This Israeli Coffee Startup Has a Plan to Take on Starbucks

Commentary about business and finance.
April 25 2014 12:15 PM

$45 a Month for Unlimited Coffee

The dream is a reality, and its name is Cups.

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Screenshot via Cups

Each day, millions of customers flow through Starbucks stores in more than 60 countries. It has over 200 locations in Manhattan alone, which explains why it’s hard to walk a few blocks in the city without seeing the green logo. But an Israeli startup that soft-launched in New York City last week just might be the David to Starbucks’ Goliath.

Alison Griswold Alison Griswold

Alison Griswold is a Slate staff writer covering business and economics.

 

The newcomer is an app called Cups, and it promises to do for caffeine what Netflix did for TV: roll a whole bunch of content into monthly subscriptions. The content, in this case, is local cafes, and the subscription is an unlimited plan for the caffeinated drinks they serve up. For $45 a month, you can use the app to order as much tea and basic hot coffee as you want at any of Cups’ 28-and-counting member locations; for $85 you can add lattes, iced coffee, and other espresso-based beverages into the mix. And as part of the soft-launch, everything is free if you download the app. Everything. Until early next week.

Full disclosure: I don’t drink coffee. But most of my friends and colleagues do, often at a concerning rate. From observing them and making some calculations, I feel confident in saying to all the coffee drinkers out there: If you frequent coffee shops, these subscriptions are a bargain.

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I met Gilad Rotem, a co-founder of Cups, at Pushcart Coffee in Chelsea, a two-shop microchain and Cups member store a few blocks from the startup’s office. Rotem drinks four or more cups of drip coffee or Americano a day, and doesn’t beat around the bush about what Cups is after. “Our goal for Manhattan is 200 coffee shops,” he says, “which is the same number as Starbucks locations.”

Rotem and his four co-founders, all high school friends and coffee lovers, launched Cups in Tel Aviv in late 2012. The team’s eight member locations soon expanded to more than 100 cafes in Tel Aviv and Jerusalem, and they knew they were onto something. They set their sights on New York, with its abundance of independent coffeehouses and caffeine-addicted residents, and two of them relocated here in October to set up shop. “We wanted to see how big Cups could be,” Rotem explains.

The genius of Cups is the notion that the best aspects of big chains like Starbucks and of local cafes like Pushcart can be merged. “We see Cups as a new kind of coffee shop chain,” Rotem says. “We’re uniting independent coffee shops together and giving them economics of scale and tools that they cannot get by themselves, but keeping their independent atmosphere. It’s a chain of independence.”

Most of Cups’ current locations are concentrated in the East and West Villages, but the team has its eye on Williamsburg for a new round of growth. If Cups can meet its growth goals and sign up 200 stores in a Manhattan-wide “chain of independence,” then its users will get the 10-block-radius convenience of Starbucks while maintaining the artisanal-authentic vibe that can only come from a local store. Starbucks can compete on the former (it already offers a loyalty program), but on the latter it stands less of a chance.

In addition to its monthly unlimited plans, Cups also offers X-cups-for-$Y deals aimed at less severely coffee-dependent users. Coffee shops don’t pay a fee to join the program, and Cups reimburses them at a discounted rate when customers purchase drinks through its app. Greg May, an owner of the Uncommons in Greenwich Village, said Cups essentially pays the shop half of its retail price on each drink. “It’s certainly brought in a lot of new business,” he says. “I think it’s a compelling value proposition for the consumer.” While the Uncommons doesn’t register a loss on the discounted drinks, May says the hope is that customers who come in for cheap coffee will end up buying a pastry or sandwich too.

Rotem emphasizes that Cups structures its model so that it bears all the risk in the case that customers purchase more caffeine than they pay for. In the first week of the soft-launch, Cups sold thousands of drinks through its New York app—not surprising, since it was all free. “Obviously when you offer New Yorkers free coffee, the response is insane,” Rotem says. “It even surprised us.” At the moment, the startup’s biggest challenge might be the rather unfortunate “Cups” name, which evokes a lingerie shop, or maybe a bra app, more than a coffee enterprise.

Though Cups’ website describes the unlimited plan as a “Special launch offer!,” Rotem says the option is here to stay indefinitely, and is still around in Israel. The only caveat is that, much as you can’t double-swipe with an unlimited subway card, you have to wait at least 30 minutes between purchasing drinks. You also can’t share your app login with other people, though that doesn’t prevent you from lending your phone to a friend. “If Israelis didn’t screw us over,” Rotem says, “then Americans probably won’t.”

In retrospect, the Cups business model seems like it’s filling an obvious hole in the market. Coffee is something that many people use every day, yet it’s still sold primarily à la carte; those costs can easily add up to over $100 a month. Until last week, I’d never heard of anything like the Cups solution. And I’ll venture to say my friends and co-workers hadn’t either—otherwise they’d be saving a lot more money.