Thinking Points

  • This week, we go over how Doutor developed into what it is today.
  • The company started with one man’s fascination of European-style coffee shops, which quickly transformed the traditionally dim and cigarette smoke-filled Japanese coffee shop landscape.
  • Despite being in the coffee chain business, Doutor never competed directly with Starbucks. Now, the company has a sizeable restaurant chain operation and is set to further diversify its brand portfolio.

If it’s your first time reading, this post is the last of a 3-part series. You can find Part 1 and Part 2 here. In Part 1, we talked about the history of coffee in Japan and how it became a part of everyday life. In Part 2, we went over the competitive landscape of coffee chains in Japan, with a particular focus on Doutor and Starbucks.

In this post, you’ll get the story behind how Doutor, the largest native-Japanese coffee chain, became what it is today. I’ll mostly reference a 7-part series from Gaisyoku.biz (Japanese).

 

Before Doutor

The first Doutor-branded coffee shop was built in 1980. However, the inspiration behind Doutor goes back to the 1950s, when a high school kid left home and started working at a restaurant to make ends meet. The kid’s name is Hiromichi Toriba, the honorary chairman of Doutor Nichires (TSE: 3087).

As a trainee cook, Hiro’s job mainly consisted of food preparation and getting coffee for the head chef. This was his first encounter with coffee: US military canned instant coffee rations. Hiro didn’t much care for this coffee, and it wasn’t until he started working his next job as a bartender that he started gaining interest in better tasting coffee.

Source: Wikiwand

By the time Hiro turned 18, he was working at a wholesaler of roasted coffee beans as a salesman. Soon, the company opened a coffee shop and Hiro became the store manager. This was about the time when he started pondering what the existential purpose of a coffee shop was. His conclusion? To provide peace of mind and a place to revitalize through a cup of coffee.

 

The beginning

About when Hiro was worried that he won’t be much more than a coffee shop manager, a friend asked Hiro if he’d be interested in working on a coffee bean farm in Brazil. Hiro joined.

In Brazil, coffee was very much integrated into daily life. Watching Brazilians casually walk into a coffee shop and talk about soccer over coffee left a lasting impression on Hiro. And he partook during his stay there.

After three years of learning everything about coffee bean farming, Hiro returned to Japan and started Doutor coffee in 1962. In the early days, the company only operated as a wholesaler of roasted coffee beans. As you might imagine, the first few years were a struggle.

Ten years into it, after the company was more or less stabilized, Hiro joined a European coffee tour. This proved a major culture shock for Hiro. At a time when cigarette smoke, dim lighting, and indoor seating were the standard definition of a coffee shop in Japan, the Europeans were socializing over coffee at the counter or out on the terrace.

 

The first coffee shop

Doutor’s first coffee shop wasn’t actually called Doutor, and it wasn’t particularly European either. It was Cafe Colorado, opened in 1972. The concept was a bright and healthy coffee shop that anybody can enjoy. It doesn’t sound mind blowing now, but this was a completely foreign concept at the time.

Cafe Colorado was a raging success. With low capital requirements, it quickly grew into a franchise. Within the first 10 years, Doutor had a combined (franchise and corporate) store count of 190.

By the end of the 1970s, coffee was no longer a luxury item, but a part of daily Japanese life. Nearly a decade after his European coffee tour, Hiro decided it was time to open a European-style coffee shop.

The first Doutor-branded coffee shop opened in 1980. Hiro priced one cup of coffee at 150 yen while other coffee shops charged twice that.

First Doutor-branded coffee shop in Harajuku area of Tokyo.

Source: Doutor

Hiro was meticulous in his pursuit to make Doutor into a coffee shop that provides peace of mind and a place to revitalize. No cheap paper cups, only ceramics. Adjustments in lighting throughout the day. Clean store. Good food. And the list goes on.

Within 7 years, the company had over 100 Doutor-branded coffee shops.

 

Pursuit of quality

With the understanding that there is no such thing as a perfect coffee taste, Doutor sets its bar for taste as something that moves people. The company purchases coffee beans in three ways: By region, plantation, and flavor. Sample after sample are tested before the beans ever make it to the roasting factories.

In order to maintain the aroma and taste, Doutor uses direct flame roasters. Only small batches, typically less than 30 kilograms (66lbs), are roasted at a time using this method. However, the company went through the trouble to custom build its own roaster to handle 200 kilograms (440 lbs.) at a time. Moreover, the beans are only roasted and delivered to stores as needed in order to keep the coffee as fresh as possible.

Doutor’s custom made direct flame roaster.

Source: Doutor

What’s more, the company opened its first coffee bean farm in 1991, then another one in 1995. Both are located in Hawaii.

 

Expansion, Nichires, and today

After the successes of Cafe Colorado and Doutor, the company expanded its reach with different brands of coffee chains with mixed success.

In 2007, Doutor merged with Nichires, a mid-sized restaurant chain operator. The two companies fit together like puzzle pieces. Doutor mostly operated as a franchisor while Nichires mostly operated its own chains. Doutor was near exclusively into coffee shops while Nichires’ strength was in restaurants.

Today, Doutor Nichires manages over 40 different brands of coffee shops and restaurant chains, both franchise and corporate. Instead of focusing on any one brand, the company is more diversification minded. That said, Doutor-branded coffee shops account for 1,122 of the company’s 2,019 store footprint.

 

The bottom line

Doutor survived Starbucks by sticking to its guns. While the two are the biggest coffee chains in Japan, both serve fundamentally different customer base. Moreover, with the Nichires merger, Doutor has increasingly become more of a restaurant chain. Going forward, we can expect to see a combination of Doutor’s strength in franchise expansion and Nichires’ strength in diversified brand development.

Author: Kenkyo Investing

Kenkyo Investing applies a value investing approach to Japanese equities, providing insights that are often unavailable to non-Japanese speakers.