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COVER STORY

competition brewing

by amena bakr

as starbucks sets to open in cairo and alexandria, existing high-end coffeehouse chains attempt to consolidate their share of the market.

few companies are as venerated, or vilified, as starbucks. the world’s leading coffee brand and retailer has grown from a single store in seattle in 1971 to a global empire with nearly 12,000 locations in 37 countries serving over 2 billion customers per year.

an icon of globalization, starbucks succeeded not by creating a better coffee – even diehard starbucks fans admit there are better blends out there – but by creating a lifestyle. the company changed the way people think of coffee, turning the lowly coffeehouse into a chic and inviting hangout – with an ample dose of snobbery. in doing so, it transformed a pedestrian commodity into a luxury accessory.

until now, egyptians’ only true encounter with starbucks has been during trips abroad. no longer. kuwait’s m.h. alshaya, which holds the franchise rights for starbucks in the middle east and operates nearly 200 starbucks in nine countries in the region, is expected to open its first egyptian starbucks outlet in cairo’s citystars mall by the end of the month. while starbucks declined repeated requests for interviews, informed sources tell business monthly that the company will also soon open a branch in alexandria and plans to open 22 branches nationwide by the end of 2007.

starbucks is rumored to have made an initial attempt to enter the egyptian market in 2005 with a bid to acquire delicious inc., which owns and operates the popular cilantro chain of cafés. if successful, starbucks would not only have landed itself cilantro’s high traffic outlets – which it would have rebranded as its own – it would have also liquidated what many deemed at the time to be its only real competitor. the deal fell through, the rumor continues, when the owners of delicious inc. rebuffed starbucks’ bid and instead agreed to sell the chain to local business tycoon hesham el-sewedy for le 40 million.

the failed bid may have cost starbucks dearly. in the year since, cilantro has expanded from 12 outlets to 23, and broadened its range of products. other chains, such as beano’s and costa coffee, have also experienced robust growth, reinventing themselves to serve a wider customer base. meanwhile, foreign competitors, including columbus coffee and, most recently, the coffee bean & tea leaf, have established a foothold in the market.

“if starbucks had come into the market two years ago i think it would have had a better chance [to capture market share],” says engy radwan, marketing manager of the coffee bean & tea leaf. she says starbucks may still be a formidable opponent, but its late start means egyptians have more options available. the coffee giant’s ascendancy is by no means certain. “it will all depend on what they serve, because if someone else comes into the market with better products and better prices they will automatically win the edge.”

cilantro, which claims to hold a 75-percent share of the high-end coffeehouse market, is the undisputed current market champion. the chain has expanded aggressively, doubling its operation size in the last 12 months and showing no signs of slowing down. “we want to be everywhere,” asserts ibrahim roushdy, the company’s development and operations manager. “right now, we have [23] cafés in cairo and alexandria, and very soon we will be in sharm al shiekh.”

sami el meligy, vice president of el sewedy industries, dismisses the suggestion that cilantro’s expansion drive was designed specifically to head off the imminent threat of starbucks’ arrival. instead, he says the company is attempting to consolidate its lead before its fast-growing competitors can catch up. “we did not initiate this expansion plan just for the opening of starbucks,” he told business monthly. “this is the way we are competing with all players in the market.”

beano’s, a local brand with 11 branches in cairo and alexandria, is also in the midst of an aggressive expansion strategy. the company recently opened a branch in mohandiseen and is planning to add up to seven branches by the end of the year. “currently, we have two outlets under construction in maadi and after ramadan we plan to open a huge branch in citystars mall,” says sahar abdel nabi, the company’s marketing manager.

meanwhile, costa coffee, a uk-based italian-style coffee roaster and coffeehouse chain, is reporting robust growth. americana, the kuwaiti-egyptian food holding company that holds the franchise in egypt, has opened 13 costa coffee outlets in cairo and alexandria since entering the local market in 2004. the chain initially focused on less trafficked areas, giving customers a more relaxed atmosphere, but recently began opening branches in busy districts, in some cases next door to competing outfits.

bean there done that

the advent of cilantro in 2000 paved the way for a more sophisticated coffee culture in egypt. previously, coffee drinking was the pastime of working-class egyptian men, who frequented the ubiquitous ahwa (traditional coffeehouse). a few upmarket establishments, such as coffee roastery and café greco, introduced the idea of italian-style espresso drinks, but it was cilantro that tapped into coffee as a lifestyle choice. it wasn’t what you drank that was important, but where you drank it. and, more women felt welcome. “we created an atmosphere where upper class people felt comfortable, while giving women the chance to go out more often by offering them a decent setting,” explains el meligy.

today, dozens of gourmet coffeehouses have cropped up in cairo and alexandria. ahmed kamal, manager of the costa coffee chain, argues the market has not yet reached its saturation point. “this is still a virgin sector, which has the potential for 70 to 80 percent further growth; so there’s plenty of room for others.”

and others are coming. last month marked the entry of the coffee bean & tea leaf, a los angeles-based purveyor of gourmet blended coffee and tea drinks with over 300 branches in the southwestern united states, middle east and far east. the company is a seasoned competitor of starbucks, going head-to-head with the coffee giant in key markets. “in some countries, such as the uae... starbucks intentionally opens on the same street just to compete with us and vice versa,” says radwan.

local investor omar islam shalaby, owner of trianon cafés, acquired the license for the egypt franchise in late 2003 but it has taken over two years to get the first zamalek branch up and running. “the reason we took so much time is because everything you see in this store is imported, from the retail mugs to the decoration on the walls,” explains radwan.

however, by opening ahead of starbucks, “the bean” has gotten the jump on its arch nemesis. “opening before starbucks has put us ahead in terms of understanding the market and customers’ needs, as well as setting prices,” explains radwan.

