National | INTERNATIONAL RATIONALE

Coffee shops on different tracks in Japan

Seattle-style outlets can only agree that taste, staff make all the difference

by Reiji Yoshida

Three specialty coffee chains from Seattle — Starbucks, Tully’s Coffee and Seattle’s Best Coffee — are aggressively expanding their business in Tokyo, changing the face of the capital with the rich aroma of espresso.

News photoOutlets of Tully’s Coffee, Seattle’s Best Coffee and Starbucks Coffee attract customers in Shibuya Ward, Tokyo.

And that aroma is about to overflow from Tokyo and seep out across the rest of the country.

After securing footholds and strong brand images in Tokyo, the three firms have entered a new stage of rapid expansion.

Their strategies differ, particularly on the question of whether to directly manage their outlets or franchise them out. The next few years will determine which strategy works best as the three rivals set up new shops.

Starbucks plans to increase the number of its outlets from the current 321 to 500 across the country by April 2004, opening two every week somewhere in Japan.

Tully’s is preparing to open 300 shops by December 2003, while Seattle’s Best Coffee is to open 300 shops in 2006 in a bid to rival Starbucks.

The sudden rush of Seattle-style coffee shops may appear to be an invasion of Japan by foreign capital-companies, as businesses struggle amid a prolonged economic slump, but the apparent success of these new outlets is being made on the backs of Japanese entrepreneurs who have evolved in a new age of globalization.

None of the three Seattle cafe operators initially had concrete plans to extend operations to Japan, and it was Japanese entrepreneurs who initially approached and talked them into taking a stab in this market.

“One key to success for a foreign company is to have a good partner in Japan,” said Munenori Hotta, a senior researcher at Foodservice Industry Survey & Research Center, an affiliate of the agriculture ministry.

Starbucks Coffee’s advance started with a 1992 letter from Yuji Tsunoda, a board member of Sazaby Inc., traditionally a retailor of bags, clothing and other products. Tsunoda also runs three restaurants in Los Angeles.

He wrote to then Starbucks Corp. Chief Executive Officer Howard Schultz, suggesting improvements to the interior design of a cafe near Tsunoda’s restaurant.

In less than a week, Shultz had written back to Tsunoda and began a correspondence that eventually led to Starbucks’ advance into Japan, with Tsunoda becoming president of Starbucks Coffee Japan Ltd. in October 1995.

“At that time, Starbucks was studying the feasibility of advancing overseas, but it had not decided which country it was going to open a cafe in,” said Kazuko Nakada, a spokeswoman for Starbucks Coffee Japan.

Tsunoda, however, was not the only one to see the enormous potential of the Japanese market.

Takao Niimura, executive vice president of Nippon Brunswick Co., a wholesaler of bowling equipment, had reached the same conclusions.

In 1995, Niimura was already convinced that the Seattle-style cafes would be a success in Japan, providing high-quality coffee at middle-class prices.

Nippon Brunswick, a joint venture between trading house Mitsui & Co. and Brunswick Corp. of the United States, was looking for a new business that could grow into another pillar for the company.

In 1995, Niimura first knocked on the door of Starbucks’ head office in Seattle, looking for a license to begin operations in Japan.

But Niimura was just a little too late — Starbucks Corp. was already in talks with Tsunoda to launch Starbucks Japan, which was established later the same year.

Niimura then went to see executives of Seattle’s Best Coffee, another major outlet operator in a city that bustles with specialty coffee shops.

But at first, Seattle’s Best had no interest in operating in Japan, as it was focused on its business in the U.S., Niimura said.

The rocky negotiations continued as Seattle’s Best was purchased by AFC Enterprises, Inc. in 1998. But Nippon Brunswick managed to acquire a license to operate in the Kanto region, opening its first cafe in Tokyo in 1999.

In the case of Kouta Matsuda, who heads Tully’s Coffee Japan Co., the art of persuasion was more dramatic.

The 33-year-old CEO grew up in Africa and the United States, where his father worked for a trading house dealing in seafood products. Before setting up Tully’s Coffee Japan, Matsuda was an employee in the new business loan department at Sanwa Bank.

When he heard that Tom O’Keefe, Tully’s founder and chairman, was in Tokyo for business talks on wholesale coffee beans in September 1996, Matsuda rushed to his hotel and knocked on O’Keefe’s door without an appointment.

In his two-hour presentation in English, Matsuda argued that Tully’s should have its own cafes to penetrate the Japanese market, because Japanese consumers like high-quality brands.

In January 1997, the Tully’s chairman finally gave Matsuda approval and the first outlet opened in Japan that August.

A key strategy that Tully’s is employing in an effort to catch up with Starbucks in Japan is franchising.

While Starbucks Coffee Japan directly runs all of its 321 stores, Tully’s formed an alliance in October with Venture Link Co., a major consulting firm that specializes in forming franchising networks.

“Franchising enables a company to quickly expand its business across the country,” said Hotta of Foodservice Industry Survey & Research Center.

But franchising can be a double-edged sword, given the problems of maintaining the skills of the stores’ staff and the taste of the coffee, Hotta added.

Making good espresso is a delicate operation. For example, a barista at Tully’s needs to filter hot water through a coffee bean powder within the space of 20 seconds and 25 seconds.

“Twenty-two seconds is the best,” said Ayako Namba, a spokeswoman for Tully’s.

At Seattle’s Best, staff are trained to explain to customers the subtle differences in the 25 varieties of beans served, while Starbucks goes to extraordinary lengths to ensure its employees are of the highest quality.

Workers are regularly tested by a research firm, which employs people to check the responses of staff and the level of service at every Starbucks cafe at least once a month by pretending to be customers.

From board members to part-timer workers, all Starbucks workers are also obliged to undergo 20 hours of training, including being taught how to make espresso.

“The purpose of direct management of our cafes is to maintain the quality (of staff and drinks) and share our sense of value” among staff, Starbucks spokeswoman Nakada said.

Alternatively, Seattle’s Best has adopted a strategy somewhere between Starbucks and Tully’s: a number of regional companies, including Brunswick, have acquired licenses from Seattle’s Best and each will operate outlets within their local area.

“Expanding a business is a good thing, but if you don’t have skilled employees, you just end up keeping your customers waiting,” said Niimura of Nippon Brunswick.

Tully’s officials, however, argue that the franchising system does not affect the quality of their staff, as their workers strictly follow manuals.

“Many companies have succeeded in adopting the franchising system in Japan. I think it will work well for our company, too,” said Kenji Arai, executive corporate planner of Tully’s Coffee Japan.

Hiroshi Hoshino, an analyst at Nomura Securities Co., agreed that Tully’s franchising system will help it establish a nationwide network quickly, but the profits from franchising are relatively lower than that of the direct operation system adopted by Starbucks.

Besides, since Starbucks has already completed its startup investments — the toughest challenge for any venture company — direct operations should have the advantage over the long run, Hoshino said.

“I think Starbucks has taken the right direction,” he said.

One thing the three firms agree on is that the key to coming out on top in this coffee shop war is to maintain the quality of the product and staff.