“Business as usual” is a contradiction in developing countries or, at least that’s what I keep reading from (HBR), throughout the years companies have been adapting their business models to such markets forgetting the most important rule of all :Keep your market segment the same.
Huge companies like Starbucks, Dunkin Donuts, McDonald’s, and such are based on one primary basic target marketing concept. To sell their product to the masses. So they target the middle classes in developed countries. Because that segment is the sweet spot of the population, right there is where they start building up their corporate empires.
Foreign Brands in developing countries like Colombia have a strong reputation not only for their aggressive brand awareness campaigns that reach as far as here, but because they are blessed with a strong aspirational value just for the fact of being foreign and successful. When one of these brands arrives here, disruption hits everywhere, long lines of people wanting to purchase the product are usual and… hold on, Did I just said “disruption hits everywhere?”
The target market for such products in Colombia is not the middle class they were created for in their country of origin. Instead they aim for the top 1 or 2% of the population who have the means and resources to buy from them. Their value target changes from middle class in developed countries to the richest part of the population on the developing ones. In Colombia rich people are the ones who drink coffee at Starbucks and eats at McDonald’s.
The “Cafe Latte” Index.
There’s a Big Mac Index to measure the purchasing power parity between currencies. I will take a shot and do a “Cafe Latte” index.
The price of a Starbucks Cafe Latte (Grande) in Colombia is nearly US$2.50 , now hear this, the colombian minimum wage is about US$2.50. Now hear this, the Colombian minimum wage is about US$250 per month. 10 Lattes a month (2-3 Lattes per week) takes nearly 10% of that salary. If you add a croissant half the time you buy that latte, it will be 15 to 18% of your monthly income. So much for Starbucks’ goal to become “The third place” to be besides your home or office right?
“The target market for such products in Colombia is not the middle class they were created for in their country of origin. Instead they aim for the top 1 or 2% of the population who have the means and resources to buy from them.”
In Colombia we have been drinking coffee our whole lives. First in small coffee shops called “Cafeterías”. Then in Juan Valdez coffee shops, which basically targeted the same audience as Starbucks. So they use the same strategy I’ve been describing.
So why do foreign companies (and local copycats) keep repeating this “exclusive” business model in developing countries over and over? Well, because this has been a viable model hitherto.
The Democratization of Coffee
Now, there’s this company called Tostao in Bogota (Colombia) who basically took ideas from these business models and created a product for basically… everyone. Here’s the deal, a cup of coffee starts at US$0.30, a Latte (Grande) is about US$0.84, and the equivalent of a Ham and Cheese Croissant is nearly US$0.85, so 10 lattes a month, will only cut 2.1% of the minimum wage salary. Compare this with Starbucks 10%. How they did they do this? They started by having the same basic business model Starbucks had in their country of origin but for Colombian middle class commuters.
Tostao in a nutshell
A typical Tostao store has a limited budget for rental expenses. Depending on the location the size of the store varies. In order to be profitable they need to open an significant number of stores. There are nearly 100 of them in Bogota. They plan to finish 2017 with 130 more. All the pastry is imported (frozen) from Spain and baked right at the store. The design is simple yet nice. Prices and products are described on chalkboards. Forget about fancy backlighted or digital menus. Remembering the famous quote from Mies Van der Rohe: “Less is More”, Tostao in delivering a simple yet good looking store to buy from.
People can buy quick lunch options like sandwiches and salads for pretty low prices as well. The stores even have a few small-but-not-laptop-friendly tables as a subtle suggestion to drink your coffee and keep walking. You can expect long lines first time in the morning for every soul going to work. Yet the lines moves as fast as the Starbucks at Picadilly near Earls court at 8AM, nothing to envy those Brits there.
Tostao is democratizing coffee stores in Colombia, I like to think about the “YMCA song line scenario”, any given day you see a worker, a policeman, a business man and myself at any Tostao store line waiting for our coffee, seeing that in a country like mine is one of the most mesmerizing experiences you could ever have. It put us all in the same place at the same time looking to enjoy the same product, if you are from a developing country you will know what I’m talking about, for the first time in my life I’m buying something here that not only almost everyone CAN but WANT to buy along with me. That scenario in a mostly-non-inclusive country is a magnificent moment for the mind-set change we need so badly.
