Market Reports

Shokoladnitsa: the bigger the bear

Russia may not be getting the greatest international headlines of late. At its peak, Australian Prime Minister Tony Abbott threatened to “shirtfront” Russian President Vladamir Putin on his visit to his far neighbour – a football move that involves a purposeful collision. Despite Abbott’s colourful threat, Putin was still expected to travel to Australia for the G20 meeting. Although Russia faces shady diplomatic relations and sanctions, it’s mostly business as usual for the former Soviet giant. It’s certainly business as usual for the coffee industry. As this magazine went to print, the Russian Federal Anti-Monopoly Service (FAS) was set to approve one of the country’s biggest coffee chains, Shokoladnitsa’s, plans to purchase its major competitor Coffee House. The two coffee chains have been competing neck-in-neck for most number of shops. Coffee House was winning until 2011, however Shokoladnitsa was able to overtake its main competitor in the middle of 2012. Shokoladnitsa is currently the market leader, operating 420 coffee shops in Russia, of which more than 230 are in Moscow, around 100 in the regions, and another 90 are operated by the company under a franchising model. The brains behind Shokoladnitsa is Alexander Kolobov, its Founder and Owner. Kolobov is one of Russia’s most successful businessmen, thanks to a fast-food empire. In addition to Shokoladnitsa, he developed Wabi-Sabi, a sushi-café chain. He also introduced the country to Israeli Max Brenner chocolate bars and Burger King outlets, in cooperation with Russian investment fund VTB Capital. He opened the first Shokoladnitsa in 2000, when Russia was recovering from the 1998 crisis and crash of the Ruble, its national currency. Rising energy prices in the early years of the millennium fuelled incredible economic growth in Russia, with disposable incomes doubling over eight years. The result was a growing middle class with dollars to spend on coffee and low-cost food.  “At the beginning of 2000s the Russian market of coffee chains was in its infancy, being only comprised of several Coffee Bean outlets [Russia’s first coffee chain] and Coffee House,” he tells GCR Magazine. “Coffee is a very interesting format, designed for communication. People come, sit and talk, having also an opportunity to eat and drink coffee for little money. At the beginning of the 2000s Moscow, St. Petersburg and other large cities had a shortage of inexpensive, good places to eat.” The brand came from the iconic Soviet Shokoladnitsa coffee shop, located near the October metro station in the centre of Moscow and operating since 1964. The current Shokoladnitsa experience however, Kolobov admits, was taken from a US coffee giant. “At the initial stage we used the experience of Starbucks during the development of our chain,” he says. “We believe that it is really impossible to design new revolutionary offers and meals that will radically differ from the offers of main competitors. However, we are planning on finding our niche in terms of the format of our business.”  The Shokoladnitsa chain follows Starbucks’ self-service format. It was a risk taking on this format, following comments from the Russian Association of Coffee and Tea Producers that self-service would never work in Russia. The association has generally been negative about the potential for branded coffee shops to take off in the country, saying local consumers prefer table service. In contrast, Kolobov says this format may provide an impetus for the further development of the Russian coffee market. Although the younger generation is primarily driving the growth of coffee shop chains, Kolobov says he sees see a range of customers in his shops. “There is a slight domination of female audience in our coffee shops,” he says. “As for age, we can see both children and students, as well as mature people. However the majority account for young people within the age range of 20 – 35 years.” Following on from success in the past decade and a half, and with a new brand set to come under the company umbrella, Kolobov now has his eyes set on expansion – even in less affluent parts of the country, outside of major cities. “We have plans to expand in the regions, despite the fact that this may be associated with certain difficulties,” he says. “In the case of the regions, purchasing power of local customers is significantly lower than in Moscow, which is not very suitable for us, as we prefer to operate in the premium segment.  However, in any case we have big plans for regional markets.” Although regional centres may present their challenges in terms of spending power, the rising costs of rent in cities remains a major issue threatening to stifle urban expansion plans. It currently costs around US$200,000 – $300,000 to start a shop, however those costs are doubled to open up in a shopping centre. “Ever growing rental rates, especially in Moscow, probably remains the biggest problem for the business,” says Kolobov. “At the same time, a shortage of personnel remains another pressing problem for the company. In recent years the number of coffee chains has significantly increased, which resulted in the increase of demand for personnel in this sphere.” Despite these challenges, Kolobov is now ready to put everything the company has into purchasing Coffee House and expanding his reach. He tells GCR Magazine that the majority of funds will come from their own cash reserves, with the difference taken in bank loans. He says that at present, all of the coffee chain’s revenue, and even part of its working capital, is being invested in further development of the chain. Like much of Russia’s business community, Kolobov offered no comment on whether sanctions by Western countries, for Russia’s current involvement in Ukraine, would affect the business. One official spokesperson from the Russian Ministry of Industry and Trade tells GCR Magazine that the Russian government currently has no plans to continue attacks on foreign coffee businesses, in particular coffee chains, affiliated with the EU and the US. This follows the recent closure of several McDonald’s outlets in different parts of the country (and in particular Moscow, Voronezh and other large cities) due to supposed non-compliance of their production processes to Russian sanitary standards and requirements. Western media, including the Wall Street Journal, reported on the “sudden inspections and closures”, suggesting they were in retaliation for sanctions.  Officials adamantly denied the retaliation, and few will know the true cause. Getting on-the-record information out of Russia officials is challenging. The official who spoke to GCR Magazine asked not to be named for fear of repercussions. This follows the dismissal of Andrew Belyakov, Russia’s former Deputy Minister of Economic Development, who was recently fired for publicly criticising the Russian government’s latest decisions. Sources close to McDonald’s and McCafé say that it will probably revise its expansion plans in Russia, and even possibly suspend them. Reasons cited, however, were not fear of retaliation but  due to deterioration of the country’s investment climate, and the devaluation of the Ruble by 15 per cent. Other Western coffee chains might soon follow. As long as Russians keep drinking coffee, this could be good news for Shokoladnitsa  and Kolobov, as he sets himself up as the new Coffee King of Russia. GCR

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