E36: The Future of Dining

Indonesia In-depth

We explore the behavioral insights in the F&B sector, the explosive growth of online food ordering and delivery services and rise of virtual kitchens in Indonesia with Edward Tirtanata, co-founder of Kopi Kenangan, the grab-and-go coffee chain that has experience explosive growth in the Jakarta metro area and Surabaya. On this episode of Indonesia In-depth, Edward shares his business strategy, consumer trends and how technology has changed the way we consume our food and beverages. Links to this episode are below. Here are the main takeaways from the episode:

Food delivery service is booming in Indonesia

• The usage of online ordering and delivery apps have enabled a major shift with how Indonesians consume food and beverages.

• The verb to “Go-Jekin aja” or “Grab-in aja” a meal or beverage is part of the daily lingo. Go Food is by Gojek and Grab Food is by Grab and are the two most popular online food delivery services in Indonesia.

• According to a 2017 Euromonitor International consumption survey, Indonesian consumers largest expenses are on food and beverages (and tobacco) and a close behind that is consumer food services. This has become somewhat of a “perfect storm” between hungry Indonesians, food platforms and delivery services.

Food delivery is huge but so is grab-and-go

• Edward says the footprint of conventional retail stores are shrinking and he believes that this is a strong trend for the food and beverage (F&B) sector in Indonesia.

• “There’s no point in opening a 1000-meter food retail/restaurant anymore, that was the trend 20 years ago. More seating doesn’t mean more revenue nowadays,” he said. Instead, Edward explained that for food retail, “You have to be as small as possible and in as many locations as possible.” Edward believes that the future of food retail will require establishments to be as close to the customer as possible to make purchases for convenience sake and shorten delivery time for online purchases.

Kopi Kenangan’s Explosive Growth

• Established in mid 2017, Edward Tirtanata and James Prananto saw that there was a market gap between local low-end coffee and high-end coffee chains in Indonesia with the latter being dominated by Starbucks.

• Edward was inspired by the explosive growth of China’s Luckin Coffee and established Kopi Kenangan based on this model. Luckin is a cashless coffee chain that started in October 2017 with nine stores. Now, it has grown to up to 2,100. It’s cheap and convenient grab and go brand attracts many coffee go-ers and even rivals its veteran coffee producer, Starbucks in China.

• Kenangan’s outlets are no more than 20 square meters in size and the coffee beverage names are based on playful, and somewhat cheesy Indonesian cultural references, but this combination has been a hit and attracted new investment.

• Starbucks, which first opened in 2002 in Jakarta’s Plaza Indonesia, has now over 400 branches and growing, but Kopi Kenangan, or “Kenangan” as it’s locally referred to, just two years old, has 96 locations and is aiming to have 1000 stores by 2021.

• Kenangan’s short-term timeline: Edward aims to have 160 stores by the end of 2019 and 500 by the end of 2020.

• Each Kenangan outlet has a small footprint, no more than 20 sqm, and as a result, rent is only 6% of their revenue according to Edward.

• Some serious coffee connoisseurs might feel that coffee is meant to be treated delicately and enjoyed in a relaxing ambience and we asked Edward his thoughts on whether the fast-paced grab-and-go culture is “degrading” for such an iconic beverage. “Coffee outlets have always used this ‘third home’ strategy where your first home is your house, second home is your office and third home is the coffee establishment. And, that’s why the cost of rent, WIFI and fancy furniture are included in the price of a cup of coffee. We are trying to offer the complete opposite of that. We don’t have seating or nice sofas. Customers just take their coffee and go. We are providing a quality product and value in this case since we don’t have to integrate the cost involved for sit down coffee shop into the price of our cup of coffee.”

Data driven F&B industry

• Almost every purchase we make leaves some type of digital footprints and this data is becoming more and more important for F&B retailers, including for Edward and his beverage chain.

• Data analysis based on customer purchases via pre-order and delivery apps have revolutionized the F&B sector.

• Instead of relying on merely intuition and excel sheets, F&B businesses owners are beginning to rely heavily on this data to obtain insights into what is trending, where new shops should be established and how tastes are changing.

• The use of food delivery platforms such as Gofood, GrabFood in Indonesia (and Uber Eats, Doordash etc in the US) are rapidly increasing. These apps connect consumers with food providers and charge a fee. Gofood for example charges 20% for each item purchased.

• When a customer orders through the app, the platform can learn a lot about the individual by building a profile based on their order frequency, type of food, taste preference, location, emerging trends and much more. Often, the customer develops a closer relationship with the app platform rather than the actual food and beverage provider themselves.

• Some F&B providers have become concerned about who should ultimately control the data and who should be allowed to exploit it to grow their businesses. Some establishments in Indonesia such as McDonalds, KFC and Domino’s Pizza have partnerships with these platforms but also have established their own delivery fleets and have their own delivery apps.

• Edward believes there is a trade off when partnering with these platforms but says it works for Kenangan and said, “I could burn money on delivery costs with online orders with my own app and own ecosystem or I can save on my unit economics. That [my own delivery service] won’t give a start up like mine good unit economics especially since I’m selling a product that costs USD$1.50 so I’m avoiding doing the delivery on my own. I would have to either pass along the cost to the customer or subsidize the cost which would make me massively unprofitable, much like Luckin Coffee.”