The HUAWEI Dance
It’s not the first time we see this. Huawei technologies had the same patron as “the Economist” mentioned “The rise of domestic firms such as Huawei is a disaster for the Multinationals”. Established in 1988 Huawei basically focused on markets that western companies ignored for years. Nowadays it is a main competitor of huge multinationals like Cisco Systems.
Huawei strategy started by producing very simple mobile phones that provided the basic functionalities the average costumer asked for. This is how they managed to penetrate markets of developing countries like Zimbabwe, Nigeria, Pakistan, Kazakhstan and Turkmenistan that no one was interested in, aiming for the underdogs you could say.
At a major mobile phone event held in 2007 at Johannesburg, they presented one of the models they were marketing in Africa, the basic mobile phones were in most of the attendees hands. How come? Well, they gave free phones to every person at the event, daring their western competitors to follow suit. That’s how aggressive Huawei marketing tactics became a company standard. (1)
Both Huawei and Tostao understand how to develop strategies to place their products and value in developing countries for masses who are unexplored by most western corporations. The problem is once the western corporations realize the jeopardy represented by the upstarts it’s too late to react. The usual “too little too late” scenario has taken effect.
“…for the first time in my life I’m buying something here that not only almost everyone CAN but WANT to buy along with me, that scenario in a mostly-non-inclusive country is a magnificent moment for the mind-set change we need so badly.”
The business model inception is right there, it’s just a matter of time until more and more companies understand this and put in motion this whole concept of inclusiveness in developing countries corporate DNA.
So how about doing this for Hamburgers, Tacos, arepas (4) or even Financial services? (Read my Blog about Blockchain) anyone?
Update: Starbucks surely is getting short in their stores projection, according to their 2013-14 plan (2), they will be opening 50 stores in Colombia by 2019, it’s late 2017 and they have openened 13 stores so far (3), their projections were before Tostao opened their first store in mid 2016.
Killing is not the same as DEATH, I do believe Starbucks is not going to die, for sure as an industry incumbent company is looking ways to digitize their business model and/or evolve and innovate, but that doesn’t change the share-shifting factor I believe is taking place.
I’m Phillip Stolen, which is Felipe Hurtado in Spanish: What say you?
(1) “Billions of Entrepreneurs: How China and India Are Reshaping Their Futures—and Yours.”Tarun Khanna, Publisher: Harvard Business School Press.
(4) Michael loves arepas, thanks for you kind help!
50 thoughts on “How a local coffee store is killing STARBUCKS in Colombia.”
Thanks I found the article really interesting article…. but I see no evidence of Tostao impacting Starbucks profitability? Starbucks is still rapidly expanding in Colombia’s affluent suburbs and I would have thought predominantly serves a different segment of the market (that 1 or 2 % you mention) and then the aspirationalists, which may gravitate to tostao. I would imagine Tostao is having more of an impact on Juan Valdez sales than Starbucks?
Interestingly I am from Australia and Starbucks really struggled to enter the market there but here they are marching forward quite rapidly.
Hello Josh!, thanks in advance for your comment, well, Starbucks surely is getting short in their market projection, according to their 2013-14 plan (1), they will be opening 50 stores in Colombia by 2019, it’s late 2017 and they have openened just 13 stores so far (2), and this was before Tostao opened their first store in mid 2016. The Aspirationalist you mentioned actually didn’t exist for Tostao, just mind that a country like Colombia divide people according to the place they lived by “Estratos”, so everyone knows if you are “rich” or “poor” right away, been that said, the marketshare Tostao took from Starbucks were not aspirationalist by any means but “Hesitaters” by any means.
About the Impact, well, Juan Valdez and Starbucks targets the same 2% segment, both are equally expensive for the common middle man in Colombia, a simple price comparison will show you this.
Australia is a developed country, so comparing any business model in Australia with Colombia, it’s like comparing apples with bananas, that was the main subject of the Blog, to keep aiming for the same public foreign corporations used to aim in their country of origin.
Thans for your input Josh.
Hi good article, a few spelling mistakes…
Thanks Eileen! English is not my native language , if you can mentioned some of them it would be great! 🙂
I Loooveeeed the article! It was about time someone gave to people great quality products for FAIR prices! I have never eat something fresh @Juan Valdez and although I’m in the “upper class” segment, I’m only aiming going to Starbucks from time to time because its ridiculously expensive!
