Grab and Go:
Edward Tirtanata of Kopi Kenangan
IndoTekno Podcast, 4 August 2020
Welcome everyone to our 10th episode of Indo Tekno. Selamat datang, semuanya! I'm Alan Hellawell, Founder of startup advisory firm Gizmo Advisors and Venture Partner at Alpha JWC Ventures. For our Indonesian listeners, pendengar Indonesia dapat membaca transkrip Bahasa Indonesia kami.
This week's story can be described any number of ways. It is the story of the emergence, in less than three short years, of one of Indonesia's most dynamic household consumer brands. It can also be described as the story of one of the country's first and most pervasive, "new retail" business models. And very notably, it is one of the very few profitable business models in Indonesia's technology startup space. To share with us the story of grab-and-go coffee chain Kopi Kenangan, we are very privileged to have join us today company Cofounder and CEO, Edward Tirtanata. Ed, pleasure to have you with us.
EDWARD TIRTANATA 1:09
Pleasure to be here as well.
So, Ed, can you share with us your own story leading up to your August 2017 founding of Kopi Kenangan?
EDWARD TIRTANATA 1:17
Sure. I started Kopi Kenangan in August 2017. But prior to that I was actually doing a premium tea house before, and in 2015 I quickly realized when I was doing tea, despite us being actually the biggest premium tea house chain in Indonesia, we quickly realized that it's not scalable because a cup of tea at 40,000 Rupiah, or a cup of coffee at 40,000 Rupiah is not something that's affordable to most Indonesians: 40,000 times 30 days. That's 1.2 million Rupiah, or approximately 30% of your Jakarta minimum wage, for the capital city of Indonesia. So that is why we realized that Indonesia has a gap between instant coffee and your typical cafe or coffee shop all over Jakarta, which is mostly priced at about 40,000 Rupiah. So I identifying that missing gap, we decided to open something different than your typical "third home" coffee concept. Third home is a term popularized by Howard Schultz from Starbucks in which your first home is your house. second home is your office and third home is supposedly Starbucks. And that is why you see a lot of cafe with a nice sofa and fast WiFi, and all those costs are actually incorporated into your cup of coffee. And what we quickly realized is that for people who drink coffee every day, not everyone actually wants that nice sofa or fast WiFi. They just want a good cup of coffee with a reasonable price. And that is why we started Kopi Kenangan, in the Standard Chartered building in August, 2017. We intentionally opened beside three global chains which were selling coffee as well. The reason why we intentionally opened there is because we want to test the scalability. If we cannot compete against the global brands, which have 400 or 500 outlets in Indonesia, then there is no way for us to actually scale up this brand. And it came to us as a surprise: in August 2017, we were able to make our money back in three months. So payback period was three months. We quickly used that payback money to open a second store, third store, and all the way until the eighth store. We were able to gain significant traction and revenue. And that's when we decided to fund-raise from Alpha JWC, and we've been a proud portfolio of Alpha JWC ever since.
So you guys have your beginnings in the "epicenter" of competition,. You decided to set up shop with a bunch of competitors in the immediate vicinity. So you're clearly from the "What doesn't kill you makes you stronger" school of thought, is that right?
EDWARD TIRTANATA 3:57
If you are startup, you should not shy away from competition. You should try to actually compete against them head-to-head, so that you find the right product-to-market fit, or you test your existing product-to-market fit, or else then it'll be very hard for you to scale up in the future.
Ed can you give us some quick facts and figures around Kopi Kenangan's current scale and growth rates?
EDWARD TIRTANATA 4:19
Sure. We ended 2017 with one single store. By 2018, we had 26 stores. And then 2019 was a rocket ship ride for us. Basically, we went from 26 stores to 223 stores. And, as per December 2019, we don't have a single unprofitable store. So we are not just expanding rapidly, but profitably as well. And I think at that time, we were able to get double digit percentage EBITDA on a company level as audited by PwC. And on top of that, we believe that we are the number one online coffee delivery company in the country as well as for December 2019. And I think as per today, we have 354 stores. So, despite the pandemic we are still expanding at the rate of 30 stores per month excluding the Ramadan period. So, that is where we are and we would like to maintain this momentum going forward as well, if not grow faster.
You have been able critically to maintain profitability during this hyper growth phase. More of a qualitative question: Ed, are you at all concerned about compromising elements such as company culture or employee competence in growing so quickly?
