Tully’s Coffee

February 21, 2006 [Tuesday]
Tully’s Coffee

Tully’s Coffee Japan: A Venture Capitalist’s Lucky Break

by Helene Yim

Timing, talent and persistence are all key ingredients to success, but in the venture capital business, instinct is first in choosing a winner. These were the words of wisdom from venture capitalist Hitoshi Suga, who spoke at FCC’s February meeting about the trials and tribulations of starting up a foreign capital business in one of the world’s toughest markets to enter, let alone prosper in. The company featured was the phenomenally successful Tully’s Coffee Japan, of which Suga-san is vice chairman and which is also known by its corporate name, Food-X Globe Co., Limited.

Venture capital investment differs from investing in financial markets since the investor must do more than just analyze balance sheets and forecasts, yet it is not as physically demanding as actually starting up and running a business. So without knowing the intricacies of a specific business, the investor must be able to grasp certain factors that will point to success. In Suga-san’s experience, that factor is the charisma of the leader. And secondly, the investor must trust his initial instinct, because as Suga-san can vouch for, no matter how impressive the credentials, if a person cannot size up a situation on a human scale, then the venture can be a hit or miss – something venture capitalists cannot afford because of the amounts of money at risk.

Suga-san and Tully’s Coffee Japan first crossed paths in 1997 shortly after Suga-san was given the responsibility of scouting up new businesses on behalf of Mitsui Bussan, the Food Business Unit of a major Japanese trading company. In 1996, the unit had raised 450 million yen to create a new venture capital business and appointed Suga-san to run it. Armed with a successful resume at Mitsui Bussan and his Harvard MBA, Suga-san felt confident that he could pick out the winners from the pack. But day after day of being shown PowerPoint presentations, the sales pitches began to wear on him. Then, almost by chance, Suga-san happened upon a little coffee shop in
Ginza, Tokyo’s fancy shopping district. He had just read about three young and very successful companies in the U.S. which were looking to secure a foothold in Japan; Tully’s Coffee was one of them so Suga-san decided to pay a visit. His first impression upon entering the shop was the aroma – “it smelled good” – a quality as basic as it is important to a restaurant. His second impression was the amicable directness – call it chutzpah if you will – of the young man who served up his coffee order. After realizing the young man was the shop’s owner when he wished to speak with the proprietor, Suga-san was asked to sit outside with him despite the chilly weather – to make the coffee shop look as though business was “blooming.”

In the short time that two talked about business prospects, Suga-san would learn more about the shop’s proprietor, a 29-year old former banker named Kouta Matsuda: he had spent his formative years living abroad, first in Africa then the United States, then after graduating from Tsukuba University worked at a big bank for several years before quitting to start out on his own. His approach to business was very optimistic and persistent, as the story of his shop’s establishment can attest. After constantly begging founder Tom Tully O’Keefe of Seattle for an initial meeting and finally being granted that first meeting, Matsuda-san was able to secure the right to the Tully’s name, and in just two months opened
’s first Tully’s coffee shop. He ended up borrowing 70 million yen to set up shop ($574,000). Matsuda-san was also a very hard worker: he basically lived in his shop in order to cut down on commuting time and increase his working time. So after two hours of talking, Suga-san was convinced he had a winner with Matsuda-san’s vision and commitment, and offered to back his Tully’s Coffee Japan venture, which the young entrepreneur readily accepted.

Suga-san put down seed money of 30 million yen and researched future prospects of coffee shops in
Japan. The market was, and still is, predominantly made up of mom-and-pop style shops. However, the foreign shops represented a new concept of coffee shop in Japan
: they were smoke-free and brighter, they allowed freedom of movement (customers could walk around with their coffee mugs), and they were aimed at a younger and coed crowd. With cash-rich competitor Starbucks entering the market at the same time, Tully’s had its work cut out, but Suga-san felt that Tully’s would “fly” because he was convinced that Matsuda-san had the personality and the drive to make the new style of coffee shop in Japan succeed.

Within two and a half years of opening, Suga-san took the company public, raising $10 million which allowed Tully’s Coffee Japan to expand to approximately 300 shops throughout
, with a target of 330 shops by spring 2006. Business expansion has been steady and very carefully planned, always with an eye on spending money in the most effective way possible. Tully’s Coffee Japan does not have the kind of capital that competitors Doutor/Excelsior and Starbucks do, and it desperately wanted to avoid the same fate that befell another famous U.S. coffee chain, Peet’s Coffee of San Francisco, which exited Japan after only six months because of the extremely competitive business conditions.

Therefore Tully’s Coffee Japan stretched investment by minimizing rent costs – which in
includes key money, a sticker shock for any new entrant – while maximizing brand exposure. One solution was to open kiosks in high traffic office buildings, which proved immensely successful beginning with first kiosk in the Otemachi office building of Mitsui Bussan, the venture capital’s parent company. Rent for the kiosk was a comparatively low 250,000 yen/month for only 16 square meters of space, but sales soon grew to 8-9 million yen – per month.

Another strategy was to diversify into an entirely new market: the green tea shop, which was designed to appeal to like-minded customers. Matsuda-san himself thought of the idea, believing the time was ripe for yet not another coffee name, but a Japanese green tea shop that would be quite different from the traditional Japanese kissaten. In fact, the idea was hatched within close proximity to a Starbuck’s: as Suga-san recounts Matsuda-san’s thoughts, “Why open a Tully’s next to Starbuck’s? Sell green tea instead,” and also offer onigiri rice balls and Japanese desserts. Matsuda-san sketched out a logo and decided to call the green tea shop Koots, after the nickname his American friends gave him back in the States. So in a reciprocal direction, Matsuda-san and Suga-san set up several Koots shops in the
United States with one scheduled to open in Seattle

In less than a decade, Tully’s Coffee Japan had become a model success story in a venture capital case study. It reached solvency to the point where it was able to buy back its own shares after the first IPO, and it plans to go public again. The reasons for its success can be attributed to two factors after the prerequisites of good timing, talent, and persistence were met. The first factor is a large financial backer, which in this case was Suga-san who acted as a mentor to a young entrepreneur and guided the business through the crucial stages from being a one-shop operation to an enterprise consisting of hundreds of outlets that now span two countries. The second factor is an entrepreneur who has the charisma and drive to succeed. In this example, Matsuda-san is the kind of leader who has the ability to attract good people whether investors, customers or staff, as well as the vision to understand what is relevant from a customer’s point of view. Today, both Suga-san and Matsuda-san still maintain a solid partnership, and business is thriving to the extent that Suga-san must double check the number of shops whenever he gives a presentation, since that number is always growing. Needless to say, Tully’s Coffee Japan was the lucky break for both venture capitalist and entrepreneur alike.

Helene Yim works for a media and translation company in Tokyo and also teaches part time at a university in Utsunomiya,
Tochigi Prefecture. She can be reached at heleneyim@aol.com