Thank you Jenn!
I love that Tostao has opened. I am also amazed at the amount they have spent on rental with stores in key areas around the 72 etc. Starbucks isn’t going anywhere though, it’s about presence. Starbucks isn’t aiming at the same market at Tostao. Those that go to Starbucks stay hours, it’s a hub or social place. Tostao is priced for colombians and speed.
I remember when Starbucks tryed to enter Hayes Street on San Francisco and there were signs that said “keep Starbucks out of Hayes Street”.
Some people just dont like corporations, they like the locals to earn this money.
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Very interesting article. I am from Colombia but living in South Africa for the last 12 years. I never have been fan of Sturbucks, I feel that their coffee has a funny taste. I prefer 1.000 times to have a tinto or the coffee from Juan Valdez. I loved the strategy of Tostao and the fact that they thought in a market that other brands didn’t think about.
A Girl in Africa
Thank you Diana!
Great article, in both: data and writing! congrats.
Thank you Nicolas!
I absolutely agree with this article. I love Tostao, remembering what coffee shops were before
I’m sorry, pal. But Tostao is NOT a Colombian company. It’s Spanish. And its financial muscle is really strong. You should do some fact-checking first.
Thank you Juan, the main point wasn’t about the owners, is about their business Model, They import the Bakery from Spain, but they are from Panama actually. I said Colombian since the company (BBI COLOMBIA) is established in Colombia and operating as a Colombian company.
Gracias por el artículo. Tostao lo está haciendo bien y su modelo incluyente con seguridad tendrá éxito en la medida que logren renovarse a sí mismos cuando el mercado se los exija.
Por otro lado, te cuento que en este momento los ojos de Starbucks están puestos en el mundo digital. Su estrategia se llama Digital Flywheel y puedes encontrar múltiples referencias en internet.
Te puedo asegurar que la batalla la quieren dar en otro lado diferente a las tiendas y así transformar nuevamente la forma en que las personas tomamos café.
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Gracias por el Dato Jean Philip!, seguro lo están haciendo y revisaré el tema, hace poco estuve leyendo sobre la matriz digital, y habla sobre los Incumbentes Industriales (Industrial Incumbents) los cuales buscan tech Entrepreneurs y Gigantes digitales para ser aliados y sacar su modelo de negocio a la digitalización, lo revisaré, gracias por compartir de nuevo.
Great article Felipe, is true that economies are now struggling with people preferences and not the opposite that people should adapt to economies… Im of the believe that “trendy” is an evolution of something traditional, that’s why something trendy in USA will probably not be trendy in Colombia where the tradition of a good coffee was never driven by the cost of it or the comfort of the shop but by the quality of it, and that’s why Colombia has become one of the “best coffee” producer in the world and not just another big producer…
Thank you Alexander.
I’d always thought about it, and saw Tostao doing it right, but never thought about the social (i.e. inclusion) aspect, just from a business perspective. And you are right, we need more of it!
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Nice analysis Mr. Stolen ;), a couple added opinions on the matter, from Bogotá:
– First, expensive stores like Juan Valdez thrive here due to the brand’s “parent” Café de Colombia which is loved by every colombian. Starbucks lacks that, they got here with their reputation which rapidly lost it’s value when comparing prices to other “high class” coffee shops. (Result: way behind their projections)
– Last: Tostao wins it, by taking a daily product like coffee and making it “cool” yet keeping it affordable. As the saying goes: “Nadie es profeta en su tierra”. As long as Starbucks keep trying to sale coffee as “special” to those who grow it and know that great flavor comes for a fraction of the price, they won’t make it as they did around the globe.
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Muy buen articulo! Lo compartire con mis estudiantes, saludos.
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BBC Bodega has the same model of bare bones self-service but a pint is costly. I sometimes wonder where Colombians (particularly younger ones) get the money to be drinking $10,000 pints.
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Me parece muy buen articulo y creo que tiene razón en lo que dice, lo felicito. Creo que es un caso de éxito que se merece todo el reconocimiento sin lugar a dudas y discute muy buenos puntos sobre ello.