EDWARD TIRTANATA 5:36
I think culture is actually something that you set up from Day One. And, as long as you keep on reinforcing that company culture, it will stay for many years to come. And interestingly, we have three cultures in Kopi Kenangan: 1) "Day One" mentality, 2) "One Cup, One Customer" and the last one is 3) teamwork. That is how we view the business. I would like to touch again on the Day One mentality. I think it is a term popularized by Jeff Bezos of Amazon. And he was saying that Day Two is decline, followed by death. So that is why we must always be nimble, fast and accept risk as a part of our day-to-day decision. So that is why we have been very nimble as well, in opening the stores and investing in technology, testing out different products from both technology and company beverages. That nimbleness and that "experiment mentality" when we just started Kopi Kenangan in August 2017, are something that we've been maintaining since Day One. In terms of employee competence, we believe that there are two parts to this: first is the store employee, in whom we are actually investing a lot in learning and development, because what we believe is that at the end of the day, they're the one who is serving the customer. So that is why investing a lot in learning and development is very important. And on top of that, one thing that most people don't realize in Indonesia is that it is not too often a company gives out shares to the managers who are actually working in store. I don't think that is the case with any of the QSR companies in Indonesia. QSR stands for "Quick Service Restaurant." And we are actually the first one in Indonesia who does that.
Ed where do you want the company to be by the end of 2021? And what is the broader longer term vision of Kopi Kenangan?
EDWARD TIRTANATA 7:24
We believe that we are not just a single product or single country startup. We believe that, in the future, the potential for growth lies in realizing the power of distribution. We believe that "product is king," but then "distribution is God." So that is why by actually having more stores, we will be able to be closer to our customers, because one of the things that is important for coffee or beverages is that convenience is very important. So the more stores you have, the closer you will be to your customers. So that is why we are opening at a very rapid rate, and I believe that by 2021, we would like to end the year with 1,000 stores. And we would not just be selling coffee. We want to be able to sell beyond coffee. And that is exactly what we did in 2019, where we have evolved from just selling the "Kopi Susu," which is our "hero product," to selling other stuff like "Boba," "Macha," Thai tea and other beverages as well. And, going forward realizing that distribution will be our biggest asset, we would like to keep on layering in new products on top, from food to other stuff as well. And going forward, by having more customers, more additional products and more stores, will be able to capture even more data on our customers, and in return, increase the frequency and "AOV" (average order value) of their purchases in the future as well.
Ed, as I mentioned in my introductory remarks, and you also referenced, Kopi Kenangan is very impressively EBITDA-profitable. How have you been able to achieve that during this period of very, very strong growth?
EDWARD TIRTANATA 8:58
One of the things that I believe is that, if you have a great product-market fit, you don't need to spend too much on customer acquisition. So I believe that most startups that I have seen in the region, or even China and the US as well, have many of their expenses actually going to "CAC" (customer acquisition costs). And for us, we have been very frugal in doing so. So for example, I believe that in 2019, the total marketing spend in our company was less than 10%. And that includes voucher expenses, discounts and other marketing collateral that we are doing at Kopi Kenangan. So, that is one of the keys, in my opinion, in order for you to achieve EBITDA profitability in building your startup.
Gotcha. So much of the Kopi Kenangan story seems to come from the unique identity that you and the co-founders have crafted. Can you share with us some of the unique facets of the company's positioning that customers have come to love?
EDWARD TIRTANATA 9:59
Basically at Kopi Kenangan, what we are telling our customer is that we are selling high quality coffee at an affordable price. Of course, we are not just saying it. We are actually showing it as well inside our stores, and this is very important for any companies that are doing consumer brands. And that is why if you go to Kopi Kenangan, we actually use coffee machines that are world class like La Marzocco and Victoria Arduino. And on top of that, we even use a high quality milk as well. And that is why at Kopi Kenangan you see that we display an empty milk carton, because we want to show our customer that we are actually using high quality ingredients, and those are actually marketing as well, by showing not telling, you are able to gain more significant brand equity in return.
Understood. Now, coffee is not exactly an entirely new concept Indonesia. The country is currently, I think, the world's fourth largest coffee exporter. And one frankly does not have to venture more than a block or two anywhere in Jakarta to find a warung, a small cafe or a chain outlet to get one's "caffeine fix". What gap in the market is Kopi Kenangan serving?
EDWARD TIRTANATA 11:08
I think, if you look into the data, of the freshly brewed coffee market in Indonesia, it is actually only 7% of the total caffeine spending in Indonesia. Whereas, if you look into our Japanese or US counterparts, the bulk of purchases in those two countries are actually freshly brewed coffee. So, even though you see a lot of warung or even convenience stores around Indonesia that are serving coffee, those are not freshly brewed coffee like the ones you get at Kopi Kenangan. So that is why that gap is still there. Because most of the people who are offering freshly brewed coffee, they're selling it at a very expensive price. So there is nothing in between where we are today as a company that is selling freshly brewed coffee at an affordable price, somewhat similar to a convenience store price. And that is exactly what we are doing at Kopi Kenangan.
