Coffee house brews up big franchise deal in China

Lewis (left) and Stuart Deeks aim to supply their own blend roasted in Auckland. Photo / Supplied

The Chinese will be drinking New Zealand-roasted coffee following a deal done by the Kiwi owners of the Esquires coffee house franchise.

Brothers Stuart and Lewis Deeks own the Canadian-developed coffee house franchise for everywhere outside of Europe and North America, and have expanded from New Zealand to the Middle East, Fiji and India.

Now they have sold the master franchise for China to a large investment company in Yunnan province in the country's south.

Yunnan Metropolitan Construction Investment (YMCI) - part-owned by the Yunnan government and listed on the Shanghai stock exchange - will open 250 Esquires outlets over the next 10 years. The first store opened in the central business district of Beijing a month ago.

Another two are expected to be opened within the next two to three months, and 16 are planned for 2010.

Stuart Deeks said the New Zealand franchisor provided hands-on operational support to its overseas franchisees, helping with site selection, arranging local suppliers, training and store design.

A local company, Design Environments, had provided the store designs for India and Saudi Arabia as well as China. "The whole shop's basically come in a container out of here."

Deeks said Esquires aimed to supply all its stores worldwide with its own blend of organic, Fair Trade coffee roasted in Auckland.

While it sounded like it would not be cost effective, the company had been able to negotiate reasonable rates for freight out of New Zealand, he said.

However it ran into high duty costs in some places - India, for example, charged 110 per cent duty - and the volatile New Zealand dollar was "a nightmare".

In China the duty was 15 per cent, but under New Zealand's Free Trade Agreement with China that would come down.

The Chinese operation is headed by Ellen Zhang, a former employee of YMCI who emigrated to New Zealand in 2004. She has taken a 29 per cent shareholding in the new venture.

Zhang said coffee drinking had become popular with China's urban young. Deeks said it was trendy in China to be seen in a coffee house and the potential for growth was enormous.

The capital of Yunnan, Kunming, had a population greater than New Zealand's. "That's one of 100 cities that size with no coffee."

There were good margins to be made with a shot of coffee costing just a few cents, and beverages accounted for around 70 per cent of Esquires' turnover. However, doing business in China required a good business partner, and he said he could not have achieved the deal without Zhang.

There was a lot of bureaucracy, and it was easy to misunderstand. "What's said and what's meant are two completely different things.

"It's [been] the most stressful 18 months of my life, but at the same time the door's unlocked now."