Ahora creo que falta reconocerles mucho más que la idea, de compáralos con Huawei o Starbucks, incluso de cómo se salen de apuntarle al 2% del mercado nacional y abordarlo de manera masiva. Tostao logra tener una versión bastante elevada de un lugar “bueno, bonito y barato”. Y si son los precios bajos (o justos), los productos de muy buena calidad que van acorde al precio y que se consiguen en lugares sencillos pero agradables lo que llama la atención de todos los clientes que han ganado en tan poco tiempo. Pero hay más que esto detrás de este gran negocio.
No busco criticar, pero creo que a estos factores la competencia se podría ajustar sin que pase mucho tiempo. Yo creo que el factor de mayor importancia, lo más clave del negocio y de mayor mérito es su eficiencia operacional. Esto no cualquiera lo puede conseguir y es la diferenciación que podrán seguir teniendo por mucho mas tiempo y que los hace tan exitosos.
Un negocio no solo requiere de clientes para ser tan exitoso, también necesita ser rentable para poder expandirse como lo ha hecho, como planean seguir haciendolo y mantenerse con vida sin tener que compensar ajustando los otros factores (precio, calidad, etc). Esto no es nada sencillo y menos con las condiciones tan buenas que ellos ofrecen. Productos de calidad hay muchos en el mercado, los precios y establecimientos son decisiones, pero aún así seguir siendo rentables es de genios. Ese es el balance estratégico entre todos esos factores el que les permite atraer al mercado y ser gran negocio a la vez, y solo es posible por su eficiencia en las operaciones.
Su modelo de negocio utiliza proveedores que mantienen alta calidad, bajos precios para sus volúmenes de ventas que no son fáciles de conseguir. Utilizan bajos márgenes de ganancia que se buscan compensar con un volumen de ventas mucho mayor y siempre mantener los costos bajos para así generar rentabilidad en el negocio. Es por eso que un Oma, Panpaya, o cualquier cafetería/panadería no podrá competir con ellos. De hacerlo, si ofrecen lo mismo a esos precios su negocio no se podrá sustentar.
Este no es un mercado donde solo existían uno o dos jugadores antes de Tostao, son varios y de todos los tipos. Eso evita que estos negocios estén vendiendo a precios súper altos con ganancias altas porque simplemente no hay mas opciones, aquí ya se tenía la competencia. Pero Tostao llego a mostrarle a todos que lo hacen mejor que los demás y que su negocio no lo pueden igualar en todas las condiciones a la vez. Para descubrir las claves de los suministros y operaciones se tomara bastante tiempo y para entonces estarán muy consolidados en el mercado.
Nuevamente, excelente articulo y muy buen tema.
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Buen input, gracias Ferrero!
Thanks for the interesting and informative article.
One question I have is what you think the impact of a low cost model like Tostao’s is on other segments of Colombia’s economy, such as the coffee farming sector? In 2012, the USDA estimated that Colombia imported 90% of the coffee it consumed (DANE estimated that it was around 80%), because Colombian roasters developing products for the Colombian middle and lower classes couldn’t afford to pay the relatively expensive price of Colombian coffee. At ~USD 0.30 per cup, even if Tostao isn’t (or doesn’t end up) importing cheaper coffee in order to maintain its prices, I doubt they can afford to pay Colombian coffee growers very well. Taking that into account, is this “inclusive” business model not made viable at the expensive of Colombian coffee farmers?
Do you think Colombian consumers can actually help improve the remuneration of Colombian coffee farmers, or is it better for the farmers to sell their beans to consumers in developed countries? Having lived in Colombia for eight years, I also know that Colombians don’t like hearing that their country’s best coffee gets sent abroad, while they’re left to drink the lower-quality stuff…
Thank you Tyler!, that’s a good and yet tricky question, my family actually were coffee plantation owners, one of the hardest part of that business is the amount of time a coffee plant took to deliver the “fruit”, so if the price is low, the next harvest is going to take a while. About the quality you are right, probably today is different but back on my days when I was a child, we kept the lowest coffee denomination for us, and the highest quality was sold to “Trilladoras” owned privately or by the “Federación Nacional de Cafeteros”.
Colombia is basically one of the “Grocery Stores” of the world, so I think the agro-industry is going to get better and better since humans needs to be fed somehow. Nowadays I’ve heard coffee makers are doing way better than 10 years ago.
