The third biggest coffee chain in New York isn’t a chain at all. It’s Cups, an Israeli app that wants to turn the city’s independent coffee shops into Netflix-style subscription service.
For $45 month, the app offers subscribers unlimited coffee, tea, or espresso (that will cost you a bit more though) at a growing number of small coffee shops across Manhattan and Brooklyn. Today, the company has 45 businesses signed up, but Gilad Rotem, one of the company’s founders, says the company wants to eventually hit 200 shops — the same number of Starbucks outlets in the city.
The concept, says Rotem, is to blend the strengths of a chain with the authenticity of the small business. “We want create a new kind of chain or network,” Rotem told me over the phone Tuesday. “By uniting these independent coffee shops, we’re allowing them to utilize the power and advantages of a big franchise or chain.”
Gilad, a long-time gaming executive, started the company with four high school friends as a side-project while living in Tel Aviv in 2010. The inspiration behind the subscription concept, and most of the model, came from MoviePass, a Netflix-for-movie-theaters startup that raised a couple of million dollars from some prominent technology investors in 2011. That startup has struggled, so far unable to find the right balance between attracting consumers and placating cinema operators.
Cups appears to have struck a better balance with the coffee market. The company writes a check to each cafe each month based on the number of drinks subscribers redeemed during the previous period. But it doesn’t pay the counter price — rather, as bulk purchaser the company negotiates a wholesale price with the shop owner beforehand. Think Spotify, but with baristas instead of musicians.
Cups describes the discount as essentially a marketing cost for the coffee shops. The company will not feature more the one shop in each area in the app, which means each participating cafe can effectively share each other’s customer list without cannibalizing sales. And since it pays businesses per drink, Cups takes on the risk of subscribers suddenly starting to guzzle down multiple cups every hour.
To Rotem, that small discount is a franchise fee of sorts — a membership into a coop of coffee shop owners who come together to share customers and offer them a better product. The end game, says Rotem, is to create a lightweight alternative to the franchise, using the network to bring the purchasing power of a big chain to independent businesses.
“When you think about it, Cups is the third biggest coffee shop chain in New York after Starbucks and Dunkin’ Donuts, so there’s no reason why our coffee shops should pay more for milk,” he said. “We’re starting to work on some new projects to use the economies of scale we now have in our network of businesses to their benefit.”
Rotem says the company might use the company to buy commodities — everything from milk and sugar to media and technologies — on behalf of the coffee shops in its network while allowing each shop to remain in control of the more differentiated aspects of their business. “We’re never going to tell them what music they should play, or what coffee to buy,” he told me.
Co-operatives have seen a resurgence in recent years as some of the large vertically integrated corporations of the 20th century lose steam. In Germany, for instance, a shift away from centralized, coal-driven energy toward decentralized alternatives like wind and solar has led to a boom in energy cooperatives throughout the country. The number of energy cooperatives — essentially, small businesses and individuals — pooling solar and wind power jumped from eight to nearly 200 within six years.
In a conversation with Street Fight last week, author and advisor to EU Jeremy Rifkin argued that growth of cooperatives coincides with the decline of some of the large vertically integrated firms that emerged in the 20th century. These firms need to vertically integrate in order to ensure that each part of the supply chain functioned seamlessly. However, as communication technologies improve, the marketplaces becomes more efficient, and the need to own everything becomes less important.
Efficient fragmentation is one of the foundational trends in the local technology industry, and here’s why: the price of coordination — driven primarily through the cost of moving of information — was simply too high to merit meaningful partnerships between companies before the web. However, in a connected marketplace the cost of moving information is free, so partnerships between buyers and competitor scale marvelously. Today, a company like Cups can measure who buys what and where, and automatically distribute earnings to each location in a way that was previously only tenable under a centralized model.
Steven Jacobs is Street Fight’s deputy editor.