Market Reports

Eastern Europe’s coffee trends

While Eastern Europe‚Äôs economic growth and strong coffee culture show great business potential, some of the big coffee chains are learning their lessons the hard way. Matija Hrkac reports from Croatia.’,’none’,’

In this part of Europe, where the East meets the West, there are two certainties: economic instability and that people will continue drinking coffee. Coffee shops are packed at any time of the day and on a sunny day, when the cities are bustling with life, you’ll struggle to even find a place to stand.

As Eastern Europe shows increasing economic promise, big coffee chains have been looking to tap into this coffee-loving market. Although slowly and cautiously, big coffee players are working to get their piece of the pie – but the problems they are facing are stemming from more than just the economic uncertainty.

While south-east European countries do have some similarities, too often they’ve been grouped together with too little regard for their economic and cultural differences.

The coffee culture, however, does share some common traits across countries. In this part of Europe, customers all enjoy a similar coffee experience – they like to sit down to enjoy their coffee and the ritual seldom lasts less than an hour or two. You don’t have to actually drink it to “go for a coffee” – it’s more of a social invitation to enjoy a conversation with a friend.

The last few years have shown that coffee chains specialising in take-away sipping cups have struggled to embrace this culture. And some companies are learning their lessons the hard way – or cutting their efforts short – to find the best way to capture this market. Starbucks had already chosen the location for its first outlet and even started interviewing potential employees, when they decided to put the project on hold. The decision likely came from the knowledge of another chain’s failed experiences.

Vlamanda Group, the Croatian franchiser of Costa Coffee, entered the Croatian market in 2008 with high expectations. Their initial plan was to open up to 30 outlets in five years. Two years later, they shut down the only three they had managed to open.

Looking back, the former Chairman of the Vlamanda Group Mario Scherr reflects that the failure was a result of not taking into consideration the local coffee culture and simply trying to replicate their previous success.

“A concept like Costa or Starbucks is a totally different way of drinking coffee than the one we [in Croatia] are used to, both in their offer and in their method of serving,” says Scherr. “Self-service is something that our citizens are not accustomed to. These chains were first introduced in the wealthiest countries of the world, like the United Kingdom and the United States. They were placed in high traffic locations such as train stations, airports, malls and so on. From there the coffee-to-go concept evolved.”

Scherr says that this concept may well work in Croatia, but a different approach will be needed.

“To make this kind of concept a success, you need time – time to create new habits with customers,” he says. “With an intensive marketing campaign, some adjustment to local values and good locations, coffee chains will be able to do business in Croatia and the neighbouring countries.”

In addition to trying to change the culture, Scherr says that adjustment will also be needed to the store’s model. For instance, in Turkey, many chains were successful by introducing Turkish coffee onto the menu.

In addition to cultural differences, Costa also faced what Scherr says are common problems among foreign investors – small market volume, high rent and low purchasing power.

These problems aside, the initial failed attempt has not discouraged the Vlamanda Group completely, as the company plans to announce the reopening of some shops. In their second attempt, a few changes will be made, with the shops in different locations – mostly in malls and business buildings.

Oliver Tosic, CEO of the Croatian distributor of Lavazza Coffee, reiterates that the main reason why big chains have struggled in Eastern Europe has been inflexibility and an insufficient understanding of the market they are entering.

“[These markets have their] own culture and the tradition of espresso,” says Tosic. “Then there are the high expenses that any franchise presupposes: and that automatically means higher-end prices. And thirdly, there is the location. Chains should avoid top positions in the city centre because of strong competition and focus their business on airports, big shopping malls and frequent tourist destinations.”

Contrary to Costa and Starbucks, Lavazza has experienced relative success in Croatia, which Tosic attributes to good placement in the market.

But, where Costa Coffee has struggled in Croatia, they have been thriving in the Serbian market. Delta Sport, one of the strongest companies in Serbia, owns the Costa Coffee franchise rights for Serbia and Montenegro. At time of print they’d opened 22 outlets in the two Balkan countries. When they started in 2008, they planned to open up to 50 outlets by 2013. While that is unlikely to happen, their efforts are nevertheless considered successful.

When they opened their first outlets in 2008, Petar Ivkovic, Development Manager of Costa Coffee, told Biznis magazine that he believed Serbia presented great potential for companies offering espresso coffee. While Turkish coffee is still dominant in Serbia, the number of people enjoying espresso-based drinks has been growing rapidly.

In their first year in Serbia, the Costa outlet in the Delta City mall in Belgrade was one of the most successful Costa outlets in all of Europe, and the sixth top earner across the continent.

A campaign launched at the beginning of this year promoted Costa Coffee warm beverages and cakes in every country in Europe. It led to a 10 per cent growth rate at the Serbian branch, placing them as the third best performing outlet for the New Year period, just behind Russia and the Czech Republic.

The Serbian market, however, does come with its own challenges. Irena Jovic, the Managing Director of the Cafe&Factory coffee chain, owned by a privately held Belgian-Luxembourg-Swiss company, has four outlets in Serbia, all of which are in Belgrade.