What does the competitive landscape look like these days? Is it likely to change going forward, and why?
EDWARD TIRTANATA 12:03
To dissect our competitors; there are the legacy brands who are doing the "third home" concept. And that is not what we are doing. There's no way that they can shift back, or pivot into our business model, which is a "grab-and-go" tech-enabled coffee chain. Because, in the first place, they already rent a huge space, right? It's not that easy to just shrink your existing space. So that is very different than our this model. And I believe that there are a lot of copycats in Indonesia, which are doing exactly what we are doing as well, except for the tech-enabled part. And that is exactly why we would like to invest a lot in technology as well, where we can acquire our customer and we can engage our customer. It will be a very important factor going forward. And, on top of that, the fact that our competitors that are at-scale, are mostly doing a franchise business model. And, as you can imagine, if you are a franchise business model, it is just very hard for you to offer high quality to your customer, because there is an extra "mouth to feed": the franchisee needs to earn some money as well. There's an extra 7% to 10% franchise fee that is not going to the customers, but that is going to the business owners instead. So that are some of the downside of having a franchise business model. Granted, they can scale much faster than us. But then, that is not what we believe in because we believe in building an enduring company for many years or decades to come.
Gotcha. Ed, Kopi Kenangan's trajectory has been indeed, from many measures, incredibly steep. On the fundraising side alone, the company closed a massive $109 million round in May of this year, making it one of the region's largest rounds, and particularly during the COVID era. Has this acceleration come as a surprise to you and if so, what adjustments have you made to the business plan as a result?
EDWARD TIRTANATA 13:55
So basically, I think this round came to us as a surprise, because initially we were not planning to raise $109 million. In fact, we were planning to raise on $40 to $50 million. But then due to the high interest in the business, we were able to secure that extra $50 million. And why that is the case is because, I believe that, our results speak for themselves. We didn't try to amass as much funding as possible. We just focused on the business metrics, which are the most important part. And as a result, with this extra funding, we might be able to expedite some of our vision, like opening more stores, going into food and longer term entering the cloud kitchen business. And of course, other than that, we can definitely invest more in technology. Unfortunately, we will not be able to expand regionally as planned. We were actually planning to start the overseas expansion in 2020. But then looking at the current conditions, I believe that that is much better for us to focus on domestic dominance.
In addition to Alpha JWC Ventures and Sequoia Capital, our cap table also boasts the likes of JayZ, Serena Williams and Facebook co founder Eduardo Saverin's B Capital. Can you share some interesting anecdotes about how you built such an illustrious list of investors?
EDWARD TIRTANATA 15:20
Just like I mentioned before, it's all about focusing on your business metrics. After the Alpha round, we didn't actually try to fundraise from Sequoia. But then we just keep on working very hard at our business. Whenever there were people who would like to meet us, we'll gladly do so. And as a result, I think Sequoia was interested in us, we did our Series A round in 2019. We were then invested in by both Sequoia and Alpha JWC. Both, being very reputable investors, made some of the global investors want to invest in us as well. So I think back after Sequoia invested in us, JayZ's venture arm contacted us, we pitched to them, and they loved what they were seeing. And they invited Serena Ventures to be part of this journey as well. And as for Edwardo Saverin, I think B Capital basically is very bullish on both Southeast Asia and India. So that is why they would like to invest in businesses that have good potential in becoming a unicorn or become an enduring business.
Well, my daughter would describe your cap table as pretty cool. Now on the topic of other unexpected events, I assume that you had to rip up much of the game plan that you had nine months ago, prior to the onset of COVID. What have been the most dramatic ways in which you've changed the way Kopi Kenangan does business in the midst of the pandemic?
EDWARD TIRTANATA 16:46
Basically, in terms of what we are doing, thankfully, our business has actually been profitable because revenue is a mix of walk-in and online delivery. One thing for anyone who's doing food: we must always realize that the walk-in will always be more profitable. So that is why, back then, we were actually focusing more on walk-in first. But then now, looking at the conditions, we have to focus on online delivery first, especially for this year. So that is why we are still expanding at 30 stores per month, or one store per day. It is because what we quickly realized is that we don't have coverage in every sub-district in Jakarta. So we use our heat map, in which we know where our customers are. And by identifying in which area we don't have presence, we are able to open as fast as possible; opening outlets that are actually delivery friendly.