Another reason to visit Colombia again.
The people behind Tostao are doing a great thing that is not dissimilar from Starbucks. They’re doing it to Colombian scale.
As to the chalkboards with menus and prices – that’s how several local, non-chain coffee place do it here in Portland, Oregon. (And one local brewery chain too.)
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If one Latte in Starbucks costs US$2.50 and the minimum wage in Colombia is US$250, then it is going to be 100 Lattes a month and not 10 as mentioned in the article.
Hello Camilo, you’ve Got it wrong Camilo, I said 10 Lattes represents 10% of the buyers income…
Felicitaciones felipe!! excelente análisis.
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Add to this that Starbucks doesn’t know how to make good coffee. They came here with their stupid mermaid thinking we were going to bend over, but you don’t go to the north pole to sell ice to the Eskimos. Colombia is a country of coffee tradition, so their recipes might pass as good in other places, but we know better than Starbucks.
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People in the USA who know coffee consider Starbucks a seller of milk drinks with burnt coffee.
very interesting…i have noticed more and more Tostao s all over the norte….newer one on 15 y 102 …will check it out…i enjoy the cup size at Starbucks…i have found the tinto at JV terrible in
the last few years…thanks for the article. Keith
Thanks for the input Keith!
Very good article Felipe. Congratulations. let´s see next step to check if Tostao will sustain its market share.
Thank you!, indeed, lets see..
Hi Felipe! I found your article very interesting and I completely agree with you. I am from Colombia and I´m in the coffee business too, so I know a lot of facts, numbers and statistics that confirm what you are talking about. Personally I don´t like Tostao´s coffee, neither Starbucks´ (leaving aside how ridiculous expensive it is for just buying a non quality coffee cup), but what Tostao offers to the Colombian market it´s just what the middle and low class consumer is asking and willing for: good value for money in coffee and pastry products. Tostao is doing great moves in the coffee stores segment in Colombia, and they are doing it very very fast with a nice marketing strategy. It is important to take in consideration too that the investment and the business group behind Tostao is big and they have the financial muscle to support their fast expansion and their business model. Although they´re not global players in the coffee industry, they are becoming a reference in the coffee market in Colombia. As we say in Colombia “the one who hits first, hits twice”, and for sure Tostao will continue for long time in the market with their low cost coffee business model.
Thank you Juan, I totally agree with you!
Excelente artículo Felipe, Gracias , vivo fuera de COLOMBIA y nunca he sido fan de Starbucks, y no conocía de este negocio de Tostao en Bogotá, me llamó mucho la atención que importan sus productos de panadería desde Espańa y busqué en Google y ví que es una empresa internacional y parece que están haciendo bien las cosas.
Así es Catalina, gracias por tu comentario!
According to their Vice President for Latin America, there are 20 Starbucks and they are still intending on reaching 50 stores by 2019 so you are using out of date information. (http://m.portafolio.co/negocios/empresas/las-metas-de-expansion-de-starbucks-en-colombia-508598).
Furthermore Starbucks in Colombia is actually a Colombian company (Alsea), whole owned by a Spanish company. With their other brands in Colombia (Dominos, Archies, Burger King) have more stores than Tostao.
I would much rather have the successful portfolio of brands in Colombia that Alsea have (with solid margins) than Tostao who operate on tiny margins.
Thank you Jack, well according to the second link I used (Starbucks website in Colombia) they have 15 stores, I’m quoting their own information.Despite all that, even the owners information, my main point here was not about who owned what, but to make a point about how a new business model is giving a good fight using the same strategy companies like SBKs used in their country of origin.
As a Colombian I don’t mind Starbucks or any other multinational coming here and doing business. If it weren’t for foreign companies o people travelling outside the country and copying in the past these business models, we would be a far more undeveloped and less diverse economy. You cannot have a large middle-class if your economy doesn’t have many middle-class jobs as well as middle-class products and services. I have nothing against coffee from a greca and an empanada, but they’re far-off from being any of the former. Colombian culture is by nature traditionalist, risk-averse and historically isolated from the world, sometimes you need a little foreign push in order to move forwards. I’d rather se people working for multinationals than being maids, doormen and “mayordomos”.
I totally agree with you.
Excellent article, posted it to our Facebook page.
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