Coffee, as well as coffee bean growers, millers, roasters, local governments, and agriculture credit sectors.
Another organization is the Specialty Coffee Association of the Philippines (SCAP), which was established in 1998 to promote and support the specialty coffee trade in the country. SCAP’s objectives are: to advocate Philippine specialty coffee as world class; encourage members to use Philippine specialty coffee in their coffee outlets; sponsor events and forums that showcase Philippine specialty coffee; provide programs to assist local coffee farmers; upgrade the quality of coffee; and to promote general awareness and appreciation of Philippine specialty coffee (F&B World, November/December 2003).
PROSPECTS The specialty coffee shop industry is seen to sustain its growth of 10 percent to 20 percent yearly for the next three to five years. Players attribute this to the growing awareness of specialty coffee among consumers, the improving image of coffee in general as something that is good for the health, and the expanding family spending on eating-out. On the growing adoption of coffee by other restaurants, players say their wide list of coffee concoctions make them stand-out among other foodservice outlets.
Their unique ambiance is also a big come-on. Players also capitalize on what is popular such as the availability of wireless internet or WIFI and the offering of potential product substitutes such as tea, juices, shakes, chocolate drinks, and healthy products such as salads, low-calorie versions of their best-selling drinks, pastries and the like. The offering of customer loyalty programs also helps them push their sales targets.
Overall, the continuing focus on addressing key success factors such as product development and innovation, brand and product promotion, and outlet expansion would allow the industry to continue to enjoy a brewing business and at the same time, help the development of the domestic coffee growing industry.
References: BusinessWorld, November 2000 F&B World, November/December 2003. Interviews with Key Players, February-March 2006 Securities and Exchange Commission Specialty Coffee Association of America.