TT-556 -- Coffee Shop Business, ebiz news from Japan

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A weekly roundup of news & information from Terrie Lloyd.

General Edition Sunday, March 7, 2010 Issue No. 556


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- News
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Publicly listed Starbucks Coffee Japan announced that its
profit will rise by 6% to JPY3.1bn on sales of JPY96.4bn
for the 2009 fiscal year ending March 31st, 2010. This is
actually a surprise, because the company was known last
year to be struggling in face of competition from Doutor's
Excelsior chain as well as the shock pricing served up by
McDonalds when it launched a high quality JPY120 Java
coffee at its restaurants. Apparently McDonalds served up
160m cups of coffee in FY2008, up 32% over the previous

Starbucks says that it was able to come out with a profit
increase rather than the originally expected loss by
changing its menu to include more Japanese foods and drinks
(think roasted green tea lattes) and by offering a second
cup of coffee for just JPY100. As noted in the Nikkei, this
may sound like rampant deflation in a store that normally
sells coffee for a starting price of JPY290 or so, but in
fact coffee at Starbucks gets dumped as soon as it ages any
way, so the second cup would have little impact on costs.

Although Starbucks is the world's largest coffee store
chain, it appears to have its work cut out in Japan. The
profit came despite flat sales and partly thanks to
falling costs of raw materials such as the coffee beans.
So how much bigger can Starbucks grow in Japan and
how will it fare in the long term?

[Continued below...]

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[...Article continues]

Japan is currently the number 3 importer of coffee globally
and consumed about 412,000 tons of beans in 2005. Per
capita consumption, however, is still around 3.3kg, putting
the country at Number 41 in the tally of coffee drinking
nations. Clearly there are still a lot of people not
getting their hit of "Joe" each day. This should be good
news for Starbucks, so long as it can profitably identify
the missing demographic groups and bring them in to the

The largest domestic coffee shop operator is
Doutor-Nichires Holdings with its Doutor, Excelsior, and
Colorado brands, totaling some 1,201 stores. Although not
clearly defined in its financial reports, the company
appears to have sales of about JPY30bn from its coffee
business (i.e., non-restaurant) -- substantially less than
Starbucks. Overall consolidated sales are a bit more than
JPY100bn, making it larger as a business than Starbucks.

While Doutor's relatively low income from coffee sales
might be surprising, it probably comes about because of the
fact that out of 1,120 Doutor branded coffee shops, 974 of
them are franchisee-owned -- resulting in far less revenue to
the company per store. The Excelsior brand is where Doutor
has obviously decided to use the Starbucks model and of
the 181 stores, only 43 of them are franchisee-owned. This
really shows in Doutor-Nichires sales numbers as well,
where the much smaller number of Excelsior stores
contribute more than half the coffee sales.

Doutor is trying hard to build up its Starbucks-killing
Excelsior brand, and is doing so by making its stores more
accessible to a wider range of customers than Starbucks.
For example its allows smokers. The stores also tend to be
more centrally located to train stations and high traffic
areas (Shibuya excepted) and is more flexible on food and
drink menus, allowing alcohol. They have also launched a
loyalty points program that ties in with Culture Convenience
Club's Tsutaya video stores.

The Doutor switch to focusing on the Excelsior brand must
pose a problem for the company's many Doutor franchisees.
These operators are under tremendous pressure to cut costs
and yet are stuck with a tired brand that is only
marginally more up-market than McDonalds. If we were a
foreign coffee chain thinking about entering the Japanese
market, we'd be looking at targeting these franchisees,
some of whom own dozens of stores each. Buying good
locations is expensive, and attacking Doutor at this level
would not only get proven operators on the ground, it would
take out a major competitor in each area -- for a while at

Apart from Doutor and the McDonald's shock, the overall
coffee marketplace has been struggling for at least 18
months. Back in November, UCC Ueshima, one of the largest
players in the general coffee supply market took over
majority control of coffee producer Unicafe, paying JPY3bn
for a 50.47% stake. UCC stepped in after Unicafe declared a
huge JPY3.6bn loss for FY2009. Unicafe got squeezed by
rising coffee bean prices (which have since eased) and
falling sales caused by competition. Between them UCC and
Unicafe now control about 25% of all regular coffee produced
in Japan.

Then in December, restaurantor Zensho bought out Art Cafe
and its 35 coffee shops. Zensho reportedly paid a mere
JPY300m to acquire Art Cafe's JPY2bn in annual sales. The
low price was attributable to Art Cafe running in the red
for some time. This acquisition really speaks to how
difficult it is for smaller chains to survive in the
current environment.

So where does this leave Starbucks? Well the CEO in a
recent interview said that his company would not join the
cost cutting engaged in by its competitors, on the basis
that Starbucks has its brand and ambiance to help make
premium sales. But it is clear that the market has reached
a level of saturation and it will be much harder for the
company to expand in the future. We can ascertain this from
the fact that Starbucks will only open 30 more stores this
year, versus an originally planned 80.

