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KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

Caffbene: Master Brewer


of Growth and Global
Ambition
A Case Study
11/30/2014

Group 3
13104, Phiroj Alam
13112, Yokko Yehang Kirant
13124, Abhisek Pokhrel
13133, Madhav Silwal

Synopsis
The case entitled Caffbene: Master Brewer of Growth and Global Ambition is written by David
Y. Choi, Byungoh Kang, and Fred Kiesner. The case portrays Sun Kwon Kim, the founder of
Caffbene as an entrepreneur, who had already achieved success in various business sectors like
home electronics distributorship for Samsung, franchising of video arcade shop, and food service
franchising before entering into coffee market. Caffbene was founded by Kim in 2008. It was to
achieve remarkable success in a highly competitive South Korean coffee industry dominated by
U.S. and conglomerate-founded brands like Starbucks, Angel-in-us, Twosome Palace etc. The case
depicts the strategies employed by Caffbene to differentiate itself and achieve an extraordinary
rate of growth. When Caffbene overtook Starbucks in South Korea, Kim decided to go head to
head with Starbucks in the U.S. in Times Square. However, Kim was faced with a difficult decision
making situation, whether to abandon flagship store in USA or not.

Issues
The core issues of this case are as follows:

What accounts for Caffbene's remarkable success?

Is Caffbene really No. 1 brand in Korea?

To what extend did personal qualities of the founder contribute to Caffbene's success?

To what extend does Kim display "effectual reasoning"? How has his reasoning helped so
far and how will it help Caffbene's success going forward?

What did Caffbene do to manage and control product and service quality during a period
of such remarkable growth?

What is the financial significance of the NYC store decision?

Is Kim's global ambition realistic given his company's financial position?

What should Kim do now with the lease/permit situation in NYC?

Should Kim try to get out of the lease, find a new location and perhaps abandon the US
entry altogether?

Case Facts
Sun Kwon Kim was determined to be make money from his early childhood due to poverty. Kim
started his business career in restaurant in 1993 as a failure. However, he was successful afterwards
in home electronics distributorship for Samsung and was even ranked number one among
distributors in Gyeonggi province.
After getting the taste of success, Kim quit the distributorship and started a new venture. He
carefully observed a video game arcade located near his electronic business and was amazed by
the crowd of children that filled the shop. So, he founded a video arcade franchise business in 1997
which grew to 300 video arcades in next two years, during asian financial crisis. 40,000 companies
went out of business and real GDP declined 6.9 percent year to year during the crisis, however
Kims franchise video arcade was successful. Kim closed this business in 2003, when he was no
longer able to recruit new franchises willing to pay royalties.
In 2000, Kim started food service franchising on a Gamjatang (Korean traditional soup) restaurant.
Standardizing the food taste and cooking process was difficult, so Kim researched and
experimented with the cooking process for a year before launching its business. Finally, Kim
developed a method of supplying half-finished foods to his franchises. He grew the business
successfully to over 200 stores at its peak. At the end of 2010, the business was still in operation
with 150 stores and much of the ownership had been passed to Kims brother in law.

In 2005, when Kim was visiting Vancouver, he saw downtown area with abundance of
coffeehouses. He also observed that the kitchens of these coffeehouses were fairly easy to operate.
Kim knew that simplicity in kitchen operation is key success factor in franchise business.
Therefore, Kim began to show interest in coffee business. At that time, Starbucks Korea was
operating well and the coffee industry was crowded. However, Kim believed that Starbucks as
well as other brands were not fully addressing the needs of the customers. He also observed that
all the leading players were copying Starbucks, and hence the industry was homogenous.
Furthermore, Starbucks seemed to be little stale and outdated due to the fast changing tastes of the
Korean people.Kim also noticed that people spend significant amount of time in coffeehouses by
engaging in meeting and conversations. Kim realized that Starbucks and other coffee retailers were
missing a valuable opportunity by not serving a more complete food menu to these people who
were sitting and talking for hours in the coffeehouse.
Kim decided to focus on only few desserts that harmonized with coffee, like waffle, ice cream and
other beverages. The menu was finalized after extensive research. When the whole concept of
coffeehouse was finalized by Kim, he formed a corporation with 1 million USD of personal
investment. In April 2008, Kim opened the first company owned Caffbene store in Cheonhodong,
a commercial area near a subway station with high foot traffic of office workers, students and
housewives.
For six months, few customers visited the company owned store or the eleven franchised stores
Kim had authorised. Kim hosted various events and promotions, but based on the analysis of the
Caffbene membership card transactions, there were few repeat customers. Kim realized that
customers did not feel there was anything special about Caffbene, and so continued to choose
familiar brands. Moreover, more visitors seemed satisfied with the combination of coffee, waffles

