Company: Awfully Chocolate
Video interviewee: Ms. Lyn Lee, Founder
Intellectual property rights are often the key to sales and growth – and it’s not just about the money; it’s also about freedom, integrity and control. Just ask Awfully Chocolate, which has become expert in actively collaborating with others by way of franchising to expand internationally, based on a very pro-active approach to IP rights management.
Awfully Chocolate was founded in 1998 by two lawyers, Lyn Lee and John Yap, when they set up a cake shop at Joo Chiat, Singapore. Their business model focuses on quality of ingredients rather than quantity. Initially, it could not have been simpler: the company sold just one type of whole chocolate cake.
Even more intriguing, the company decided at the outset to not display the actual product. Instead, it spent time on the design of the shop, to entice the consumer in, “enhance its immediate environment” and provide a “boutique chain” feel.
Whilst today the company does offer a wider product portfolio, such as other branded chocolate goods (e.g. handmade chocolate truffles), a café concept and Nine Thirty dining bistro restaurants in Singapore and Shanghai (selling Awfully Chocolate desserts), the store concept still has a focus on only a few products – including three types of chocolate cake, and a premium dark chocolate ice cream called hēi 黑.
In the early years of brand building, designing unique retail spaces, as well as offering a quality product, was important for Awfully Chocolate to stand out from the competition. To avoid dilution from other brands and increase ‘stand-out’, stores are intentionally situated away from the competition in more secluded spots, Clearly, the strategy worked, as cakes would often sell out before the end of each day – sometimes even before a store opened, due to pre-orders.
Keeping a secret
The term ‘secret sauce’ is sometimes used to describe a special feature or technique that is kept confidential by an organisation and to which its success is attributed. For other companies in the food industry, this would often be the recipe for the cake, and indeed the cocoa and cake mixes are proprietary to the company. However, Awfully Chocolate shows that this principle can extend to all aspects of the business model; the chocolate mixes, methods of baking, business methods, store concept and brand packaging.
For the recipe, secrecy is important. Awfully Chocolate rightly concluded that this could not be protected by copyright law; whilst this may subsist in the words on a page or visual and typographical representation of the recipe in a cook book, it would not protect the idea behind it.
Accordingly, the company has taken trade secrecy very seriously. It only allows a limited number of key Awfully Chocolate staff, known as ‘master bakers’, access to its proprietary baking techniques.They are also the only employees with this knowledge to train franchisee bakers and are central to maintaining quality control with franchisees. Additionally, only a very select few employees have access to the baking mix ingredients and chocolate blends.Also, all discussions with cocoa blend and couverture suppliers are held with strict confidentiality terms.
Over time, though, the company has concluded that the brand and the overall experience are the most important assets of all, As John Yap explains, “In terms of our baking processes, we no longer try to hide them.As our business has grown – the most important thing is our brand. Others can try and replicate our product, but as we had first mover advantage for a quality chocolate product and our brand has been around for nearly 20 years – people have grown up buying our product.The market is a lot more conscious of brand and social currency, and the consumer doesn’t want to be seen carrying a copycat.”
Protecting the brand
It is important for Awfully Chocolate to maintain ownership of key intangible assets (such as its brand, recipes and processes) and to monitor quality. Over time the company’s trademarks (and the goodwill these help to protect) are a key part of the structure that leads to franchising opportunities and growth.
Awfully Chocolate filed for registered trade mark rights in Singapore early on, before many online trade mark search tools were available to conduct clearance searches. As the company expands its product portfolio, new trade marks are following with a number of registrations covering “Awfully Chocolate”, “hēi 黑” ice cream, “Nine Thirty” and “Service Magic” brands, including in China. These will no doubt lead to further revenue-generating IP commercialization opportunities in the future.
Running a successful franchise
It was important to tailor model francise contracts for their own purpose. As an example, John Yap noted that a lot of franchise agreements available at the time had as the first deliverable of a franchise the franchisee’s registering of the trademark in their own territories; this conflicted with the company’s intention to retain all rights and the goodwill in them.
Additionally, it has been known for franchisees to demand payment from the franchisor for any goodwill that has been built up in the brand in their franchise territory, should the franchisor decide to terminate the franchise. Awfully Chocolate is clear in that no matter how much a franchisee spends on advertising, they cannot enter a value for goodwill on their balance sheet, so Awfully Chocolate do not pay any franchisee for goodwill if they need to take the franchise over, in case of breach of contract or expiration of the franchise
Learning from experience
However, it has not all been plain sailing. A negative experience with one of its first overseas franchisees ended up with the need for Awfully Chocolate to obtain an ‘Anton Piller’ order, a specialist form of court order that provides the right to search premises and seize evidence without prior warning. Since then, Awfully Chocolate has got very close to signing a contract in another, different country – only to discover that local franchising laws mean that the agreement could only be terminated with the consent of the franchisee! This shows that it is important to choose export markets with care and to understand what protection their legal systems afford.
However, such experiences have encouraged the company to invest in technology and processes to act as a clear blueprint for future operations. These help the company to audit its partners and supply chain, and maintain the quality associated with the brand, so that it can expand with confidence.