THE STARBUCKS EFFECT
By James Kilner
Reuters
St.Petersburg Times.ru
August 15, 2008
Russia
Almost non-existant a decade ago, coffee culture now dominates the
streets of Russian cities.
A waitress serves customers in a Le Pain Quotidien cafe in
Moscow. Russian cities have experienced a boom in Starbucks-style
cafes.
MOSCOW — A frothy cappuccino or fresh mozzarella salad is no longer
enough. Russia’s growing middle classes now want service with a smile.
With much of Europe and North America saturated, the newly affluent
among Russia’s 143 million people are an attractive target for Western
coffee shop chains eager for growth, and Starbucks and Costa Coffee
are among brands now found in Moscow.
But where once any alternative to Soviet-style fried meats and
dill-laced boiled vegetables was a thrill, increased competition now
means superior service is important to attract and retain customers.
This is a challenge, says Ian Zilberkweit, an American part-owner
of the Russian franchise for the Belgian coffee shop chain Le Pain
Quotidien.
He and his Armenian-American business partner have drawn up bonus
schemes and share plans to persuade staff to shake off Soviet habits
and instill loyalty in a typically casual sector.
"The Soviet system meant there was no system for treating people
nicely," said Zilberkweit, who has just opened his fifth store. "It
was all about shifting products."
Cash from energy and commodity exports has boosted Russia’s economy
since a crisis in 1998. The World Bank estimates real incomes rose
by 80 percent between 1998 and 2007 to nearly $8,000 per person —
roughly level with Mexico and Lithuania.
Data from Moscow-based Business Analytica shows the number of bars,
cafes and restaurants in Moscow rose by a third between 2004 and
2007 to 6,600, with the fastest growth at the mid-priced level. Big
chains now own around a third of the outlets in Moscow, double the
proportion in 2004.
Starbucks Corporation, which is closing shops in North America,
opened its first branch in Moscow in 2007 and now has five, and Costa
Coffee opened in March through a joint venture. Starbucks declined to
give details of its plans but Costa aims to open at least 200 cafes
in Russia.
"All companies are focusing on the Russian market in all leisure
sectors, not just coffee. It’s a country that Costa has to be in,"
said UBS analyst Stamatis Draziotis.
Le Pain Quotidien’s Zilberkweit said the potential in Russia was just
too great to miss out on.
"In Europe, real incomes are not going up due to rising prices, but
in Russia it’s different," he said, wearing a grey London Business
School sailing club shirt. "Because the domestic economy is growing
like crazy, incomes are still going up like crazy."
By the end of this year, Le Pain Quotidien aims for eight outlets
in Moscow, rising to 50 within four years. Sales now stand at about
$5 million but are targeted to rise to $20 million by 2009, said
Zilberkweit.
A former investment banker at HSBC bank, he said competing in Russia’s
lucrative dining market is further complicated for foreign firms
because spending patterns and business costs differ from those in
the West.
Le Pain Quotidien projects itself as part-bakery, part-cafe,
part-restaurant.
The interiors are wooden, a counter sells freshly baked bread and
pastries — supplied by a bakery which Zilberkweit part-owns — and
the menus are based mainly around soups, salads and light main meals.
But Russian customers spend their money differently from people in
other countries.
About 50 percent of Le Pain Quotidien’s sales are from food in Russia
compared with 35 percent in Britain, for example. Rent is by far the
biggest expense in Russia while staff salaries are the main expense
in Europe.
Its prices in Russia are similar to the rest of Europe — $3 for a
croissant, $7 for a bowl of soup and $17 for a fish pie — and diners
usually add on a tip of around 10 percent.
With prices high and rising, Russian customers are no longer willing
to stomach slow, erratic and surly Soviet service.
"If I see a new place which I want to go into, I do worry what the
service will be like," said Natalya Miloserdova, 27, puffing on a
cigarette outside the tour agency where she works.
"You pick a place to eat where you know the service will be good."
Zilberkweit said service has been a neglected aspect of retail in
Russia as most staff grew up without experiencing any.
"We were unbelievably frustrated two years ago because we would get
these people in and we would just want them to smile and they wouldn’t
even know why," he said.
Smiling staff can make the difference in Russia’s increasingly crowded
cafe sector.
"The customer, five years ago, in Russia would have been only too
happy if within five minutes’ walk there was a place to have a coffee
latte," he said.
"Now, he has 10 choices and demands much more."
Another Soviet hangover Zilberkweit has had to confront was a drop
in an employee’s work ethic after promotion.
"In Russia, the moment you give somebody a title they stop working,"
he said. "Now, we give people more money and more responsibility but
not a new title."