Brazilian Startup The Coffee Hits $45M Valuation, Aims to Seduce Starbucks Customers

The Brazilian startup that provides technology for cashier-free payment at coffee shops has raised $7.5 million in a round led by Monashees and CapSur Capital

Photo courtesy The Coffee
January 05, 2023 | 11:12 AM

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Bloomberg Línea — When you enter one of The Coffee’s units, you encounter a minimalist style. The shops are small - no more than 3 meters by 3 meters or even less than that -, have an attendant to serve the drinks, and orders are taken by the customer himself through a tablet at the cashier or through an app. It is also the consumer himself who makes the payment at the cashier or on the app, without contact with the attendant. The points of sale follow a Japanese aesthetic and look like a small shop in Tokyo.

The coffee chain founded by brothers Carlos, Alexandre, and Luis Fertonani was born in Curitiba in 2018 inspired by the model of Japanese mini-cafés in which customers download an app and order their hot drinks to-go, cashless payment so that baristas do not need to receive payments and can dedicate themselves “only” to the coffees.

It is a model aimed at millennials and Z generation consumers, born between 1980 and 2000, who appreciate more elaborate and higher quality coffees -- precisely the public behind the success of the American coffee shop chain Starbucks. But, unlike the Seattle-based competitor that conquered the world, The Coffee bets more on consumers who only want a coffee to go, since most of the shops are small and located in places with more pedestrian traffic.

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Today the chain has 195 shops, 11 of which are in Europe. Eighteen are company-owned shops. The others operate in the franchise model. The company has 80 employees, including the technology staff and baristas.

Combining coffee and technology, the Brazilian startup has attracted the interest of venture capital investors in recent years. At the end of December, the company announced it had received a US$ 7.5 million (around R$ 41 million) round of investments led by the Monashees fund and CapSur Capital, a Brazilian company specialized in growth equity.

It was the third round already raised by The Coffee. In 2019, the company received a Seed contribution of $500,000, and in 2020, it raised a Series A of $5 million at a pre-money valuation of $20 million.

Now, with Series B, the company has more than doubled its value to US$45 million (close to R$250 million), at a time when raising funds at a higher valuation has been a challenging task for entrepreneurs in the face of increased investor scrutiny in the high-interest environment.

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Even though it has a minimalist design inspired by Japanese coffee shops, The Coffee does not have a shop in Japan yet but aims at the international market. The first contacts have already been made to open shops in Mexico and Peru.

According to Carlos Fertonani, one of the three founding brothers and CEO of the startup, in an interview with Bloomberg Línea, the new injection of capital will be directed to this expansion to other countries and the development of technology.

“The first round of funding of $5 million was for us to make our own shops and set up the team. Now we seek this new funding to make the international expansion, “said the entrepreneur. “It was in the plan for us to do a new round regardless of the difficult market situation.”

The third coffee wave

The coffee market has transformed in recent decades. Consumers, previously accustomed to drinking mostly or only traditional coffee, have started to look for higher quality beans or other more elaborate coffee recipes - iced coffee, mixed with other ingredients, such as vanilla or caramel, for example.

The change in habits boosted the sales of companies such as Nestlé, which created its own coffee brand, Nespresso, to sell espresso coffee in capsules and machines for the home consumer. Another company that bet on this change was the coffee shop chain Starbucks, which has more than 35,700 shops worldwide and had revenues of US$32.25 billion in the fiscal year 2022, which ended in October.

Even with such giant competitors, The Coffee hopes to grow in what it calls the “third wave” of coffee. “Starbucks was a super recognized brand in the second wave of coffee and we aim to be the leading coffee brand in this third wave,” said Carlos Fertonani, the startup’s CEO. Global coffee consumption is expected to increase by 1% to 2% per year by the end of the decade, according to a recent interview with Bloomberg News by Vanusia Nogueira, executive director of the International Coffee Organization.

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Industry experts understand the first coffee wave as the end of the 19th century and the beginning of the 20th century, with the increase in coffee consumption around the world for domestic purposes. It would have been during the first wave that coffee started to be roasted industrially, with innovations in advertising and labeling. This daily dose of coffee was lightly roasted, made from low to medium-quality beans, coffee that is served in snack bars.

The second wave would be between the 1960s and 1990s, with Starbucks, which started as a small coffee shop specializing in gourmet coffee, as the main representative. It was in the second wave that other types of coffee drinks became popular, such as cappuccinos, and the creation of baristas, which used premium, dark-roasted beans, Melitta filters, and French presses.

The third wave encourages selected beans and specialty coffees, with specific information on where each coffee came from and who produced it. The idea is not only the quality of the coffee but the entire control of the production chain and the appreciation of the producer. In the third wave, coffee is seen as a special product and not as a commodity.

Blank Street, an American startup that follows the same model as The Coffee, took to the streets of New York in 2020 with the proposal of serving the coffee of the last wave in a “to go” model, with shops that appeal to a younger public and with orders via the app. In 2021, Blank Street received $67 million from major venture capital investors such as General Catalyst and Tiger Global.

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Operation

In Brazil, you can only serve Brazilian coffee. But roasted coffee can be imported, which is what Nespresso does, according to Fertonani. However, after the coffee is roasted, it must be consumed within a month, if the quality is not to be lost. Therefore, for the coffees that The Coffee sells abroad, the company sends green coffee from producers in Brazil and roasts it in Europe. The Coffee has a “coffee hunter” who looks for farms and well-scored crops in Brazil, such as in São Paulo and Minas Gerais, to buy the coffee.

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“We only serve coffees from 84 points upwards,” said Carlos Fertonani. The scale of the SCAA (Speciality Coffee Association of America) is what gives the score to the coffees. In this system, in which the maximum score is 100, to win the specialty title a coffee must score at least 80.

Betting on quality coffees, The Coffee expects that its consumers will be willing to pay for specialty coffees and author drinks, even if they cost more than traditional coffees, ranging from R$ 9 to R$ 12 a cup.

Although most of the shops follow the minimalist model, the chain has some larger shops, with tables and chairs, and has expanded its product offering to also offer snacks such as brownies, cookies, and candies, as well as thermal cups, paper filters, tote bags, kettles and even umbrellas in the Japanese minimalist aesthetic.

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“The big shops are important for us to do brand building, for people to feel the strength of the brand. Our differentiator is not small coffee shops, it’s coffee, technology, and design,” says the CEO. The shops are profitable, but as a franchisor, The Coffee has still been burning cash for expansion and technology development.

“In any case, it is important that some shops are owned for us to test some products, and understand how the model works. We believe it is necessary to have some own shops to teach the franchisees how to do the management”, said the executive.

Another business of the company is in offering a digital wallet -- something that has become a separate business for coffee shop giant Starbucks. On The Coffee’s app, consumers can top up R$100 and earn a R$15 loyalty credit. The idea is to develop the technology further so that the coffee the user normally drinks is offered via notifications at the time that the customer consumes the product.