“Our chain is small but among the first in the region which is absolutely dedicated to the quality concept,” she says. “We select some of the finest coffees in the market, some of them being Cup of Excellence and sometimes from micro-lots.”

Cultural differences aside, she says that the biggest problem in Serbia continues to be the instability of the economy.

“Customers are looking for quality and sometimes are not ready to pay for it and the criteria is going down,” she says. “That’s why we as a company must be spot on, in order not to lose our customers, who may go to cheaper coffee shops.”

Jovic warns that big chains should reconsider their investment in the region. In addition to a tough economic environment, she says that customers can be picky. That being said, she does say that if the espresso culture continues to catch on, there may be huge opportunities to grow.

“If done the right way, and if [these companies] hit the right spot, in product and in marketing, big coffee chains can spread throughout the region really fast,” she says. “We are not so different as we think, we eat McDonalds, KFC, Burger King; we shop in Zara, Mango and Bershka. We go to shopping malls. In the future, we might drink our coffee from mugs.”

Jovic’s prophecy is already taking place in two regional countries where big chains are growing strong. While they have yet to reach total dominance, they’re slowly gaining a position in the market and a loyal fan base.

Since Bulgaria and Romania became European Union members on 1 January 2007, both have supported a large expansion of foreign coffee chains.

Costa Coffee first came to the two countries in 2006. Starbucks followed a year later, opening their first shop in Bucharest.

At the end of 2009, Costa Coffee’s parent company Whitbread concluded negotiations to acquire Coffeeheaven, a pioneer coffee chain in the Bulgarian market. The move helped strengthen Costa’s position, adding 90 outlets throughout Eastern and Central Europe to its portfolio.

Bulgarian barista Mihaela Petkova was named Costa Coffee’s barista of the year 2010, wining the company’s annual competition run Europe-wide. Taking the title just one year after Costa entered the country, this helped lift the profile of Bulgarian coffee, as well as highlighting the importance of employee education , which further helped spread the brand in Bulgaria.

“People found this new concept to be really attractive,” explains Patrik Wihelmsson, former Barista Trainer for the chain Coffeeheaven,  on the Bulgarian perception on the introduction of a foreign coffee chain. “Still, at the start, the biggest problems were the use of paper cups and the size of espresso shots. But eventually customers realised that this was the best way to serve coffee for this kind of café.”

The strongest player in the Bulgarian scene remains Italian giant Lavazza, especially in the hotel, restaurant and café sector.

Last year Lavazza strengthened its position in the Bulgarian coffee shop market by acquiring 100 per cent of Onda Coffee Break, a Bulgarian chain with 11 outlets.

Marco Lavazza, Development and Acquisitions manager of Lavazza group, said in a press release late last year: “Coffee shops are particularly effective and suitable to increase brand awareness and direct knowledge of Lavazza’s world and products and create new habits in consuming and enjoying Italian espresso. We intend to increase our group’s presence in countries where the espresso segment shows a significant growth rate, such as Bulgaria and Eastern Europe overall.”

At the moment, Starbucks has just four outlets in Bulgaria. They opened their first point of sale in Sofia in 2008 in partnership with the Marinopoulos group, a company that has partnered with the global giants in a few regional countries.

Romania is currently Starbucks’ strongest market. In four years they opened eight shops, with seven of those in shopping malls.

In a move to adapt to the local culture, Starbucks remodelled one of its stores this year in the Bucharest Mall Vitan under the ‘Regional Modern’ concept. The approach is to ensure that all the furniture in the store is made domestically, while also featuring reused and refurbished material. The store is over 360 square meters large and can seat 145 customers. It has become Starbucks’ flagship store in Romania and beyond.

While chain stores that have learned to adapt to local tastes may hold an advantage, at the end of the day it’s tough to escape the fallout from economic uncertainty. World Bank Consultant Djurdjica Ognjenovic explains that historic political instability in Eastern Europe has led to poor infrastructure and minimal research and development, as well as poor corporate governance principles. Foreign investors often face slow bureaucracy, an unfriendly business environment, corruption and inefficient judicial systems. Ognjenovic notes that these are all systemic issues that can’t be improved in the short-term.

Coffee chains have fallen victim to these circumstances, where so often making profit in the short-term is a necessary part of the business plan. A systematic, patient approach will be necessary to build a loyal base of clientele and position themselves as an important market force.

Ognjenovic says that accession to the EU is a good time for countries to “clean house” – improve legislation, simplify administrative procedures and improve competitiveness.

“Ex-Yugoslav countries, although separated by boundaries, may be looked on as a single market,” Ognjenovic says. “Individually, these countries are small, but usually entry into one of these states means entering the whole region. “

But, not everything is as dark as it seems. Bulgaria and Romania have succeeded in attracting an annual growth rate of foreign direct investments of 70 per cent annually since opening negotiations for EU membership. As it is these two countries that have best embraced coffee chain culture, perhaps this is a lesson that where foreign investment comes, the coffee chain is sure to follow. GCR

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