VF Franchise Consulting

He’s challenging Starbucks with a robot-powered cafe chain across China

Jul 31, 2018

Instead of ordering at the cash desk, customers scan a code on their phone and pick out their drink. / Photo credit: Ratio

Instead of ordering at the cash desk, customers scan a code on their phone and pick out their drink. / Photo credit: Ratio

There are no baristas to be seen at a coffee shop called Ratio in downtown Shanghai – and no cash desk queue. To get their caffeine fix, people perform a ritual that has become increasingly common across China: whip out their phones, scan a code at the entrance, place an order, and then pay via their mobile.

The Ratio app lets people customize their drinks.

The Ratio app lets people customize their drinks.

Then a sleek robotic arm at the coffee station gets to work. It grinds coffee beans, pumps espresso shots and water into a cup, and places the final product on the counter to await pickup.

Then a cheery human waiter brings over a cup of Americano to Gavin Pathross, the founder of this cafe. My nitro cold brew is still being made, the store’s app tells me.

“I’m a big Americano drinker, but Americano is 25 percent espresso and 75 percent water. I like half the water and more espresso – 2.8 shots of the espresso. That’s not called Americano. It’s just a different ratio. And that’s how we named our company, Ratio.”

Photo credit: Ratio

Photo credit: Ratio

China is seeing a coffee boom. Average coffee consumption per person is expected to grow 18 percent between 2014 and 2019, well above 0.9 percent in the US and 3.5 percent in Japan, according to Statista.

“China’s younger generation has already developed the habit [of holding] a drink in their hands. But it’s not limited to coffee. It can also be milk tea,” Li Yao, partner at Tsing Ventures told Tech in Asia recently at the Forbes Under 30 Asia event in Hong Kong.

Starbucks commands a whopping 51 percent share of China’s coffee chain market, but entrepreneurs believe that there are other consumer needs that the giant hasn’t fulfilled.

One rising star is Luckin. With 525 stores and a robust 30-minute delivery system, it has surged to become China’s first coffee startup to hit US$1 billionin value since it launched last November.

“Starbucks has dominated [China’s] coffee market for a really long time, so the time is ripe for challengers to bring along new offerings, be it a new taste or a new understanding of coffee,” suggests Li.

For Ratio, that means bringing efficiency, personalization, and consistency in consumers’ coffee experience.

Automating KFC

Pathross opened his robo-café in June 2018 after spending three years leading the digital transformation at Yum China, an offshoot of US fast-food company Yum that operates KFC, Pizza Hut, Taco Bell, and many other brands.

Gavin Pathross at his Ratio coffee shop / Photo credit: Ratio

Gavin Pathross at his Ratio coffee shop / Photo credit: Ratio

Spearheading the redesign of the KFC app, he made pre-ordering one of the key features so that angsty customers no longer had to wait in long lines to order. He also oversaw Pizza Hut’s “store-of-the-future” initiative, which featured robotic waiters and scan-to-order from the table.

As Pathross implemented digital efficiency for Yum China, he saw the lack of it across China’s coffee chains. That’s what eventually prompted him to start Ratio.

“Let’s recall what a traditional coffee ordering experience looks like,” Pathross says as he takes a big sip of his ratio-adjusted Americano. “You get to a commercial building at 9:30 am, get up to your office on the 50th floor, and come down to buy your morning coffee. Because it’s rush hour, you wait in line for five minutes. Then you make a payment and go wait in line for another five minutes for your order.”

“The waiting is essentially just telling the barista one thing: ‘I want a small latte.’ We feel that there’s a lot of excessive interaction that’s not meaningful to customers, so we want to take that away.”

“China’s younger generation has already developed the habit [of holding] a drink in their hands.”

Ratio is among a horde of Chinese tech companies seeking to automate the food and beverage industry. They’re tinkering with processes ranging from ordering and paying to food processing and delivery.

The poster child of this movement is Alibaba’s Hema Supermarket chain, which features a sleek food court. Robots replace waiters as well as chefs – though not completely, as Hema’s menu includes some tricky dishes such as spicy crawfish.

Photo credit: Hema

Photo credit: Hema

As with Ratio, Hema customers order and pay through an app. One of Hema’s Shanghai branches fulfills 70 percent of its orders online, according to the company.

Picky punters

“There’s a lot of space for automation in China’s food industry,” Alan MacCharles, partner at Deloitte China, tells Tech in Asia.

China’s fast-food outlets suffer from a 17.8 percent employee turnover rate each year, compared to 11.2 percent for sit-down restaurants.

“Employers have to keep hiring and training, hiring, and training. That’s a lot of cost,” points out MacCharles.

Ratio’s robotic arm doesn’t just speed up ordering and cut labor costs – it also beats humans at meeting picky customer needs. To maintain the precision of, say, 2.8 shots of espresso is almost impossible for a barista, however talented and experienced they are, Pathross argues.

“There’s a lot of space for automation in China’s food industry.”

A March 2018 report from Bain & Company finds that consumer needs in China are becoming more diversified. By digitizing user journeys, businesses like Ratio and Hema are able to aggregate reams of user data, from which they can churn out consumer insights. Pathross compares the future of coffee retail to Spotify, whereby machines can learn about millions of different user tastes and make personalized recommendations.

“Chinese consumers are very sophisticated,” Pathross states. “You can’t get far by giving them sub-par products.”

Along with coffee, Ratio’s robot also mixes cocktails. For MacCharles, this is particularly interesting because automation can combat the “large margin of error in cocktails.” Adding one versus two drops of absinthe, for instance, can make or break the drink.

How far can robots go?

At this point, my nitro cold brew coffee arrives. The waiter explains how nitro’s chemical process works and stresses that I must stir before tasting.

Photo image: Ratio

Photo image: Ratio

Why not eliminate human waiters to further slash labor expenses? Pathross says he doesn’t want to run just another funky vending machine – his goal instead is to maximize consumer experience in a cost-effective way. As such, he’s looking to re-invest cost savings “into customer services and higher quality ingredients” because businesses can “only go this far with automation.”

As he observes, “Why pay RMB 150 (US$22) for a drink at a five-star hotel? Because there’s a sommelier or mixologist to tell you, ‘This is Chilean wine, and that is Spanish wine.’ That learning experience is phenomenal to a lot of customers.”

“Chinese consumers are very sophisticated. You can’t get far by giving them rubbish.”

As the Bain report highlights, “the best brands in China are moving to integrate products into the overall customer experience,” which includes not only buying a product but also learning about how to use or consume it.

Like Starbucks, Ratio also serves tea and desserts to drive more sales. Thanks to reduced spending for labor and rent – one robotic arm takes up less space than a bunch of baristas and a cashier – most of Ratio’s coffee is cheaper than Starbucks’, and its most pricey cocktail costs no more than US$13.

Pathross has started raising a series A round for his coffee chain. The branch where I met with him is Ratio’s first. Five more will roll out across Shanghai this year, and several more are slated to open across other Chinese megacities in 2019.

Converted from Chinese yuan. Rate: US$1 = RMB 6.83

Editing by Steven Millward, Eileen C. Ang, and Jack Ellis

Rita Liao – TECHINASIA

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