Cornering Japan: Starbucks, Tully's do battle in a famously fickle market
In a country best known for its tea, the Americanized Italian espresso has become Japanicized Americanized Italian espresso. The stores have the familiar blond wood counters, the blue frosted glass fixtures, the whimsical swirling graphics, the lattes, espressos and, yes, even the Americanos.
But here it's kohi, not coffee. Their tall is our short. The thirtysomething slipping in for a morning latte before work in the United States is less of a fixture than the twentysomething girl sipping a green-tea Frappuccino on the sidewalks of Tokyo.
It's less about the coffee, more about the fashion.
"The group that hangs out on the coffee shops on Pike, it is a little more discretionary in its choices and likes the nonbranded coffee cafes," said Steve Clemons, who works for Seattle wireless company ViAir and travels to Japan every month. "That demographic in Japan really related to the brand image. There Starbucks is a brand that can be worn as well as drunk."
And that's the fear around the Japanese American Italian coffee companies. Japan is notoriously famous for its food fads. When Cinnabon opened here, hundreds lined up. For a few years, it was Belgian waffles. This season's must-have? Milky coffee.
The Starbucks business in Japan has been so successful that 25 of the top 30 Starbucks stores are now in Japan. But sales growth at stores open at least one year is falling as the company adds more stores.
Even as it rushes out new stores, competitors are nipping at its heels.
Tully's Japan now has 74 stores, compared with Starbucks' 385, and it plans to expand through franchising.
Lookalike chains have opened, each bearing a Starbucks-looking round logo.
In a lawsuit-averse country, Starbucks brought legal action against competitor Excelsior Coffee, after Excelsior used the same green font and round green logos. (Excelsior has since changed the "E" and "C" on its sign to blue and replaced the green circular logo border with a blue one.)
Mature coffee culture
Although coffee was introduced to Japan only after World War II, the culture was mature before Starbucks arrived. Today, Japan is the third-largest coffee-consuming country in the world after the United Staes and Germany.
Twenty-five years ago, when Americans couldn't tell the difference between Folgers and their restaurant's coffee, Japanese consumers could find a variety of whole roasted beans in department stores.
In the 1970s and 1980s, mom-and-pop coffee shops called kissatens flourished in Japan.
The coffee cost 100 yen, about 76 cents, and people spent their lunch hour playing the video games built into the tables.
Those stores have started dying out; the total number has fallen to about 80,000, compared with 200,000 in the 1980s.
On the streets of Ginza, a Rodeo Drive-ish shopping district, pre-Starbucks specialty-coffee stores served espresso and cappuccino at tables in dainty cups.
Starbucks introduced a new coffee culture by pouring espresso in a paper cup in its not-quite-fast-food, not-quite-restaurant setting. Starbucks Japan began in 1996 through a 50-50 joint venture with Sazaby, which owns upscale bakeries, restaurants and a chain of chic housewares stores in Japan.
Because living space is so limited in Tokyo and little entertaining is done in the home, Starbucks stores quickly became a place to hang out. Last year, it had an initial public offering and reported a 2001 profit of $6.3 million as sales grew 63.2 percent to $406.5 million.
Tully's opened in 1997, eventually finding an equally receptive market. Its sales tripled to $28.5 million between 2000 and 2001, when it also went public.
In the United States, Tully's is a gnat buzzing around a giant; it has 103 stores, while Starbucks has 4,447.
In Japan, it's a worthy competitor. It plans to franchise 100 new stores by March.
Starbucks Japan was born through a common business arrangement for foreign companies in Japan: Find a company with similar values and form a joint venture. By contrast, Tully's Japan took a less conventional route.
Kouta Matsuda, the chief executive behind Tully's Japanese enterprise, was a banker raised in Senegal and the United States who became smitten with his first cup of espresso in Boston.
On a business trip to Seattle, he spent two days stopping at every coffeehouse he could, then began calling and sending letters to Tom O'Keefe, then Tully's chief executive.
