https://asia.nikkei.com/Business/J.CO-finds-sweet-success-in-Indonesia

JAKARTA — At a J.CO Donuts & Coffee shop in Jakarta, a busy yet cheerful cashier attends to customers behind a brightly lit display case. Inside are two dozen unique flavors of doughnuts with creative names such as Berry Spears, Black Jack, Copa Banana, Jacky Chunk, Tira Miss U and Why Nut?

This kind of innovation is crucial for the doughnut-and-coffee shop operator, which has more than 200 outlets across Indonesia. Its ability to come up with fresh ideas and adapt to changing local tastes and trends has made it a hit with customers in Indonesia and neighboring countries. Now, the company is counting on this innovative spirit to expand beyond Southeast Asia.

J.CO has established itself as one of Indonesia’s most-popular doughnut-makers. Its array of playfully named flavors has helped it compete against U.S.-based Dunkin’ Donuts, which began operating in the country more than three decades ago and also has more than 200 stores. Krispy Kreme, another well-known U.S. doughnut chain, has a smaller presence in the country, with 18 stores in Jakarta.

In terms of pricing, J.CO has a competitive edge over its rivals, selling its doughnuts for 8,000 rupiah (60 cents) each, while Dunkin’ Donuts and Krispy Kreme price their products at 9,000 and 9,900 rupiah, respectively. Both U.S. chains have been aggressively offering promotions to boost sales.

Krispy Kreme was one of the principal inspirations for J.CO founder Johnny Andrean, the 57-year-old Indonesian owner of an eponymously named hair-salon business with 164 branches. Andrean also runs the local franchise of Singapore’s BreadTalk, a bakery and restaurant chain.

Andrean opened the first J.CO store in 2005 in Tangerang, on the outskirts of Jakarta. His philosophy was simple: offer premium-quality doughnuts at an affordable price, much like Krispy Kreme in the U.S. Over the next decade, J.CO developed an additional, distinct appeal with its whimsical and novel approach to doughnut-making.

“J.CO communication is very fun,” said Natasia Liu, the company’s international franchise director. “If you look at the name of our doughnuts, we have Avocado DiCaprio, named after Leonardo DiCaprio. We have Blueberrymore,” she said, pointing to the pun on the name of actress Drew Barrymore. “We want to give each product a personality.”

Liu said J.CO usually launches new products every two or three months, with ideas inspired by the seasons and the latest consumer trends. The company also has diversified its products by introducing items such as doughnut sandwiches and croissant doughnuts. Its stores have evolved, with some offering communal tables for professionals who come in for work meetings and coffee-making classes.

Creative adjustments

Its rate of expansion in Southeast Asia has been steady. Just two years after opening in Indonesia, J.CO moved into Malaysia, followed by the Philippines and Singapore. (It now has five stores in Singapore, 18 in Malaysia and 45 in the Philippines.)

Late last year, it ventured outside the region for the first time with a store in Hong Kong, a market with no major doughnut chains. It recently opened a second outlet in the city and plans a third later this year.

Liu said that understanding local customers in diverse markets, and making creative adjustments to keep them satisfied, is the key to J.CO’s international expansion strategy. “We spend a lot of time in matching the local palates,” she said. “In Hong Kong, people are very health-concerned. They don’t like things to be very sweet, so we adjust to the local taste.”

Winning the loyalty of customers in Hong Kong and keeping them coming back is especially important given the city’s high rents. Soaring rental rates was one of the main factors that led Krispy Kreme to shut operations in Hong Kong in 2008 after just two years. Liu, however, is hopeful that J.CO will continue to generate sufficient revenue to cover Hong Kong’s high rents and labor costs, and to thrive.

J.CO has been experimenting with other products such as sandwiches and croissants. (Photo by Annafsul Muthmainnah)

Indonesian franchise consultant Djoko Kurniawan noted that a challenge to J.CO’s overseas expansion plan will be how it handles competition from existing companies that have the advantage of local knowledge and experience. Other than adjusting products to local tastes, which Djoko said J.CO has done well, the company should engage in “cultural collaboration” with local customers, he said.

Djoko said J.CO’s future expansion pursuits look bright, however, noting that its strengths and the lack of significant competitors in the doughnut-making industry put it in a good position for better growth. “I don’t see them having much weakness, and the threat against them is very small,” Djoko said.

Unlike J.CO’s domestic expansion strategy, in which the company manages the operations of each store, its overseas operation uses a master franchise system in each country, which allows international stores to incorporate local knowledge into products and services. Liu declined to disclose details of the company’s partners, but said it looks for levels of passion, care and vision that match those of J.CO.

Middle East growth

While the Asian market remains J.CO’s priority and target for expansion in the near term, it also has Saudi Arabia in its sights. The company sees the religious links between Indonesia, the world’s most populous Muslim-majority country, and Saudi Arabia as an advantage.

However, J.CO has been the target of negative coverage on blogs and social media in Indonesia over its failure to obtain certification that all its local stores are halal in conformance with Islamic law.

“We can assure you all ingredients we use in J. CO are halal,” Liu said. The company has already obtained certification for its stores in Malaysia and the conservative Indonesian state of Aceh, she said, adding that its broad store network across the archipelago meant full certification would take time.

The prolonged absence of a halal logo in its stores has raised concern among some Muslim customers. The national halal authority, known as LPPOM MUI, said J.CO has not yet applied to it for certification. Osmena Goenawan, deputy director of the agency, said certification usually takes no more than six months to obtain.

Having established partnerships in four overseas markets, Liu said that J.CO is looking for its next challenge. But the company is taking a prudent approach.

“We receive many emails every day asking for our franchise,” she said. “But partnering is like marriage — it’s not an easy thing. Of course, we want to have the right partner to take care of our brand.”