The second installment from Ben Fahy’s series on the coffee business in Aotearoa and beyond.
Jesse Newson, the chief executive of Coffee Supreme, recently returned from a trip to Japan. For obvious reasons, it had been a few years since he’d visited Supreme’s flagship cafe in Shibuya, Tokyo, which opened around five years ago, but hearing about customers’ experiences with the brand and seeing the influence its staff were having in the fledgling Japanese speciality coffee market was pretty special, he says.
And when you look at where else the brand can now be found, he says it shows that Supreme has worked out how to establish itself in different markets while “holding true to what it is”.
“To see that evolve in Tokyo, one of the largest cities in the world, gives me absolute confidence that it can be done, and that we can do more and push Supreme further.”
Coffee Supreme was started by Maggie Wells and Chris Dillon in Wellington around 30 years ago when they opened Reds cafe and then started roasting their own beans under the Supreme banner. Next came Auckland and Christchurch around 20 years ago, followed by Sydney, Melbourne and Brisbane and then Tokyo.
That kind of growth requires ambition and a lot of hard work, but with its eye on further growth in these overseas markets, expansion planned into North America and elsewhere and the founders nearing 70, the business had reached a fork in the road and it was recently sold to New Zealand-owned private equity firm Pioneer Capital for an undisclosed sum.
While starting small and being acquired by a bigger player is a well-established model in many sectors, particularly tech, there has historically been more stigma associated with it in the creative realm and the food and beverage sectors. There is still tension between big corporate profits and indie purpose, so can you maintain what you’ve had in the past and get the returns these kinds of companies typically demand?
“I think it comes down to the belief of the people that are buying it, and whether they’re buying it to change it or do more of the same. I can only comment on our situation but they bought it because they believe in our plan. It’s not their job or their business to make better plans. It’s to back people in business who have a plan and then help them execute it … One of the things that was most attractive to us about our shareholders and the investment was the belief they had in the people, the knowledge, the brand and the story.”
Newson says they now have people from Pioneer with great financial and commercial depth who have been added to the business to try and amplify those things, so he’s very confident the fundamentals of the business won’t change.
It’s nice to be loved, of course, and Newson says Supreme had a few options when it came to choosing its suitor. It decided to go with Pioneer in large part because it was a fundamentally New Zealand-owned business and the profits would return to New Zealand.
“You see lots of businesses in lots of categories talking about being New Zealand-made. They’re providing employment and economic stimulus, which are wonderful things, but being New Zealand-owned and helping Kiwis’ superannuation and iwi organisations is a pretty cool opportunity.”
Newson says the coffee industry is quite collegial, so the response to the news has been “super positive”.
“The tone for the response to our sale was probably based on the tone we set for our peers. We never used the sale of any of our peers as a leverage point, so that shared mutual respect was afforded to us. When Allpress sold, for example, we took part in a story saying, ‘hey congrats, awesome. It’s recognition of a lifetime of work and we wish them all the best’.”
Marketing is a crucial ingredient when it comes to coffee brands and Supreme is very good at it. While the company has intellectual property around its roasting techniques and blends, Newson says “we don’t export a product”.
“The product comes from the other side of the world. Ultimately we export a brand, an experience and, without getting too soppy on it, a lifestyle.”
“It’s very much our belief here that marketing is storytelling and to do that well you need authentic, compelling, honest stories to tell about what you’re doing and how you’re doing it … Marketing is just an amplification. We’ve got a great brand and we’ve invested heavily in that brand over the years. Continuing to maintain that and making sure consumers are very clear about what that stands for is the driver behind any marketing we do.”
The cafes that Supreme supplies are “our bread and butter” and have played an important role in building that brand. A common model in the alcohol industry is for bars to be helped with set-up costs as long as there’s an exclusive arrangement in place to sell the company’s products. The coffee industry is similar, although “without the same onerous contractual arrangements around exclusivity”, and Supreme operates a full service model, which Newson says is rare and includes roasting and production, account management, training, delivery and technicians to service machines. He says the company’s investment into its brand does rub off on cafes, but it’s not uncommon for other coffee brands to swoop in and try to steal the supply contract.
“It’s always been competitive and I’m sure it always will be. But we have a sense of what works now. Our biggest threat is people trying to sell in cheaper coffee to cafes and taking advantage of their situation and getting them to compromise on their ethics to make something work short term. We’ve seen lots of cases over the years where it hasn’t worked. It’s been detrimental to their business.”
“Billboard cafes” have long been a strategy of wholesalers, but Supreme sold down some of its hospitality assets into a joint venture model with its managers through Covid.
“That’s worked out really well. Everyone knows having an owner on the floor is the best ticket to a successful hospitality business. We have eight either in full company ownership or half-owned. We’ll keep doing that. A flagship in every city is a bare minimum for us.”
Supreme’s mission is ‘better coffee for all’, Newson says, and it took that mentality and ran with it when it started selling its wares in supermarkets around two years ago. Along with online sales, this now makes up around 20% of its revenue, up from 8% before Covid. While some may think that being available in the supermarket is the opposite of specialty, he says its arrival has created a new super-premium category that has subsequently welcomed brands like Everybird and Peoples.
“All our coffee is premium grade specialty coffee so we’re not compromising on our quality. We’re proudly head and shoulders above the price of our competitors … but we had to have a belief that the consumer was educated enough to know that better quality coffee was available and that better quality coffee costs more.”
He doesn’t believe most consumers know who owns the coffee brands on the shelves, but they also don’t know who owns the toilet paper or toothpaste brands. What they do tend to recognise is quality and he was confident the Supreme brand was strong enough to earn that premium and they could convince shoppers to put their ritual at risk and trade-up to another more expensive brand.
So, in this environment, is it possible to do what brands like Supreme, Allpress, Kōkako and others have done and turn a cafe or tiny roastery into a national or international brand?
“I think there are major barriers now. There have been barriers over time and I don’t want to pay our founders or other founders a disservice, but the mathematics of starting a coffee roastery are quite different now to what they were.”
The biggest barrier is the cost, he says.
“The price of green coffee is at rates we’ve never seen and we have a softer US dollar. It makes the margin structure of a coffee business very tight. That’s a very difficult place to be as a small coffee roaster, but there are still people doing it and doing a great job of it. It’s just harder for them to find an angle.”
Newson says its new ownership structure and the fact that all the dividends are being put back into the business means it can also help out its suppliers.
“We have a lot of producers we’ve worked with for a long time and they’re having a hard time at the moment due to costs. We’re bearing the brunt of that and that’s one of the fortunate things we can do with the structure we’ve got. We can wear the costs for a while to maintain quality and continuity of supply and ride this price peak out so that it doesn’t push coffee prices to be uneconomic for cafe operators.”
As we’re finishing up our chat, as an aside I ask Newson if they ever have any IP issues with international clothing retailer Supreme.
“We know our lanes and we stay in them. Supreme New York and Supreme Coffee were founded at the same time. One became a multi-billion company and the other one …
“Will soon become a billion dollar company?” I say.
“Not sure about that,” Newson laughs, but with a renewed vigour “in terms of what Supreme can be and how far its influence can reach” and more capital at their disposal to grow, you wouldn’t put it past them.