and gelato, but neither the quality of menu nor the ambiance was matching to them. Therefore in
december 2008, Kim decided to drastically change the Caffbenes interior to an antique European
outdoor cafe incorporating a comfortable vintage style. Kim decided to experiment with a book
cafe concept, where visitors could drink coffee and feel comfortable reading or studying. Kim
also upgraded the menu with healthy drinks using traditional Korean ingredients. Also some
unique menu items such as tea blended with fruits and herbs were added.
Kim implemented the changes in newly opened flagship store in Apgujeongdong, the most famous
and trendsetting street in Seoul. Upon opening, the store received positive comments from visitors
and critics. Young women flocked to the store and took pictures of the interior and posted them
on social media websites. Many visitors came to the store to read stores while drinking coffee and
others brought netbook computers. Finally Kim believed that the new concept was ready for
aggressive franchising and marketing. Caffbene was the first coffeehouse to advertise on TV with
celebrity endorsement. Caffbene received an overwhelming customer response from the TV
advertisement. Both customers and inquirers about Caffbene franchising opportunities poured
into the stores.
Caffbene also focused on the adequate supply of high quality coffee beans. Therefore, Caffbene
entered into a Farm to Table (FTT) contract with Ipanema, the largest single coffee plantation in
Brazil. Caffbene became the first Korean coffeehouse to have direct contract with a foreign coffee
farm. Similarly, Kim established Berne Cup Coffee College, which provided a barista training
program, coffeehouse start-up education program, and coffee-making classes for both employees
and hobbyists. Furthermore, Kim also focused on employee benefits, and introduced employee
benefits program to ensure employee feel satisfied and respected. The provision for vacation bonus
was also introduced.

Kim also focused on customer and franchisee relations and established open communication with
customers and franchises. Mystery shopping program was employed to ensure the service quality.
Also, any customer could submit his or her wish to the Caffbene website, and Caffbene would
select thirty wishes to grant each month. Kim also listened to the advice and requests from the
franchisee and maintained friendly relationship with them. Kim also focused on franchisee training
program and had a team of supervisors that visited stores and monitored franchises. Also, new
team comprising of forty expert trainers, each with more than five years of work experience in
coffee industry and franchising business was formed. Each trainer visited franchised stores and
worked alongside the employees to demonstrate proper methods for activities such as greeting
customers, operating the espresso machines, and cleaning the floors.
In September 2010, an investment firm associated with Starbucks approached Kim and asked if he
would be willing to sell the business. Kim turned down the offer. Also a Korean conglomerate
approached to Kim with a similar offer, for about 170 million USD. Kim again declined. Also by
the end of 2010 several brands started to imitate Caffbenes various strategies. Therefore, Kim
began to look abroad for growth. China and US were the initial target markets. Entering Chinese
market was safe because of the cultural similarities between the countries whereas entering in the
US was risky due to the presence of Starbucks. However, Starbucks was already defeated in Korea
by Caffbene, and Kim wanted Caffbene to be a global brand, so decision to enter US was
finalized by Kim. Furthermore, New York City was chosen for the first store as it was the center
of the worlds economy and culture.
Finally, a location on the Times Square, with high foot traffic and visibility was selected. The only
downside of the location was cost, with monthly lease costing more that 100,00 USD. Kim visited
the place, made an offer, and then followed up with a large down payment of 1.35 million USD.

However, it was later discovered that the previous tenant had been operating in the location without
the needed permits. This meant that Caffbene had to apply for permits from the city government,
which was notorious for being difficult. Kim was advised that the permit process could take
anywhere from six months to two years. Therefore, Caffbene could be down millions of dollars
in lease payments before the store ever opened. Furthermore, the landlord also refused the request
to extend the five month grace period to deal with the permitting process. Kim could seek legal
compensation for damages with 1.5 million USD paid as down payment and try to find new
location. However, finding a new good location in Times Square was difficult. Furthermore, it was
unclear how long the lawsuit would take and how much would it cost in total. Therefore, Caffbene
could be stuck with two lease payments and locations. The other option available to Kim was to
fold the US operations.

Analysis
Caffbene founder Sun Kwon Kun has demonstrated the remarkable success in the coffee business
which seemed as a saturated market where the top class American founded brands had already
dominated the Korean market. This case demonstrates that the personality of an entrepreneur like
Kim can play a bigger role in terms of entrepreneurial creativity. It was his determined
entrepreneurial alignment and opportunities he saw in the market that made his outlandish
decisions a phenomenal success in coffee business. An ambitious growth plan in the mind along
with the intention of addressing the fast changing needs of the customer can act a good foundation
to start any business.

