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A Passionate Brew
The Tully's Coffee Japan Story
Mr. Hitoshi Suga
July 2004

Hitoshi Suga - Tully's Coffee JapanWhat do a magazine cutting, the President of a global venture capital corporation and a jobless banker have in common? Brew them all together and you'll find the essence behind Japan's third largest coffee chain, Tully's Coffee Japan Co., Ltd.

How did Tully's, which started with just one store in Tokyo's Ginza district, reach the point where today it is now hotly challenging the supremacy of Starbucks?
Hitoshi Suga, Vice Chairman and Board Member, Tully's Coffee Japan Co., Ltd./FoodX Globe Co., Ltd, was on hand at the July 5th EA-Tokyo seminar to explain.

“I was so confidant that…. we could really make it. E
Call it fate if you will but the stars were definitely aligned when Suga first met Kouta Matsuda, President of Tully's. In 1998 when Suga was President of Mitsui Group's global venture capital firm MVC, he saw a small tabloid paper article featuring a new coffee shop that had just opened in Japan. Tearing it out, he asked his Vice President to find out who was running it. After receiving an enthusiastic reply, Suga decided to visit the store himself and taste the coffee.

When he arrived at the new store he was greeted by a smiling young man wearing an apron. Asking to see the president, Suga was promptly told he was speaking to him.

“That was my first meeting with Matsuda, who at the time had just opened his first store with two part timers. After talking with him I asked him whether he wanted to grow his business. He replied  Ees.' I tasted the coffee and asked him whether he could make the business big. He replied ‘Well, I am so busy that I think I can only open 2-3 stores at the most.' E/p>

Suga never thought about it at the time but the words just came out of his mouth, “Would you like to work with me? EWithout a pause, Matsuda said, “Yes, please. E/p>

“At MVC, I used to see 2-3 company presidents every day who came to me asking for our investment, so it was very unusual for me to approach an entrepreneur in this way, ESuga recalls.

The two men then arranged a meeting with the Licensor of Tully's Coffee USA and subsequently both companies incorporated with MVC initially acquiring over 70% of the business.

“That meant we had to be completely responsible for the future of the new venture which is another very, very unusual thing for any Japanese venture capital company to do, ESuga says. “I really didn't know how I should proceed with the project. I never expected before I encountered this that MVC could become the actual owner of the entire business and become responsible for it. But something really hit me in my mind and I was so confidant that with Matsuda and myself working together, we could really make it. E/p>

But what about the competition? At that time, Starbucks, with the backing of a massive amount of funding, had opened their first two stores in Tokyo.

“Starbucks were doing quite well but I felt that with Matsuda's energy, personality and background, perhaps we could become at least a good number two in this new market ∁Ethat was my instinct, ESuga said. “Instinct is pretty important for any venture capital start up investment. You have got to be something of a fortune teller to some extent to look at a person and consider whether they are really going to make it or not, because at start up level, no matter how good his business sounds or his presentation looks, you can never tell. E/p>

Making the grade is extremely tough
Securing venture capital is a major challenge and the training ground is littered with casualties.

“Over the last four years I have seen over 2,500 investment opportunities out of which I made only 10 investments, ESuga explains. “On the other hand, Tully's coffee was almost an anomaly ∁EMatsuda didn't have an incorporated company, he didn't have a fancy MS Powerpoint presentation and he didn't have any substantial projections for the future; the only thing he had was the store he was running. But it smelled good, ESuga said, “and that's so important for any business. E/p>

Considering the immense competition for a limited amount of venture capital, how did Tully's get the green light?

“At the early stages of a start up business, little things may not necessarily work completely but you've got to have a background instinct and the ability to judge people who are running these ventures, which is very difficult, ESuga says. “After meeting Matsuda I wondered how I could help him. Our parent company Mitsui was not interested in helping a small coffee shop at all and our investor lineup was very small so I thought I needed someone to help this new venture. I knew the person who was running Mitsubishi Corporation's new venture capital firm Millennium Ventures. I asked him whether he was interested in investing in my new coffee venture. He paused for a moment and asked, ‘Why do I have to invest in a coffee shop?' Thankfully Suga's contact persuaded all the top echelon of Mitsubishi Group to invest five million Japanese yen into the small venture.

