Starbucks in Israel: what went wrong?
In one market,Starbucks, the king of modern day coffee emporia, is struggling to get customers through the door. Aaron Priel reckons he knows why.
What suits global coffee drinkers is not right for Israel. While Americans and even the Japanese may appreciate Tall or Grande cups of weak and frothy coffee, thinking they are getting more bang for their buck, it doesn't work for Israelis, who are prepared to spend plenty of shekels for very strong coffee in very tiny cups.
That's the crux of the matter, summarised in a survey by Globes entitled "Ten reasons why Starbucks isn't making inroads in Israel." The idea that the taste of American coffee is unacceptable to the Israeli palate is nothing new for the entrepreneurs. When Starbucks was informed of this point, they shrugged it off, commenting "we were told that the Swiss would not drink Starbucks coffee because they prefer café crema, yet people waited in line for 45 minutes when we opened our first branch".
Even after realising that the Israeli public wasn't beating down their door en masse, the entrepreneurs did not try to localise the flavour. For the sake of comparison, look at McDonald's Israel general manager Omri Padan, who received permission from the multinational's head office to adapt McDonald's menu to local tastes.
The Globes survey lists the reasons for Starbucks failure in Israel:
- The locations
Brand-building means knowing to pay premium prices for the most desirable locations, especially in the beginning, in order to create brand identification. But Starbucks spread over five different areas, with one branch in each, instead of establishing several branches in one area in a saturation strategy. "In contrast to the Israeli chain Arcaffe and Starbucks's own strategy in the US, the physical distance between Starbucks Israel branches is too great [and failed] to generate a critical mass of brand recognition," said the survey.
- The panic
The survey maintains that signs of panic began trickling down to the chain's employees at a very early stage. Starbucks Israel had 60 employees before even opening its first café. When actual sales turned out to be far below the business plan, panic began spreading from the executive level to middle management. Within six months a large number of the original staff were fired, severely affecting motivation.
- The bureaucracy
The café managers, arguably the most important link in the chain, enjoy little freedom. A café manager who cannot replace a customer's cup of coffee without the signature of an executive supervisor loses customers. Vered Sharon-Rivlin, who compiled the survey, says that a successful café manager can generate an additional US$200,000 in revenue just by providing a congenial atmosphere. But Starbucks Israel constrains managers' ability to promise customer satisfaction.
- The withdrawal from Jerusalem
Starbucks' weakness was revealed in full when it withdrew its intention of opening a branch in Jerusalem, due to terrorist attacks. The decision had a dual impact: Despite unambiguous pro-Israel declarations by Starbucks CEO Howard Schultz, and Jerusalem's special stature in the Israeli psyche, the local company decided to withdraw from the capital city. This decision reversed the public's attitude toward the chain.
- The weird way they targeted their audience
Analysis indicates that Starbucks Israel seems to have failed an elementary marketing condition: clearly defining its target audience. Arcaffe appealed to the business community, which is not price sensitive; Coffee Bean and Tea Leaf appealed to the young, and Aroma appealed to people seeking value for money by discounting its prices 30%.
Starbucks Israel could have exploited its latent marketing potential based on the fact that café chains held only 1% of the Israeli market and no chain had yet established market leadership. But instead of making Aroma its prime competitor and opening a new market, Starbucks Israel went head-to-head with Arcaffe with a policy of matching prices. By the time the chain decided it would enter supermarkets like Super-Sol, its lack of positioning was glaringly obvious.
- Those patronising Americans
Starbucks' patronising style was full-blown before it ever entered Israel, the survey indicates. As with another champion of globalisation, McDonald's, people love to hate Starbucks. The more sites like IndyMedia succeed, the more fashionable it becomes to hate multinational brands. Instead of deflating this hostility and neutralising the antagonism through humility, Starbucks did precisely the opposite.
"We conquer markets wherever we go," seems to be the motto of the multi-billion company (US$9bn to be precise). You don't like the coffee? You'll get used to it.
- Those greedy Israelis
Delek Group and Starbucks' strategies clashed. Delek wanted fast money, while Starbucks has a long-term strategy of brand building. The clearest example of the clash was Starbucks' uprising against the firing of 20 employees two months ago, including some of the founding team. If there is one thing Starbucks is proud of, it's their philosophy against firing employees. The financial savings were offset by the cost of demoralisation.
Entrepreneurial businesses like Starbucks and other chains are founded by people with fire in their bellies, the survey claims. "Delek, a major corporation preoccupied with other businesses, is a different kettle of fish."
Fastfood exemplar McDonald's, for example, avoids granting franchises to companies, preferring private individuals. McDonald's believes in people, and assumes that financing will follow. Putting an entrepreneurial business in the hands of a corporation that has no retailing affiliations and has a long line of other activities turned out to be a mistake for Starbucks.
- Yair Hasson
The resignation of Starbucks Israel general manager Yair Hasson contributed to the collapse of the company's esprit de corps. Managers who graduated from Starbucks' extensive training programme at its Seattle headquarters swore that Hasson's resignation robbed them of their enthusiasm and their interest waned.
Hasson originally received the Israel franchise from Starbucks, after having been booted out of the six leading groups that bid for it. He won thanks to his record in establishing Burger King Israel. In the US, he had franchises for Pizza Hut, Taco Bell, Haagen Däzs and Baskin-Robbins. He personally exploited Delek's ruthlessness to expand its stake in Starbucks Israel.
- One million dollars
Delek is proud of its success in driving Hasson out, but the man, Hasson, is laughing all the way to the bank - having been paid US$1m for his shares.
By Aaron Priel, just-food.com correspondent
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