Now Ed, Kopi Kenangan also as a team in China. Can you share some color around that?
EDWARD TIRTANATA 17:43
One of the things about tech talent: we have to realize that there is a tech talent war in Indonesia. And why is that the case? It is as simple as: there are not many people graduating from engineering or software engineering. In particular, every single year, I believe if you compare the data, for example, people graduating from IIT in India or Beijing University in China; there are hundreds of thousands of engineers graduating every year. Whereas from ITB, I think you only have a couple hundred. And with the rise of tech in Indonesia, the demand is increasing, whereas the supply is not picking up as quickly as the demand. So, that is why it was hard for us to hire in Indonesia. So, we decided to go to China in which there is an oversupply of engineers instead of under-supply.
While we're on the topic of China, one of our industry peers has suffered some pretty bad coverage over accounting issues since the beginning of this year. What are the key takeaways in your mind from that event, Ed?
EDWARD TIRTANATA 18:47
So it is an unfortunate governance issue. And, I believe that that doesn't have any correlation with coffee companies in the US or Indonesia. We just continue to try to become a profitable company, while implementing the highest levels of governance.
Is technology crucial to Kopi Kenangan's success, and where are you applying technology most successfully?
EDWARD TIRTANATA 19:09
Technology is definitely very crucial for Kopi Kenangan's success. Because we can engage with our customer, we understand our customer. And in return, we can somehow increase the AOV (average order value) of our basket size. And plus, we would like to increase the frequency of customers ordering through Kopi Kenangan as well, because we need to be engaged with our customers. We need to understand them. We need to be able to speak to them. For example, at Kopi Kenangan, what we quickly realized when we were collecting data on our customers' purchases; many of our customers are actually only purchasing once a week, whereas if you're drinking coffee, most probably you are drinking four or five times a week. Especially after looking at our Nielsen data, we quickly realized that many of our customers are actually buying different brands every day. And that is when our loyalty technology comes in: we would like to have a very sticky loyalty program, which would make our customers keep on returning to Kopi Kenangan. And by understanding our customer, if they are not ordering as often as what we would like them to, we can throw in some vouchers. They can become more frequent customers. And on top of that, it is much easier for us to do bundles or add-on's. So in return, we'll be able to increase the AOV of our customers' purchases as well.
What are the biggest challenges that you and company leadership are addressing right now?
EDWARD TIRTANATA 20:31
COVID-19 changes the whole landscape of the hospitality industry. I don't think the hospitality industry has ever faced a more dangerous existential crisis than what we are facing today. Right now we are just focusing every day on maintaining cash burn at very minimal levels. And on top of that, we are trying to minimize cash burn by doing two things: one is cutting costs, but we will never want to fire our employees, because what we believe is that our employees are our biggest asset. So as long as we can, we don't want to fire our employees. And then second, one of the things that people are missing, is that cash burn is a component of both revenue and costs. So that is why we are still growing at a rate of one store per day, because that will eventually help us in minimizing cash burn as well. Because what we realize is that if we open the store right, we can actually still generate extra cash flow to the company; that is if we open it catering to the pandemic.
Ed, what advice would you give first time entrepreneurs in the consumer and technology space?
EDWARD TIRTANATA 21:43
An angel investor myself, what I have seen from some of the consumer goods companies that are pitching to us is that many of them actually spend a lot on marketing and CAC, which I thought should not be the case in any consumer space. First thing that you need to do as a startup, or in your Day One, is you must think about the branding. Where is your positioning? Where do you want to be? Who is your market? And most importantly, how are you going to be able to capture them without actually discounting or burning money? With Kopi Kenangan, we have a very clear value proposition, and we were able to identify that missing gap as well. So, that is why, for first time entrepreneur, please be mindful of this. If you haven't reached your "Zero-to-One", you should not try to scale up too fast, because if you don't have your zero to one yet, then maybe you are just scaling up from zero to minus 10. So, scaling up, or "blitz-scaling" is about "One-to-N". Don't rush it. Just make sure that you have a great product-to-market fit.
Great advice. This has been a fascinating discussion, Ed, and it's been great to have the privilege to hear the Kopi Kenangan story firsthand. This concludes our 10th installment of Indo Tekno. Thanks again so much for joining us today, Ed.
EDWARD TIRTANATA 23:01
Thank you very much for the opportunity. It's an honor to be here.
The podcast was translated from English to Bahasa Indonesia by Alpha JWC Ventures. Terima kasih untuk mendengarkan. Sampai jumpa lagi!