Impact of boycotts on international Israel-related brands on Malaysia's coffee industry

THE boycott of international brands associated with Israel has sparked diverse opinions on its impact on Malaysia's local coffee industry, highlighting both potential opportunities and adverse effects.

On Oct 7, 2023, the world’s attention was drawn to the decades-long oppression of the Palestinians by Israel.

A global movement, transcending race and religion, rallied behind the Palestinian cause, sparking actions such as the widespread boycott of Israel-related brands like Starbucks.

In Malaysia, where support for Palestine has always been strong, the boycott took off quickly.

A year on, the impact on Malaysia's coffee industry was evident, as many consumers turned away from international chains in favour of local businesses, leaving some boycott-hit outlets left empty or forced to shut down.

To understand how this movement has affected Malaysia's coffee industry, key figures in the sector shared their insights on the changes.

Local entrepreneur's perspective

Home concept cafe Let's Coopi Roasters founder Hamizah Hamzah said with many people boycotting Israel-related brands, she noticed a shift in support towards local businesses.

She said Malaysians were now supporting local coffee shops and brands, especially micro-roasters.

"People have been sharing on social media about local Malaysian coffee shops and cafes, recommending alternatives to the boycotted brands.

"Because we are well-established in the industry and many of our customers have become friends, word of mouth has significantly boosted our visibility," she said.

Hamizah said since the boycott began, Let's Coopi Roasters has seen a significant rise in business, with more people showing interest in their brand.

She added that although Let's Coopi Roasters was not as large as major corporations, they received overwhelming support.

"Since the boycott campaigns began, we have noticed some coffee shops and outlets nearly empty or even closing down. I see it as an opportunity for growth within the coffee business.

"To be a successful entrepreneur, you need to recognise the right moments to seize opportunities. Everyone has their own goals and it is fine to make the most of a chance," she said.

On the potential for Malaysian local brands to replace Israel-related products that have been boycotted, Hamizah expressed uncertainty regarding the complete removal of major brands from the coffee scene.

However, she noted that from her travels, especially to Indonesia, she has seen how local coffee shops have a strong influence on coffee enthusiasts.

"While the big brands are still present, local cafes vastly outnumber them, showcasing the strength and preference for local businesses," she added.

Barista trainer's take

Barista Guild Asia’s lead trainer Muhammad Zakir Mohd Zamil said the boycott of major coffee brands like Starbucks has prompted a significant shift in Malaysia's coffee market, driving more customers to local brands like Gigi Coffee.

"This reflects a growing trend among Malaysians seeking local alternatives to replace their usual choices.

"While it is still too early to assess the long-term effects, the boycott presents a valuable opportunity for local businesses to step in, strengthen their foothold and expand their presence within the industry.

"Economically, many local coffee chains and independent businesses are benefiting from the boycott of international brands. In shopping malls, there is now a noticeable contrast in foot traffic between global coffee chains and local brands like Gigi Coffee or Eight Ounce Coffee," he said.

Zakir highlighted that international coffee chains like Starbucks, once consistently crowded, no longer saw the same traffic, as local businesses were now thriving with an influx of customers.

This surge, he said was a major win for local coffee players, but with increased demand comes the challenge of maintaining consistent quality and service.

He said former customers of large brands have high expectations not just for product quality but also for service and if local businesses could not meet these standards, they risk losing their new clientele.

"Given the rapid growth of coffee shops across Malaysia, local brands need to be prepared in all aspects such as service, drink quality and understanding customer preferences; to retain their new customer base," he said.

Zakir also pointed out that a key highlight was that Malaysia's coffee consumption has seen the third-largest surge since 2020, trailing only behind Australia and South Korea.

He said coffee consumption in the country has surged by 50 to 70 per cent, rising from approximately 300,000 kg annually to over 600,000 kg, representing a remarkable increase.

"The Malaysian coffee market is not only expanding but is also highly lucrative. This opens up immense opportunities for local chains and independent cafes to capitalise on the growing demand.

"With many consumers now shifting their preferences toward local coffee brands due to the ongoing boycott, it is a prime moment for these businesses to tap into the market and seize the opportunity.

