The secrets of 85C s success

Taiwan-based coffeehouse operator 85C opened its first outlet in mainland China in December 2007 after vanquishing Starbucks to conquer its home market. Upon arrival, the company expanded rapidly in Shanghai and fought for the best sites by offering higher rents than competitors. Seemingly overnight, 85C became a feature on every Shanghai street corner, with Chinese consumers forming long lines outside.

What s 85C s secret? Simply put, it understands Chinese consumers better than its Western competitors. It knows that coffee is not a necessity (in mainland China, it constitutes only 20 percent of overall sales), but that cakes are extremely popular. Consequently, the company has developed dozens of delicious bakery products tailored to Chinese tastes.

In addition, 85C emphasizes the freshness of its products. Starbucks and many other coffeehouses and bakeries in China make fresh coffee in the outlets, but bakery products are delivered from factories and stay on the shelf until the end of the day. In contrast, 85C has glass-walled kitchens in each of its outlets. Dough and other raw materials are delivered to stores every morning and coffee, breads and cakes are made in plain view of customers.

Thirdly, while Starbucks concept places emphasis on pleasurable surroundings, 85C focuses more on the food itself.

Although the popularity of coffee is growing in China, Starbucks coffee is considered quite expensive (around $3 to $4.50 a cup); 85C s coffee sells for half to as little one-third the price. Consequently, Chinese consumers see a visit to Starbucks more as an event, either for a cozy social experience with friends or for business meetings in pleasant surroundings, whereas 85C is seen as a cheaper alternative for a pleasing snack.

Placing more emphasis on the quality of food rather than the in-store experience also means 85C can profit from fast-moving consumers who don t have time to eat in. In Shanghai, one outlet serves between 2,000-3,000 customers every day, 70 percent of whom take away their food. Fast-moving customers generate higher sales per square meter, so 85C can compete in locations with higher rents.

The impact on bakeries and coffeehouses

As a result of 85C s influence on the Shanghai market, many local bakeries have started to sell drinks including coffee and others are considering improving freshness or adding a kitchen to their outlets.

The core consumers of Starbucks and similar outlets will remain loyal because they value the atmosphere in Starbucks-like coffeehouses. But many Chinese chose Starbucks and similar coffeehouses because they were often the only convenient place to get good coffee. With 85C covering the Shanghai business district, many consumers may make the switch for cheaper coffee and better food.

85C has shifted its focus to mainland China and will continue its rapid expansion in the next few years. However, 85C s managerial skills have not been tested over a large store network or across a vast country. Also, its ability to deliver freshness depends on the company s supply chain management, and a shortage of talented management personnel has already hindered its expansion.

The company s success so far has been attributable to its innovative business model. This proves that even though the Chinese market has been open to international companies for a long time and the coffee sector has been growing rapidly, there is still room for new companies as long as their products or business models are suitable for the market.

As the Chinese economy continues its fast growth and consumers incomes and levels of spending continue to rise, many existing shopping patterns will be altered. New needs and demands will surface together with new opportunities, and retailers will need to observe, identify and adapt accordingly.