Back to list

KV Asia to build out Malaysia coffee chain’s regional footprint

Posted:

19th September,

2024

Southeast Asia’s app-centric coffeeshop craze now attracts middle-market investors
KV Asia leans into young digital consumers with Malaysian homegrown champion Zus
Breakneck expansion still the industry playbook but not without economic discipline

Brian Niccol, newly appointed CEO of Starbucks, announced plans last week to pull back from the app-driven grab-and-go frenzy that has come to define the coffeeshop experience in recent years, eschewing pickup-only stores with wooden stools for aromatic hangouts with comfy chairs.

Digital buildouts will continue, but the focus will be on in-store lingering. “There’s a shared sense that we have drifted from our core,” Niccol said.

Its Southeast Asian challengers are going in the opposite direction, targeting a Generation Z customer base that wants a fully digital experience and prioritises convenience. Meanwhile, Starbucks has run into difficulties in the region, with its Malaysian operator, Berjaya Food, posting a third consecutive month of declining profits in May amidst Gaza war-fuelled boycotts.

Jeremy Tan, a partner at Singapore-based private equity firm KV Asia, believes this points to a broader shift in the competitive landscape as Starbucks gives way to rising homegrown brands such as Kuala Lumpur-based Zus Coffee.

Last week, KV joined a MYR 250m (USD 58m) investment in Zus alongside Malaysian public pension fund KWAP and Indonesian consumer-focused holding company Kapal Api Group. They took a minority stake of less than 35%. This is the company’s first private equity investment; Choi Garden Restaurant Group of the Philippines picked up 35% last year for an undisclosed sum.

“The consumption patterns of Generation Z versus millennials are very different. Here, grab-and-go makes sense because you don’t sell one cup. How many times a day can you walk into a Starbucks and drink coffee? At most once a day,” Tan said.
“You have to go digital-first and supplement that with sit-ins, because if you’re in a business that is retail-first, for you to morph into digital-first is almost impossible. You would need to really strip the business down to the bare metal and re-engineer the entire process.”

Fast mover

Being digital-first is central to the Zus thesis because it is the key to speedily scaling to a point where the economics of a lower-price product begin to work. Zus prides itself on being an affordable alternative in the relatively pricey world of Starbucks-style outlets.

Speed has been Zus’ forte to date. The company has nearly quadrupled its number of locations in the past four years to around 600, including 550 in Malaysia and 50 in the Philippines. KV has calculated Malaysia alone could accommodate a footprint of around 2,000 outlets. Although such buildouts tend to decelerate with scale, there’s scope for that to happen within five years.

KV first looked at the business as early as 2021, but with only about 120 locations at the time and a bevy of VC-backed rivals vying for the same customer base, the investor bided its time. It ultimately invested via its second fund, which closed last year on USD 200m and can write cheques as small as USD 25m.

Due diligence otherwise focused on store-by-store unit economics – the critical weakness of full-speed retail chain expansions. Tan said that every Zus location is EBITDA-positive at the store level. Group-level profitability is seen as within reach and expected to come with further economies of scale.

The deal is significant in signalling the graduation of Southeast Asia’s app-driven coffee segment from venture to private equity, although this has been a matter of mixed fortunes.

The most notable activity in this theme includes Taiwan and Singapore-based turnarounds investor Turn Capital executing a private equity-style carve-out of VC-backed Flash Coffee. Turn acquired 100% of Flash Thailand, which had unprofitable stores.

Disciplined expansion?

Group-wide, Flash was criticised for expanding without capital efficiency, pumping cash into sizeable compensation packages for executives who didn’t have equity in the business. Hiving off its Thailand business was an act of survival. The question for KV was why Zus would not befall the same fate.

“Zus has hired a CFO and built out a new finance team, but most of the heavy lifting is already being done by the founding management team,” Tan said. “It’s not loading costs into a business that is not yet profitable. This business today is very profitable.”

Augmenting management is part of the plan, however, including country-specific leadership teams. In addition to the Philippines, there are plans to build out a presence in Brunei and Singapore. There is currently one location at Singapore’s Changi Airport to promote brand recognition.

The main prize is Indonesia, but competition is stiff. Flash is profitable and thriving in the country. Kopi Kenangan has raised more than USD 230m according to AVCJ Research and now claims to be the country’s largest coffee chain with some 860 locations.

Jakarta-based Kapal Api is expected to facilitate this entry as Choi Garden did in the Philippines, but it will take time. “If you jam into Indonesia too quickly before fully establishing yourself in the Philippines, that’s when you start stretching your resources,” Tan said.

“But then again, don’t be too surprised if we’re in Indonesia by next year. The business moves so fast, and the management team is so agile.”

by Justin Niessner in Perth

Source: Mergermarket