• Kenangan’s online delivery orders at one point were as high as 60% but now is approximately 30%. The decline is attributed to the increase in his physical stores. Pre-orders through his own app are around 10% and the remaining orders come from walk-in grab-and-go, says Edward. “We want to keep the percentage of delivery orders at around 30% so I can have the remaining customer data.”

• Although Luckin Coffee has had difficulty reaching profitability, they have had success with producing “customer heatmaps” based on ordering data through their own app which allowed them to open new stores in high demand areas and increase grab-and-go pre-orders rather rely heavily on delivery [and face the costs attributed to it]. Kenangan may also do the same.

Saving time, loyalty rewards and personalized offers

• The use of loyalty rewards apps and e-money are growing quickly in Indonesia, often by gamifying the purchase experience. Many grab-and-go coffee shops, including Kenangan, are developing this marketing method to personalize offers, subscriptions and at the same time making the purchasing experience more seamless, convenient and ultimately saving time.

• “We haven’t done any marketing to promote our app and already 10% of our orders a via this [first gen] app,” says Edward.

• Edward explained that the ability to pre-order through his app has worked well, particularly in office buildings in Jakarta. “Our pre-order function is really appreciated by our customers… they just order and get a notification that the coffee is ready, and they can come and pick it up.”

Investment to boost the Kenangan app & outlets

• Currently Kenangan is focused on what Edward calls the “low hanging fruit” or consumers that are focused on saving time or convenience.

• In June this year, Edward’s coffee shop received USD$20 million investment from Sequoia India and Southeast Asia in Series A funding. Edward says he is planning to use this funding to improve his app and more importantly, build his customer data analytics capabilities to offer dynamic pricing based on price elasticity of his customers and develop personalized promotions. The new injection of capital will also be used to increase the number of his outlets to 500 within the next year.

Cross-selling

• “I believe that the future of F&B is a combination of online and offline sales to best utilize the potential market.

• “In the future, once we have enough traffic inside our application, we will cross-sell by selling other things, such as food, by using a “cloud kitchen” which is centralized and product will be distributed to 1000 of our stores, eventually. The product would have to be easily distributed and across a vast network of stores,” Edward said.

• “I believe that product is king, but distribution is god. Once I have 1000 stores, whatever product that I have in my hand will become very valuable because of the distribution.” Edward further explained that at one point, KFC Indonesia reportedly became the largest music CD distributor in Indonesia by selling 500,000 CDs a month at the cash register in their 800 stores. “KFC, a fried chicken joint selling CDs is cross-selling at its best,” he said.

Technology for the backend

• Edward emphasized that although most business players in Southeast Asian talk about the importance of the use of technology in the consumer space, backend technology is key. “Coffee chain operations have been outdated. We will integrate our online and point of sale transactions and other data into one system which will give live updates on inventory for each outlet. We want to track the coffee beans from upstream to downstream with RFID or bar codes and replenish supplies from either our main distribution center or through a nearby outlet. This will allow us to reduce our wastage. Each package of beans will be scanned before used. We are working to develop all of these methods,” Edward explained.

1.5 million plastic cups a month to landfill

• Kenangan is currently selling around one 1.5 million cups of coffee a month. That means, 1.5 million plastic cups, plastic lids and plastic straws will likely end up in landfills. Kenangan says that they are exploring new packaging materials with the Sinar Mas Group to develop biodegradable cups, lids and straws. Edward said that an environmentally friendly straw has proven difficult to develop for his sealed cup. “The straw has to be strong enough to poke through the plastic lid which is sealed. We have made progress on this and tested different materials and we now have a new product, but it’s been difficult finding a vendor in Indonesia that can produce it at such a mass scale that we need.”

F&B consumer behavioral trends

• The way we eat is evolving. It seems that the awareness of time, and the obsession to save time, has pushed us more and more to food on the go. According to the National Statistics Agency, Indonesians are ordering take-out food more now than ever before.

• The definition of dining too, is changing. People still want their caffeine fix, but they don’t need to be sipping their brew while sitting on plush sofa with hardwood floors. Many consumers now want their coffee quick and so they can go on with their day. These are all the trends that Kopi Kenangan is capitalizing on.

• Edward stated that Indonesians are of course price conscience when it comes to food, however, when it comes to beverages, the consumers standard can change. “Generally speaking, Indonesian’s don’t want to pay a lot for food but what I’ve noticed is that they will pay Rp20,000 for a Bakmi noodle dish but at the same time, pay the same amount for just a beverage like coffee of bubble tea. They are willing to spend the same amount of money for a drink as their whole meal.”

• The use of e-money in Indonesia [Gopay, Ovo, Link Aja etc] has grown extremely rapidly in just a couple of years and will prove to be far more popular than credit cards. “We are moving quickly to all digital payments now. Ovo really came out of nowhere and has surpassed Gopay as the most popular according to news I’ve read. It seems that the partnerships they have done with Grab and Tokopedia has really helped them.”

Episode Description

Podcast hosts: Shawn & Tanita

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