What I Learned From Starbucks, Java House And Sugarpie Cupcakes About Franchises In East Africa
The recent purchase of African coffee chain Java House by Abraaj Group, an emerging markets-focused private equity group, has stirred further excitement among interested private equity and multinational buyers with an eye on East Africa.
Both U.S. private equity firms – TPG and Carlyle – also bid as much as $100 million for East Africa’s largest chain of coffee shops. Observes are betting on the region’s expanding middle class, sustained population growth, growing urbanization, and changing tastes in food and ambiance.
Java House has grown dramatically since two Americans – Kevin Ashley and John Wagner – started operations in 1999. ECP purchased a 90 percent stake in the company in 2012 and have since expanded the company from 13 outlets in Nairobi to more than 60 stores across 10 cities in Kenya, Rwanda, and Uganda.
The company recently also launched 360 Degrees, a pizzeria outlet, and Planet Yogurt, a self-service frozen yogurt chain.
The sale of the diverse business, to many observers, represents an opportunity to create East Africa’s Starbucks. But critics (or the Starbucks aficionados) push back on three fronts.
Starbucks is a place for everyone. It serves high-quality coffee but has strategically incorporated other menu options to draw in consumers from all walks of life. The stores carry a small selection of food items and an ample selection of coffee-free beverages for the non-caffeine drinkers, healthy snackers, and children all in one stop.
Secondly, Starbucks is a consistently reliable option. The gas station coffee on the side of the freeway in the U.S. is generally reliable and sufficient to consistent visitors. Starbucks, on the other hand, delivers consistently with quality to the inconsistent and unreliable customer as well as the daily visitor.
Customers will complain (often) about the high prices, but they come back time after time because there is no debate on what they will get when they visit – a good cup of coffee (or tea), free wifi, and good ambiance.
Lastly, that ambiance creates a secure expectation for any visitor regardless of location… the Starbucks in Washington, D.C. looks like the same establishment in Johannesburg and Tokyo.
So why does this matter? Building a large scale premium food/drink chain is simply not easy in the region.
Yet, beyond that obvious statement, creating Starbucks in today’s East Africa (and West Africa for that matter) requires a typical consumer who is willing to pay high margins (for example, Starbucks coffee margins can be north of 50 percent) on a consistent basis (coffee is a daily habit for many people), and the consumer base includes everyone from the street cleaner to the billionaire hedge fund manager, and all those in between.
Investors are chasing this “Starbucks” model. But the local investors still argue that the tradeoff between premium and scale is still ever-present in these young markets.
Take the glorious cupcake bakery – Sugarpie Cupcakes – in Nairobi. It provides premium delicious cupcakes for 200 to 240 Kenyan Schillings (~$2 to $2.3) per cupcake. Growing this premium chain across Kenya and across borders is a popular option for its fans.
Yet investors who look at the company will tell you that replicating the model is not easy considering the culinary specificity to detail necessary to excite customers regardless of location.
The delivery option complicates this scenario. Imagine a cupcake that falls sideways while the motorcyclist for Jumia (or Yum) crosses town and navigates busy streets in order to deliver in an acceptable time (not hard to imagine as it has happened to me, but I return consistently because of the taste).
Premium product for premium price at low cost is a winner, (as I consider ordering a few more cupcakes) but making it work is not as simple as observers may imagine.
Java House is the beginning in the development of large East Africa chains. Still, the Starbucks model has a way to go in East Africa.
Consumer incomes are growing but are still not sufficient enough across the board to drive the premium of premium models.
Accessing a wider scale of consumers, getting them hooked on the product and growing the margins through lowering of costs (and gradually increasing prices) is the Starbucks growth story.
It is not simply about the logo…or Kaldi’s Coffee in Ethiopia would be a regional star (yes the Kaldi’s logo is hard to differentiate).
East Africa is pushing forward with Java House but the Starbucks (or the obviously less premium McDonalds) are still waiting to be created. This should only further inspire the food entrepreneur and awaken the spirits in East African investors.
Kurt Davis Jr. is an investment banker focusing on the natural resources and energy sectors, with private equity experience in emerging economies. He earned a law degree in tax and commercial law at the University of Virginia’s School of Law and a master’s of business administration in finance, entrepreneurship and operations from the University of Chicago. He can be reached at email@example.com.