The Association of South East-Asian Nations (ASEAN) is the Asia Pacific’s version of the European Union; a collaborative effort to eliminate or minimise social and political borders to trade, security and economic integration. A landmark event will take place in 2015 when the 10 member countries of ASEAN join together to introduce the single economic community – a culmination of multilateral progress made on aligning economic objectives and mechanisms of each member state. What this means effectively is a collective of 600 million people who can move themselves, their money and their purchasing demands across borders with minimal expense and hassle. It also signifies the introduction of an integrated network for facilitating the movement of goods across the entirety of ASEAN. In theory, this is exciting news for coffee operators at every point in the chain. Growers and distributors should be able to sell into larger overseas markets with no taxes added to scupper their margin. Roasters and retailers should theoretically have access to a stronger domestic market as overseas visitors swell local demand. A greater number of visitor arrivals should increase demand from other sources. For instance, hotels should experience elevated occupancy levels and in turn the need to supply their guests with coffee. The move has the potential to raise the significance of South-East Asia as a growth outlet for international operators, not least franchised coffee chains looking for “bigger, faster, more” opportunities in under-developed sales regions like Vietnam and Cambodia. Costa Coffee, the second largest international coffee shop operator in the world, is present in 30 countries and has more than 2600 stores. Of these, over 50 per cent are outside of the company’s home market (United Kingdom), including franchise operations in Europe, the Middle East, North Africa, India, China and South-East Asia. They comprise a mix of company owned, joint venture-operated and franchised stores. “We are very excited about bringing the Costa Coffee Experience to the vibrant, coffee loving people of South-east Asia,” Aparna Chopra, Head of Marketing – MENA, India, SE Asia, Costa Coffee, tells Global Coffee Review. “So far we have opened stores in Singapore, Cambodia and Thailand. We have not announced any other market entries yet, but we are actively pursuing partnerships in a number of other countries in the region.” History has proven that a potential danger for international companies looking to roll out tried-and-tested franchising models across the AEC is the diverse socio-economic, political, religious and aspirational mixes. From Kuala Lumpur to Phnom Penh, Manila to Vientiane, Bangkok to Hanoi, the characteristics of each market varies broadly. Integration is designed to help eliminate psychological and logistical barriers, but these local disparities remain. “Our franchisee selection process is very similar across the world and helps us partner with similar organisations in new markets,” explains Aparna on how Costa is overcoming these disparities. “Cultural differences and ways of working vary across the world and we manage this by making sure we understand our customer in every market.” Costa Coffee’s franchise strategy ahead of AEC integration is based on its four decades of experience in international growth. The question then arises as to how smaller operators are likely to be impacted by the 2015 integration. Watcharapong “Watch” Areekich is a Strategist, Portfolio Management for Bangkok-based KT ZMICO Securities. He explains that while the ASEAN region will open up a vast number of market opportunities for franchisors, they should be mindful of increasing levels of competition from markets which have experienced sudden growth, as in the case of China and Thailand, compared to those that have not. “An obvious benefit for chained businesses is scale,” says Watch. “Now that mobility of products, services, labour and capital is promoted, business operation is less subject to geography. A coffee shop in Thailand can open shops in other countries thanks to deregulation. Coffee brands can utilise economies of scale and distribute costs across various countries. AEC will drive competition among players in the market, so a Thai coffee brand will have to compete with brands in Malaysia or Singapore.” Watch says that in order to protect a domestic growing coffee franchise from the threat of new foreign entrants, due diligence at home is key. He says that increasing competition is likely to drive innovation, both in terms of product offering and marketing strategy, and that an understanding of how foreign AEC markets operate is essential. “In a nutshell, we need to build a strong fortress as we set about defending our domestic market share as well as be proactive and reap the opportunities that arise in other markets,” he says. He says business models will have to be revised from sourcing to distribution, as the business environment in which domestic companies operate will change. This encapsulates the market position of one small but rapidly growing franchisor in Thailand, Doi Chaang Coffee. With 300 stores in Thailand (a majority of which are franchised), the company markets itself for producing superb coffee with a proportion of profits returned to the Akha Hill tribal communities that produce its award-winning beans. Formed on the mantra of “Beyond Fair Trade”, Doi Chaang’s Managing Director John Darch is now considering how other markets in ASEAN can serve the company’s growth franchise model. Doi Chaang is looking to open a further 200 locations by 2015, with Thailand as a core market, with overseas markets as possible growth opportunities. Doi Chaang’s Vice President of Marketing Anand Pawa does not see the advent of AEC as a threat to smaller domestic players such as Doi Chaang. As the company continues to roll out coffee shops in Thailand under its own management and via joint ventures, Pawa says international economic liberalisation doesn’t take away the home advantage. “The launch of AEC will have no real effect on Doi Chaang because our business dominates a local market which focuses purely on quality,” Anand says. “Overseas franchises are given to experts in their own countries who have localised knowledge, and so despite a breaking down of borders, markets will remain local after AEC.” For some, the largest threat from integration comes not from new market entrants but from a traditional conservative apathy which continues to exist in many of ASEAN’s component countries. Prasarn Trairatvorakul, Governor of the Bank of Thailand, famously noted that doubts about the AEC do not focus on the dangers of integration, but rather on the cynicism that little change will come out of it. As with the European Union, there are influential countries at the economic core, and less influential stakeholders on the periphery. Thailand, by way of example, is likely to be one of the biggest winners following integration due to its geographical location and resilient economy. “The logistics and transportation sector should see big advantages in terms of cost saving, while sectors that it supports, including food and beverage retail and franchised retail, can benefit from the development of this sector and the possible cost reductions that come with it,” Watch says. For now, however, it’s business as usual for franchisors as they go about growing their network of franchisees through traditional and proved means. Come 2015, a new theatre of innovation may well emerge, encouraging keen players to look across ASEAN’s newly integrated borders for revenue opportunities. For consumers, a volley of new market entrants means greater choice and new products to enjoy; for coffee industry competitors, vigilance will perhaps be the most important key to protecting their prospects at home while exploiting exciting new possibilities in so far unexplored ASEAN frontiers.