Free Enterprise Staff  | June 23, 2015

A Coffee Startup Takes on Starbucks—and It’s Winning

You’d be hard pressed to find anyone who doesn’t like supporting local businesses. Yet sometimes convenience wins out, and we opt for the larger chains. This is particularly true when it comes to coffee, but it’s something that the coffee startup Cups is actively trying to fix.

Founded by a group of friends and originally launched in Tel Aviv, Cups is designed to give small coffee shops a competitive advantage in an increasingly competitive marketplace. The idea for the company came from a brainstorm and really evolved from there on its own, co-founder Gilad Rotem told Free Enterprise.

“We got together one day in Tel Aviv and got talking, and somehow we got to an idea about unlimited coffee subscription,” Rotem says. “We all loved coffee. To be honest, I am not sure how this came about, but it was a regular living room talk, and the idea for an unlimited coffee subscription came up, and it sparked something in all of us. It was interesting, and it sounded like something that had not been done before. So, we got the ball rolling and started a pilot in Tel Aviv.”

With 10 locations, that pilot program was an unequivocal hit, attracting interest from the city’s booming tech community, its artisan coffee makers, and local residents. It grew so quickly, Rotem says, that it was only a matter of time before he and his fellow co-founders started to plan a global expansion of sorts. It wasn’t long thereafter that they settled on New York City.

Why New York City? “New York City is basically the coffee capital of the world,” jokes Rotem, who moved to the Big Apple 18 months ago to learn more about the local market and determine whether Cups would be a viable business. It was in New York that the bigger vision for Cups was born, he says: “It was really here that we understood that Cups could be a big and interesting and impactful business.”

As almost anyone can attest, the U.S. coffee market is dominated by two giant corporations: Starbucks and Dunkin’ Donuts, which operate roughly 12,000 and 8,000 locations, respectively. Together, they account for roughly 50% of the country’s retail coffee economy. Rotem and his team, however, saw a major, untapped opportunity with the 25,000 to 30,000 small businesses that count on coffee as a major revenue earner.

With their eye squarely focused on this group of small and local coffee purveyors, Cups has amassed a network in New York City of more than 170 stores. What it offers them is essentially a risk-free way to drive more foot traffic and sales, simply by signing up to be a part of the Cups coffee network.

On the technological side, Cups functions much like the Starbucks loyalty app. Users download and sign up for the company’s app, which was developed in-house and can be used at any of the participating coffee shops. Cups offers pre-paid plans that, the company says, save consumers up to 40% off the price they would otherwise pay for their coffee. On the business side, the app doesn’t require storeowners to purchase additional hardware or software, which helps it stand out among competing firms. Instead, business owners simply select the item being purchased and then enter in their individual store code.

To support its growth, Cups simply takes a share of the sales that it is directly responsible for bringing to its member stores—no more, no less. Because the startup’s model is specifically designed to benefit the coffee shops it works with, the model presents little to no downside, Rotem points out. “We have 99% retention rate with the coffee shops that we work with,” he says.

With its New York City experiment well under way, Cups is in the process of further expanding elsewhere around the U.S. While certain locations are in the planning stages, Rotem remains mum on which cities, exactly, the company is targeting. In the meantime, the company is working on perfecting the customer experience and tweaking its app. Though Rotem and his colleagues had to reach out to coffee shops during the beginning stages, the app’s success has helped ignite positive word-of-mouth, prompting more and more business owners to approach them.

As he gears up for Cups’ continued growth push, Rotem remains based in New York, the city that showed him his idea could become a viable business. Yet while he’s forthright about nearly every aspect of his company, there is one fact he keeps to himself: Which coffee shop produces his favorite brew.

“It’s like asking me to choose a favorite child—I can’t mention just one!” he says. “What I will say is that I drink 100% of my coffee now at Cups coffee shops. I used to make it at home using a French Press, but the times have changed.”