AVCJ Awards 2019: Exit of the Year - Small Cap: Gong Cha

The coup that makes Unison Capital’s investment in bubble tea chain Gong Cha shine is the switcheroo that saw an expansion franchise take over its parent company. The private equity firm acquired Gong Cha Korea in 2014, paying KRW34 billion ($29 million) for a 70% stake, and within five years, this local affiliate became owner of the global Gong Cha brand. Taipei remains the headquarters, but only on paper.

To be clear, Korea already represented 40% of the overall business when Unison stepped in, and Gong Cha has never been one of the bigger bubble tea brands in Taiwan. But the early vision and initiative that made the strategy work deserve a closer look – not least because Gong Cha’s continued success owes much to the implementation of Korean business’ techniques in other markets. According to market sources, Unison’s exit of the company to TA Associates was agreed at a valuation of almost KRW400 billion, suggesting a roughly 8x return.

Serious scale

Under Unison, Gong Cha built up an impressive portfolio of 1,200 outlets – including franchised and directly owned locations – across 17 countries, versus 10 shops at the time of acquisition. The franchise network extends to 536 locations across North America Europe, and Asia, including a strong showing in the Philippines with 134 shops. Other notable moves include the opening of 15 locations in Brunei and eight in Myanmar, as well as a sort of non-country expansion in the form of a Princess Cruise location.

Perhaps most interestingly, the rollout has entailed the successful positioning of a definitively Asian product in some counterintuitive, non-Asian locales; there are now three outlets in Mexico, for example. Additional entries made under Unison’s watch include the US, which now has 81 franchised locations and Canada with franchised 23 locations.

Directly owned portfolios represent the bulk of operations however, with Taiwan, Korea, and Japan accounting for a combined 646 locations. Korea, the largest market by far, saw its footprint grow 120% during the holding period to 563 shops. Expansions in these jurisdictions, despite their speed, were carefully customized and calibrated. While the Korea plan tended toward mass-marketing, Japan was more grassroots. But across the board, the takeaway drinks model meant shopfronts were small, and style had to be communicated efficiently.  

“We’re not necessarily selling an environment as much as some other places do – we don’t usually have that many seats. At the end of the day, we’re very much a product-driven business,” says T.J. Kono, a partner at Unison. “Still, we felt this idea of providing a good product in a locally adjusted way was very important. And that’s really the job of headquarters. So, we wanted to be in a position to do that, which we were able to do after our acquisition of the Taiwan business.”

Japan vs Korea

Unison is a Japanese private equity firm that established a presence in Korea, with Gong Cha its first local investment. As such, entering Japan was a major priority when Unison invested in the Korea business and was a huge validation for the global expansions that followed. Indeed, Gong Cha’s failure to penetrate Japan – which has recognized appetite for bubble tea – clarifies the under-management of the company under its previous leadership. In the space of two years, Unison helped the company build up a footprint of 53 locations in the country.

Japan has experienced a few bubble tea crazes, but always more as a dessert drink unlikely to be enjoyed regularly by adults. The Unison plan was therefore to emphasize tea flavor, subtler store interiors, shorter menus that stress authenticity rather than fads, and an atmosphere closer to a traditional Asian tearoom.

This is in fairly stark contrast to the Korea plan, which included expansive, innovative menus with items such as smoothies and seasonal products. Marketing was heavily oriented toward celebrity endorsements, and the overall positioning was bubble tea as an alternative to coffee. Starbucks-style cafes are big business in Korea and there are a number of competing international brands, as well as local chains such as Hollys and Caffe Bene. 

“It’s a good example of things starting to converge a bit in Asian consumer,” says Kono. “Younger populations are traveling around Asia and they know about the popularity of Gong Cha in Korea or other countries and then they have an instant connection to the brand in Japan or China. That’s unlike it would have been 10-15 years ago, when you had to do quite a bit of marketing to create brand awareness among consumers. Now, certain trends in one market translate to others really quickly – and digital aspects such as social media have quite a bit to do with that.”

Pictured: HQ Capital's Jacob Chiu (left) with (center left to right) Soomin Kim, T.J. Kono and Sunwha Shin of Unison Capital

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• Topics
• North Asia
• Trade sale
• Consumer
• South Korea
• Unison Capital
• TA Associates
• AVCJ Awards