"Missing out on this shift would be a lost chance for growth and establishing a stronger presence in the industry," he added.

Economists Weigh In

Universiti Kebangsaan Malaysia Institute of Malaysian and International Studies (Ikmas) director and economist Professor Dr Sufian Jusoh explained that international brands entered the Malaysian market primarily for access to its growing consumer base.

Sufian said for many, enjoying coffee at establishments like Starbucks or other international brands was viewed as a symbol of status and sophistication and with a substantial segment of Malaysia's population being middle class, premium coffee has become a lifestyle choice for many.

He said these brands were not just selling coffee, they were promoting a lifestyle, seeking to integrate themselves into the fabric of the Malaysian community.

"There are two ways to view the recent boycott of Israeli-related products and brands. On one hand, it has negatively impacted Malaysian franchisees who own franchises of these international brands.

"They still need to pay franchise fees but are facing a significant drop in customers, leading to closures and financial losses, as reported in the media.

On the other hand, this situation has created opportunities for local innovation and the growth of Malaysian products.

"We are seeing local coffee brands expand and open new outlets, with consumers increasingly gravitating towards homegrown brands," he said.

Sufian explained that this shift was driving innovation in product offerings, from diverse coffee flavours to unique burger styles.

This, he said was not just benefiting high-end establishments but also creating space for small and micro-businesses to thrive.

He said it also opened up a platform for Malaysians to showcase their creativity and quality products to the international market while fostering local entrepreneurship and growth in the small business sector, which was crucial.

According to reports on Sept 10, Zus Coffee announced it has secured RM250 million in investments from Kumpulan Wang Persaraan (Diperbadankan) (KWAP), KV Asia Capital and Kapal Api Group to support its global expansion efforts.

The coffee chain operates approximately 600 stores across the region and is aggressively expanding its presence in Malaysia.

Having launched its first store in the Philippines in 2023, Zus Coffee has already established 50 locations there and aims to become a market leader within three years.

The brand announced plans to enter new markets, with its first stores set to open in Singapore and Brunei by the end of the year.

When asked about the potential for local coffee brands to eventually replace international giants, Sufian said he believed it was a feasible outcome.

"They (local coffee brands) have the potential to do so if they can maintain high production standards and deliver quality products to customers.

"It is not just about expanding within Malaysia but also about seizing opportunities to venture abroad, potentially offering franchises in other countries, especially within the Asean region.

"Some local coffee brands are already improving significantly. By focusing on elevating their product offerings and enhancing customer service, they can further strengthen their position," he added.

Sufian also said one major area for improvement within the Malaysian coffee industry was service.

He gave examples, saying that in many Asean countries, customers were warmly greeted with phrases like "Welcome!" or "How are you today?" as soon as they entered a shop.

"However, many Malaysian retailers tend to be more reserved. If local brands can adopt a more engaging approach to customer service, it would greatly enhance the overall experience.

"This is a golden opportunity for us to not only improve our products and services but also position Malaysian brands to venture internationally and compete on a larger stage," he said.

When asked if boycotting Israeli-linked brands and products was deterring investors or harming Malaysia's image abroad, Sufian disagreed with that view.

He said while these brands were well-known, they offered little in terms of technology and mainly entered the market to sell their products.

In fact, he said the real investment comes from Malaysian franchises, as they have to pay to use these brands, leading to capital outflow from the country.

"The focus should be on getting our own brands to expand abroad, which would result in an inflow of capital into Malaysia, as these brands would be the ones paying us royalties," he said.

Regarding Malaysia's international perception amid the boycott, Sufian believed there was little concern as long as the country continued to offer excellent locations and outstanding services for tourists.

He said many countries around the world did not rely heavily on international brands and yet they thrived.

For example, he said when he visited Zagreb last year, most coffee options were local brands and the same goes for many parts of Switzerland, where small, local cafes dominated the scene.

"Offering foreign tourists a taste of local culture through uniquely Malaysian coffee can be more appealing than the standardised offerings of international chains.

"Tourists often seek authentic experiences and serving them locally brewed coffee gives them a true flavour of Malaysia, making their visit even more memorable.

