Growth Case Study: Kopi Kenangan
Kopi Kenangan (KK), or ‘Memories Coffee’, is a coffee chain startup started in 2017 in Indonesia. The company received a Series B funding at $109million by Sequoia Capital and Alpha JWC Ventures, $20million on Series A funding, $8million on seed funding alongside investment from Jay-Z and Serena Williams (Kanagaraj, 2020). By December 2019, KK serves almost 3,000,000 cups/month (Lung, 2020).
The company grows alongside the ‘third-wave coffee’ trend in Indonesia as the sixth-largest coffee consumers, growing at 8.22% YoY (Putri, 2019). Founded by Edward Tirtanata and James Prananto, the company adopted new retail and has had 324 branches. They are looking for an expansion plan to Thailand, Malaysia, and the Philippines (Kanagaraj, 2020).
Growth Strategy
Go-to-market differentiation strategy
KK started when Edward found a significant market opportunity to serve coffee at a lower pricing structure. Their price offering starts at $1.2 when Starbucks offers $5/cup. Consistency is one of the leading value proposition. KK maintains quality through a ‘no franchise’ model, even though it is often being seen as counterintuitive to growth. Nevertheless, KK targets prime locations in CBD areas with smaller grab-and-go stores to reach the target market while keeping operating cost low and higher margin. Most of the sales rely on financial service partnerships (Gopay, OVO) and delivery partners (Gofood, Grabfood). KK differentiated itself in the third-wave coffee movement through a localisation strategy, which is palm sugar milk coffee as their best-selling signature drink (Alpha JWC, 2018). KK also partners with local snacks providers as a cross-selling strategy.
Market development: Branding and Marketing
Edward started his business with the brand ‘Lewis&Carroll’, offering an authentic artisanal tea experience. However, the name did not resonate to the local consumers and struggled to grow. Thus, he pivoted the business to ‘Kopi Kenangan’, a more relatable brand which creates virality. KK’s signature drink is called ‘Kopi Kenangan Mantan’, or ‘Memories of Your Exes’, which sparks virality because consumers organically posted their reviews in social media due to the name. All of their menus use slang references to induce nuance of romance (Putera, 2020). The virality has made Kopi Kenangan the #1 top-of-mind brand in Indonesia for coffee (Nielsen, 2019 in Akhaya, 2020).
New retail
Since 2016, Alibaba came up with ‘new retail’ term — interlinking online-offline shopping with the use of technology. According to the giant, new retail would offer a continuous customer-centric approach (Ding, 2019). The concept of new retail had penetrated the coffee industry through the emergence of Luckin Coffee, which went public in May 2019 with 4507 locations in China by December 2019, before their scandal went off in May 2020 (Nasdaq, 2020).
Following the trend, KK adopts a similar business model through pick-up stores and app. The in-app experience offers customer-centricity values through loyalty programs, pick-up coffee at the designated time, and online payment with cashback promotion.
Analysis and Recommendations
From their growth strategy, some key insights can be analysed. Firstly, through its market penetration and pricing strategy, KK has identified the product-market fit. The beachhead market when their first 12-sqm store opened in Jakarta is the white-collar, young workers who have urban lifestyle and value convenience. Other milk coffee brands are proliferating; however, no one is located in the high-density CBD area because of the risk of investment. The strategy leads to brilliant success: 85% of sales come from repeat customers/month, where more than 45% buys daily while maintaining 53% NPS (Agarwal, 2019).
Secondly, their differentiation strategy through product development has made their value proposition very clear: local, good quality, low-cost, convenient. The company scales with rapid growth while being profitable. The current strategy of small stores reduces operating cost and increase profitability. Their strategy to invest in technology has been a significant part of the growth. Through the use of IoT inventory tracking, they avoid waste by moving excess inventory between stores (Agarwal, 2019). The strategy resulted in a higher gross margin and strong EBITDA.
Thirdly, their marketing strategy of curating relatable content and brand virality has been the secret of their hyper organic growth. Along with the adoption of social media and digital channels, there has been a drastic change in the cost of transaction in evaluating purchases. This change reduces the waiting time of adoption, described as ‘Shark-Fin Adoption’ (Downes & Nunes, 2018). However, this also means that customers could easily switch to better alternatives and may lead to the danger of sustainability.
Dawar & Bagga (2015) explained the importance of balance between distinctiveness and centrality brand positioning to control not only the perceived image but also profitability. To survive, KK needs to have strong market positioning strategy against competitors coming from the unconventional and mainstream market.
In addition, COVID-19 has given a new challenge to the business. KK suffers to keep more than 1000 employees and temporarily closes 50% stores (Wirdana, 2020). They have managed to thrive in the market through online delivery and adapting the concept of ‘brewing at home’, which was followed quickly by Starbucks and the competitors. However, their strategy to expand internationally and the continuation of new retail is still a big question.
The new retail strategy seems to face the problem of customer inertia and lack of fit between solution and brand image. Driest et al. (2018) argue that customer-centricity is a new source of competitive advantage. The app is delivered to increase customer-centricity as data analytics would have given insights to enhance the customer experience. However, looking at the growth of users, it contributes less than 10% of all sales (Tanita, 2019). Sixty-percent of sales comes from grab-and-go and 30% from third-party online delivery, which cuts 20% commission. From the author’s own experience, employees would order coffee from food delivery services from KK’s outlet in the Ground Floor to the 5th Floor Office because of the convenience of delivery. Convenience in itself has become a barrier to adoption.
Meanwhile, Fore Coffee, their main competitor in new retail who also received VC funding of $8.5million, has 75% of transactions came from their app (Wibisono, 2019). By September 2020, the app has 1M+ downloads on AppStore, compared to KK at 100K+. If observed, what makes their strategy in new retail more successful is the difference in value proposition and brand image. Fore has a modern-futuristic brand image, and technology implementation is the main value proposition. KK’s value proposition is more about traditional, low-priced grab-and-go coffee. Thus, there might be some mismatch between how customers value the KK brand and the strategy.
With a long-term goal to reach IPO (Insider, 2020), KK needs to learn from Luckin coffee’s mistake. In May 2020, Luckin’s stock went down by 90% in May 2020 due to their revenue scam (Shameen, 2020). Some analysis mentioned how Luckin coffee hyper-scale before achieving product-market fit (Towson, 2020). Drucker (in Simon, 2016) voice hesitancy in putting low price as a value proposition. He argues low prices do not usually go together with high profit — except a business has evident and sustainable cost advantages compared to competitors. Following Downes & Nunes (2018) argument, KK needs to be careful because successful first-act, which makes startups flushed with VC’s cash, often lead to failures. From here, there are two significant issues to focus on: demand and defensibility. Even though demand has been proven in the middle-income Indonesian market, the approach may not work in other markets. Defensibility strategy is needed to thrive, which often involves turning the initial product into service and building an ecosystem.
In the future, there are some strategies that KK could implement internally and externally. Gulati & Desantola (2016) explained how the challenge of external crashes could be mitigated through a robust internal organisation. Thus, KK should continue managing growth in the long-term through their customer-obsessed culture (Halim, 2020). Externally, with Indonesian’s consumer behaviour of buying drinks with the same price of dishes, more cross-selling opportunities arise (TIA, 2020). Setting up cloud kitchens may offer values for future KK’s market. Partnership strategy could also offer additional competitive advantages. For example, with the rising trend of sustainability, KK could increase the brand’s sustainability values to solve plastic cup waste. Above all, without brand stickiness, any business model innovations may not be as significant as it can be. Thus, maintaining the current high LTV would be a critical aspect for KK to thrive in the long-term.