Kim possessed an ability to see the prospects from diverse angles. Through this capability, he was
able to develop a new retail concept in a highly competitive market and created a competitive edge
which largely contributed for rapid expansion of business within a short span. Kims extraordinary
capacity of envisioning big, blended with the ability to articulate the vision within his work team
paved the way for the success of his business. He was never disappointed with his failure. Instead
he learnt from failures and speedily corrected them in the best possible manner as demonstrated in
the early opening phase of Caffbene when the business was not doing well as expected. Kim
always was out of conventional thinking and never gave himself up to pessimistic thinking and
fear of failure.
Many business are hesitant being the first mover as they fear of unexpected disappointment and
loss of money. However, Kims leadership was not on the verge of submission to that sort of
conventional thinking. Caffbene became a first coffeehouse to advertise on TV with celebrity
endorsement and gained vast popularity in the Korean market. Had it been the trend follower, it
never would stand out in the competitive market. As a result, Caffbene is known as a trendsetter
in world coffee industry.
We are exposed to numerous examples in the real world of trendsetting company failing during
expansion phase due to their inability to manage growth and product quality when they are inside
the tornado of explosive growth. Caffbene, however, well-managed its growth and product
quality during this phase. Kim established Berne Cup Coffee College, which provided a barista
training program, coffeehouse start-up education program, and coffee-making classes for both
employees and hobbyists. Employee benefits program was introduced along with the provision for
vacation bonus to ensure employee feel satisfied and respected. Moreover, for establishing good
customer and franchisee relations, open communication with customers and franchises was

conducted. Mystery shopping program was employed to ensure the service quality. Additionally,
the discussion of executives presented in the case demonstrates the orientation of the company
towards the longer term success. Hence, we can see that Kim used effectual thinking.

Starting a New Venture


Issues and challenges of new business startup How Kim started video game business but due
to financial crisis, had to close the business. Despite realizing how Starbucks and other companies
were not catering to the needs of the Korean market, despite realizing how Korean tastes were fast
changing, despite providing the more wholesome menu that would go well with the coffee and
despite designing the caf to be more socializing-friendly, there werent significant repeat
customers as they did not see anything special about Caffbene.
Generating new ideas Kim saw how the coffee industry in Korea was very homogenous and
decided to provide new offerings like a menu (healthy drinks) that went well with coffee, designing
of the caf to be more socializing-friendly, providing books and tabs to be used in the caf, giving
that 30 wish list gifts (Mystery Shopping Program hearing aid), Not following the status quo
(TV advertising in times of recession when others like Starbucks werent), employee benefit
programs. Making drinking coffee an experience and not just a transaction
Sources of Innovation Demographics (Starbucks was providing standardized service while not
considering the preference of the Korean Market) and Changes in Perception (Something about
changes in tastes)

The Environment for New Enterprise


Schematics of the New Ventures Enterprise
Stakeholder Analysis Kim played a big hand in giving franchises as he did not give companies
who were only willing to use big money to get the franchise as that could mean those companies

were only interested in the money making aspect and did not truly appreciate the value of the hard
work put behind Caffbene.
Competitive Analysis Kim always went about making Caffbene operate in a way that was
unique to other coffeehouses. In fact, the operations were so unique that other companies started
to follow Caffbenes strategies. Seeing this, Kim wanted to go international and had the ability to
do so too with their main targets being China and the US. In the end, Kim never really followed
the market leaders (like Starbucks) but always did this differently from the start. Kim also focused
on the process aspect to be more competitive by purchasing the big coffee machine which made
the cost of producing coffee much cheaper. This meant that Caffbene were providing high quality
coffee at more affordable prices.
Competitor Analysis Despite being a global brand, Starbucks made their service standardized
which made Kim see an opportunity to exploit as the service given by the competitors was not
matching the services that the customers wanted/were looking for.
Socio-demographic Analysis Kim managed to identify the dynamics of the coffee consumers
were changing, at least in Korea. While others, only saw their caf as a place to consume coffee,
Kim saw that the customers wanted more than that, they wanted an experience. So, Kim designed
the cafs layout in such a way that the customers were left in an environment were they could sit
back and converse more privately in public. Also, Kim saw how the Korean market wanted more
than only coffee for which he provided a well-researched healthy menu and also added items that
went well with coffee like ice-creams for the female-customers.

Lesson learnt
Failure is always the learning point in any business. Instead of dwelling over the disappointment
of failure, an entrepreneur should quickly move towards a better strategy learning from it at the
cost of not repeating it. A high degree passion, patience, sense of value, integrity, propose and
flexibleness are some of the major traits to be a successful entrepreneur. Further, one should bear
in mind that risk is an inherent business characteristic in any profitable venture. Thus, wellinformed decisions should be made by analyzing every possible sort of pros and cons.
Expansion is also a one of the most critical stage in business where tendency of compromising on
quality and mismanagement are higher. In this stage, cautious handling of customers and related
stakeholders is very critical in order to sustain and remain competitive in the market for the longer
term. Also, entrepreneurs need to be cautiously concerned for the continuous growth and longer
term success of their business ventures.