Tully's Japan was born.

One big issue, Suga says, was that he knew nothing at all about coffee.

“It smelled good and I knew Tully's was going to grow. But Matsuda didn't know much about the coffee business either since he had been a banker for seven years, ESuga says with a laugh. “But he was bold enough to quit his job. Matsuda then started e-mailing and calling the President of Tully's USA Tom O'Keefe almost every day asking him for an interview. Matsuda was just a nobody, a jobless banker, but his persistence paid off and they finally met in Tokyo. E/p>

For two hours Matsuda divulged his dreams of starting a new style coffee chain in Japan. He thought Tully's was the best choice. A month later, Tom contacted Matsuda saying he would give the full licensing rights for the Japanese market to him and not charge any royalties unless or until he became profitable.

“That's another unbelievable story but is what made me instantly decide to work with him, ESuga recanted. “Matsuda has the kind of charisma, power and ability to influence decision makers to work with him. E/p>

In order for the company to expand they had to persuade the landlord to allow them to open stores. But no matter who they asked, they were told, “How can we trust you? Can you even pay the rent? E

The business struggled in the first year but they succeeded in opening three stores including the original Ginza store. Inspired by a small kiosk type store he had seen inside the Microsoft building in Bellview near Seattle, Suga decided to open a similar store inside the building of his parent company Mitsui, the office of which has 6,000 staff and a huge lobby. But there was a problem.

“Nobody thought the store would be popular given the fact that Mitsui people have access to free coffee in the office, coffee vending machines, and cheap coffee is being sold within the building, ESuga said. “But I had a different view. People working in Japanese trading companies have a lot of exposure overseas. That means they understand the taste of good coffee and they are willing to pay a premium for it. E/p>

On the first day that assumption was proven very, very right. People lined up and some complained they had to wait for an hour to buy Tully's coffee in Mitsui. Eventually, the store began clocking up nearly US$ 1 million in sales per year.

Growth has been spectacular, very, very fast.
With that tremendous cash flow suddenly Tully's Coffee Japan started to grow in 1998, and after two and a half years the company went public.

“At that time, we had sales of only US$ 8 million and only 10 stores. It was one of the smallest and fastest IPO'S by any food business company in Japan, ESuga says.

Since 2001, sales have been growing very, very fast.

“This year we are looking at earnings of 600 million Japanese yen. The number of staff kept growing after we went public because we built the momentum after becoming well known in the market. We found new people, new funding and new partners, ESuga says enthusiastically.

The entire coffee market comprises approximately 7,500 stores and is worth about 1.5 trillion Japanese yen. The three major coffee players ∁EDouter, Starbucks and Tully's have only a 12% share of the pie.

“I expect the three major chains will take at least another 20% of the entire market or about US$3 billion, ESuga remarked. “So I think if we become aggressive we can take a big market share of the coffee shop market. E

Tully's Japan currently has 193 stores with half of them directly owned, half franchised, and a good mix of very profitable stores. Starbucks and Tully's expansion strategy could not have been more different. The former coffee chain launched aggressively by opening new stores regardless of cost until they reached a point where they found themselves having to close down many underperforming stores. Meanwhile Tully's, thanks in part to their entrepreneurial history, took a more cautious route opening stores as and when they could afford to.

“We were always short of cash so we had to be very careful when spending our money, ESuga recalls. “We now have over 200 people and recruit 20-30 fresh graduates and sometimes we open 5-6 stores a month from Hokkaido down to Kyushu. Our competitive advantage is the quality of the product we sell. E

After a management buyout, the company is looking at the possibility of another IPO in the next couple of years. Suga says Tully's goals for the future are clear.

“Tully's are in a pretty close race with Starbucks and we aim to catch up with them in the next three years. E

Text: Jonathon Walsh
For comments or inquiries:

Jonathon Walsh is a professional Editor and Writer based in Tokyo, Japan, originally from New Zealand and currently working for the Japanese-English bilingual magazine Hiragana Times. He is also a regular contributing writer for Eye-Ai and J Select magazines and a growing number of websites. He has written & self-published four books and had over 150 articles published in nine different media in Japan.

Jonathon is Director of Business Grow , an innovative company specializing in providing a wide range of top quality Editorial and Advertising services to Japanese and foreign organizations.

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