No one returned his calls. Then one day, back in Japan, he phoned O'Keefe's assistant and discovered O'Keefe was in Tokyo. Matsuda went to his hotel lobby, called his room and invited him to lunch.
In 1997, Matsuda opened Japan's first Tully's store, financing it himself. He was the only full-time employee, working the counter from 6 a.m. to 1 a.m. for a year and a half.
The store lost money its first three months; Matsuda was so broke he had to sell his computer.
The third month, he wrote a letter by hand describing Tully's coffee, photocopied it and stopped by all the offices in the neighborhood, inviting workers to visit.
One year later, the joint venture Tully's Japan was formed.
Although Tully's Japan pays licensing fees to Tully's U.S., the Japan company is basically a separate entity.
In the past year, Tully's U.S. sold off most of its stake in Tully's Japan and now owns only five shares.
Different approaches
Starbucks and Tully's approach the Japanese market differently.
Tully's allows smoking; Starbucks doesn't. Many predicted failure when Starbucks banned smoking from its premises, but the strategy has attracted younger, health-conscious Japanese women, the omnipotent barometers of cool in Japan.
Starbucks drinks, such as Frappuccinos in green tea and mango, target the younger customer. Sixty percent of Starbucks Japan's customers are women in their 20s and 30s.
The danger for Starbucks Japan is that the latte of today can quickly become the Belgian waffle of tomorrow.
Many investors soured on the stock when Starbucks opened more and more stores, taking away, or cannibalizing, business from its older stores.
Starbucks Japan says it has to grow to satisfy its customers. "When we self-cannibalize, we keep the customer and keep the sale," says Marc Stolzman, chief financial officer at Starbucks Japan.
"The brand is transforming from a trendy brand to an everyday brand, and when that happens they expect seats. They don't want to wait in line. There is such a thing as being too busy."
Sales at Tully's stores open at least one year have grown even as the company adds new ones.
Matsuda said Tully's nonsmoking and smoking sections give the "salaryman" a place to smoke and sip coffee, and he attributes sales growth at existing stores to older customers who have more refined tastes and are more likely to stay loyal to the brand.
"People are coming back because we're not tea, we're not mango juice," he says. "I don't want to be a hip thing."
Critics of Tully's question whether its strategy of franchising stores will erode the quality of its coffee and service, but Matsuda isn't concerned.
He worked at a McDonald's while he was in high school in the United States. "It was terrible," he says. But when he returned to Japan, a friend working at McDonald's gave him a tour.
"It was the perfect store. The operation was clean, so speedy. Two times faster than the American speed," he says.
"I knew the franchise system would work in Japan. Japanese people are very good at following manuals and instructions."
The nitpicking between the two companies doesn't end there. Starbucks says sales at a Tully's store are only half the amount at a Starbucks store. Tully's argues that its stores are only half as big as Starbucks'.
More coffee, please
What they do agree on is the Japanese market wants more Americanos. Starbucks projects it can have 1,000 stores in Japan. Tully's estimates the country can support a total of 3,000 stores, competitors and all.
Matsuda said specialty coffee can survive the fickle tastes of the Japanese consumer if the stores evolve.
As an example, he points to Dunkin Donuts and Mr. Donut, the rival U.S. donut chains started by two brothers, as an example.
Dunkin Donuts failed in Japan, but Mr. Donut remains a popular chain.
"At Dunkin Donuts, everything was the same (as it was in the United States). The Japanese stores couldn't arrange it any differently. Mr. Donut, they started selling other products, like yum cha (dim sum). They also sold noodles," he said.
"They changed the concept little by little. They arranged it so Japanese people could feel comfortable even though it's an American store."
Will Starbucks and Tully's become the next Dunkin Donuts or Mr. Donuts? Matsuda gives the passing food fad the average life span of five years.
Starbucks is now 7 years old, Tully's is 5. For now, at least, the Americanos are here to stay.
Sharon Pian Chan can be reached at 206-464-2958 or schan@seattletimes.com.