But don't count Starbucks out just yet. While the coffee
shop market may be saturated and JPY120 coffee is sending
thrifty customers to McDonalds instead, there is still the
home and canned coffee markets. For example 63% of all
coffee drunk at home in Japan is instant coffee, and
Starbucks is about to launch its VIA coffee essence here
(in April). The VIA product has been a big hit abroad and
if successful here will open up a whole new revenue channel
that will have Nestle (the instant coffee market leader)
and UCC, not just Doutor, concerned.


Just to change the tone a little, a reader sent in this
rather cute auction going on in NZ at present. It's for two
bottles holding ghosts that were exorcised recently. The
auction comes complete with instructions on how to let the
ghosts escape their bottles again, and bidding is still
going on. Current price is NZ$1,680 (JPY102K). This would
be an awesome Halloween gift.

...The information janitors/


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+++ NEWS

- Low demand depresses bank lending rates
- Aoyama menswear mega-outlet for Ueno
- Japan to ignore bluefin tuna ban
- Astellas making hostile takeover bid
- Japan unhappy with U.S. visa-waiver fees

-> Low demand depresses bank lending rates

If you thought bank loan interest rates were already low
in Japan, think again. For some corporate borrowers at
least they just got a whole lot lower. Apparently the
average bank interest rates for January for the nation
overall were a record low 1.19%. For the top city banks,
the average lending rate was just 0.77%...! The reason
for the record low rates is intense competition from
banks trying to get large companies to lend money.
Capital spending is down more than 17% and companies are
cutting the banks out of the equation (as are savers, it
seems), by going direct to the markets with bond issuances.
In 2009, bond offerings exceeded JPY10trn for the first
time in 11 years. ***Ed: Mortgage rates are also apparently
heading downwards -- so it might be a good time to start
renegotiating if you have one.** (Source: TT commentary
from, Mar 5, 2010)

-> Aoyama menswear mega-outlet for Ueno

If you like the trend of ever-cheaper clothing, then you
will love the new Aoyama Trading menswear megastore that
just opened in Ueno. At 1,500 m2, the store is one of the
biggest outlet stores in Tokyo. Aoyama is selling off its
end-of-line and last-season clothing at the outlet for
prices 30% to 90% cheaper than normal. Suit Company shirts
(which we can testify are really excellent value) will sell
for just JPY950 to JPY4,000. (Source: TT commentary from, Mar 5, 2010)

-> Japan to ignore bluefin tuna ban

While we're not sure just how Japan will ignore it, the
nation's vice minister for fisheries has said that if
Atlantic bluefin tuna exports are banned at an upcoming
CITES-related vote later this month, then Japan would not
comply with the ban. The problem for Japan is that the U.S.
has come out in support of the ban, meaning that Japan will
not have any major allies when the 175-nation vote comes up
in Doha, Qatar. ***Ed: So what does "not comply" mean? We
can't find any reference to the alternative, but presume
that Japan might try to send its own fishing boats into the
Atlantic high seas and see if anyone challenges them. Do we
get the sense that the whale hunt confrontation in the
Southern Ocean was just Act One for a bigger showdown yet
to come?** (Source: TT commentary from, Mar 5, 2010)

-> Astellas making hostile takeover bid

Continuing the trend of Japanese pharma companies acquiring
assets abroad and particularly in the USA, Astellas Pharma
has made a hostile US$3.5bn take over offer for OSI
Pharmaceuticals of Melville, New York. Apparently Astellas
made approaches to the OSI board a number of times in 2009
but was rebuffed each time. It therefore decided to go
direct to the shareholders with an offer to buy all
outstanding common shares for US$52/share, a 40% premium
over Friday's market closing price. ***Ed: OSI is a cancer
specialist, with significant distribution and brand
recognition in the U.S. -- perfect fodder for Astellas.**
(Source: TT commentary from, Mar 1, 2010)

-> Japan unhappy with U.S. visa-waiver fees

In a rare move, the Japanese Ambassador to the USA, Ichiro
Fujisaki, has criticized the new US$10 fee for visa-waiver
travelers to the U.S., which includes almost all Japanese
(other than students, workers, and some others). He said
that the move was "not desirable" and "would not contribute
to exchanges between Japan and the United States".
Apparently both Japan and Europe have urged the U.S. to NOT
introduce the fee. ***Ed: This is a silly move by the U.S.
government. Why would you deliberately make it harder for
Japanese, German, and British tourists, who spend thousands
of dollars each in the USA, US$10 to go there? Besides
that, we imagine the cost of collecting the fee could well
use up most of the US$10 in the first place...** (Source:
TT commentary from, Mar 6, 2010)

NOTE: Broken links
Many online news sources remove their articles after just a
few days of posting them, thus breaking our links -- we
apologize for the inconvenience.


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Speaker: Christopher Neufeld, Business Development Manager
- Frost & Sullivan
Topic: Green is the New Black!

Details: Complete event details at
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Date: Thursday, March 18, 2010
Time: 6:30 Doors open, Buffet Dinner included and cash bar
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Venue: The Foreign Correspondents' Club of Japan

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Time: 23:00 Doors open till 06:00
Cost: 4,000 yen at door, 3,500 yen advance payment
Register on the Metropolis web page
Where: Legato in Shibuya:



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