"It is about embracing and showcasing our local identity rather than trying to replicate what is already widely available internationally," he added.

Sufian also explained that boycotts of products or brands were largely driven by consumer preferences.

He said Malaysians were well-informed and had strong opinions about the situation in the Middle East and consistently showed unwavering support for the Palestinian cause.

"As a result, events in the Middle East significantly influence our moral compass and many Malaysians prefer not to be associated with brands linked to those conflicts," he added.

Echoing Sufian’s views, Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid observed that since the boycott of Israel-related products and brands started, there has been a notable decline in customer footfall at major international brands.

The drop in visits, he said was quite evident when compared to the period before the boycott.

He said some of these brands, particularly publicly listed companies, have disclosed their financial figures, allowing the public to analyse the impact.

"It is clear that many of these companies have faced financial difficulties, the impact is undeniably real. When consumers collectively choose to boycott, it has an immediate effect on sales and eventually on the company's bottom line," he said.

Afzanizam highlighted that in today’s information age, people can make informed choices that have a powerful impact on the success or failure of businesses.

He said even before the conflict in the Middle East last year, competition across many industries, especially in food and beverages like coffee brands, was already intense.

"We have seen the rise of new coffee brands, both local and international. The competition is fierce and I believe that economies of scale have benefited many of the major players in these industries," he added.

Afzanizam also suggested that while the exit of some international brands from the Malaysian market may result in the loss of well-known names, it was unlikely to significantly disrupt the industry, as the competitive landscape ensures consumers will continue to have a diverse array of choices in products and services.

On whether Israel-related brands and products that have been boycotted can be replaced by local Malaysian brands, Afzanizam believed that while it might not be possible right now, there were multiple angles to consider in this situation.

He said while the boycotted brands have certainly felt the impact, this situation also presented a significant opportunity for local businesses to rise up and showcase their own brands.

"Local companies now have the chance to demonstrate their service quality and customer experience, potentially shifting consumer preferences towards lesser-known but high-quality local coffee brands," he said.

Afzanizam said this situation presented opportunities for local entrepreneurs, as long as they could scale their operations and meet consumer expectations for quality and efficiency.

"Ultimately, it comes down to customer experience, especially in service-oriented industries.

"Local coffee brands should seize this moment, improve where necessary and capitalise on the opportunities the current situation presents," he added.

Vincent Tan’s call for halt

The ongoing boycott of international Israel-related brands, particularly Starbucks, has led to significant repercussions for Malaysia's coffee industry.

On March 4, Malaysian business tycoon Tan Sri Vincent Tan called for an end to the boycott, warning of its detrimental effects on the local economy and employment opportunities.

His remarks drew attention, especially given that Starbucks Malaysia was managed by Berjaya Food Bhd (BFood), a subsidiary of Berjaya Corp Bhd, which Tan founded.

He said Starbucks did not hold any shares in its Malaysian operations and that around 85 per cent of its employees were Muslims, highlighting the negative impact of the boycott on local workers.

Despite Tan’s optimism, the financial implications have been stark. On Aug 27, BFood reported a net loss of RM91.5 million for the fiscal year ended June 30 (FY24), a dramatic shift from the previous year's profit of RM103.4 million.

This loss was attributed to consumer boycotts and a one-time loss from the sale of Jollibean Foods Pte Ltd. BFood's revenue also fell by 34.56 per cent, decreasing from RM1.1 billion to RM730.3 million.

In the fourth quarter of FY24, BFood faced a net loss of RM38.2 million, compared to a net profit of RM17.2 million in the same quarter the previous year.

Revenue for this quarter also plummeted, dropping from RM271.7 million to RM130.5 million.

The company cited the prevailing sentiment related to the conflict in the Middle East as a primary factor for the declining revenue and increased losses.

Despite these challenges, BFood remained cautiously optimistic, believing that strategic adjustments and operational refinements could gradually improve its financial performance in the upcoming year.

As the debate over the boycott continued, the future of international coffee brands in Malaysia hung in the balance, with both local sentiments and economic realities playing pivotal roles in shaping the industry.