conversely, the coffee bean & tea leaf will serve as a litmus test for the market’s sensitivity to pricing. ounce per ounce, its blended coffee and tea drinks are among the most expensive in the market, with some medium-sized coffee drinks ringing in at over le 20, more than the daily wage for most egyptians. radwan explains that the prices reflect the higher quality of the imported coffee and tea ingredients. “our prices are marginally higher than those of other cafés since we offer more in terms of variety and quality,” she says.

the 40-percent tariff on coffee and tea imports inflates the cost of the end product, she continues. yet, judging by the unrelenting crowds at its new zamalek outlet, the price has not discouraged patrons – many of whom claim to be ardent converts from other coffeehouse chains. “at first, we were afraid that our prices would be too high, but after we did our calculations we found out that we are more or less within the range of the market, though a bit higher. this is accepted because we are an international brand,” she says, stressing that the company is testing the market’s response to its pricing and will review its pricing strategy in three months. “we’re always open to adjustments if we find that it’s necessary.”

starbucks will undoubtedly face similar scrutiny if it applies, as many expect, prices comparable to those of its us branches – which could put its medium-sized blended coffee drinks in the le 20-25 range. similar drinks at smaller local chains cost about le 10-15. “if they fail to adapt to the market’s [standard] prices and our benchmark they will soon fall out of business,” radwan warns.

kamal agrees. “i don’t think that starbucks will succeed if their prices are set too high, because coffee is a habit,” he says. “people like to go for coffee more than once a week, so if the price is too high people will go less frequently.”

starbucks will inevitably attract an initial rush of interest, but unless its prices are affordable it could be a flash in the pan, says kamal. he explains that egyptians by nature flock to new restaurant and café openings irrespective of price, but are just as quick to shift allegiances if the price and quality do not meet their expectations. “it’s true that starbucks will get a lot of attention when it opens as people will be excited about going there, but when [its novelty wears off], if prices remain high after a year’s time, no one will go there anymore,” he predicts.

industry insiders suggest columbus café, a french coffee franchise with one outlet in dokki, serves as a good example of how high prices can discourage regular patronage. while the highly visible coffeehouse garnered a lot of attention when it opened in late 2004, this interest soon waned amid complaints of exorbitant prices and a less than phenomenal ambiance to back them. “some chains obviously didn’t do their homework; that’s why they have failed to attract customers,” says abdel nabi.

columbus is rumored to have scrapped its expansion plans as a result of the public’s tepid response – a rumor branch manager hatem helmy flatly denies. “it was part of our strategy since the beginning to study the market [first] and then start expanding to other areas. so far, i can say that we are doing very well and have regular customers,” he says, adding that the company will open a second branch in nasr city by the end of the year.

already, columbus has experimented with seasonal outlets, including a café in marina and a drive-thru on the cairo-alexandria desert road, which operated during the busy summer months this year. “we got a lot of positive feedback from the café we opened in marina, and people were looking forward to coming back to [visit our] cairo branch, but we faced problems there mainly related to the logistics of getting the food there,” says helmy.

the drive-thru, on the other hand, failed to meet expectations. while drive-thru espresso stands are all the rage in north america, the concept has not yet carried over to egypt, suggests kamal. “people here are still unfamiliar with the whole take-away coffee concept, so creating a drive-thru for coffee will not catch on very easily,” he says.

in the meantime, columbus is undergoing changes to revamp its menu and café design. “we are still working on ways to make the store more appealing in terms of appearance, [because] over the past year we have been more concerned with the quality of our coffee,” says helmy.

special blend

to the casual observer, egypt’s upscale coffeehouses are more or less the same. their marketing departments, however, are working hard to change that perception. as the coffeehouse market matures, they are increasingly seeking new services and partnerships to attract customers while creating a unique identity that distinguishes them from the swelling ranks of competitors.

certainly, lessons can be learned from starbucks, which has adopted new services and concepts to expand its market. in 1993, the coffee giant partnered with barnes & noble, opening starbucks outlets inside many of the us bookseller’s branches. marketing genius, say business gurus, as nothing is as satisfying as a good book, expect perhaps a good book and a good coffee. starbucks later went on to introduce an in-house music program, a reloadable coffee debit card, wi-fi service, music listening stations and cd burning stations.

local coffeehouse chains are experimenting with similar concepts. cilantro partnered with local bookseller diwan in 2005 to introduce small bookshops inside some of its cafés. customers can peruse the english and arabic titles over coffee, with the option to purchase them on their way out. according to roushdy, the bookshops further hone cilantro’s local-yet-cosmopolitan image by giving its outlets “a more cultured and intellectual appearance.”

beano’s has followed suit, signing a partnership agreement with dar el shorouk, one of the largest bookstores and publishing houses in the country, to provide books for its newly opened mohandiseen branch. the chain has already added small “book corners” to all its branches, and, conversely, will soon open branches inside dar el shorouk stores.

the bookshop concept has forced beano’s to slow its expansion, or at least to take more care in how it proceeds. “we want to plan our steps carefully and expand slowly so we don’t lose our success as a result of miscalculated steps or [incorrectly applying] our concept,” abdel nabi explains.

cilantro and beano’s are also competing for the tech-savvy crowd. both chains offer free wi-fi service for customers to browse the net over a cup of cappuccino. cilantro has also set up music listening stations at some of its branches. beano’s is mulling a plan to one-up its rival with an on-site techie to assist customers with their phone, computer and internet needs.

while the technology battle heats up, costa’s management is charting a decidedly low-tech course focusing on the basics. kamal says the chain will remain focused on providing a relaxing atmosphere where customers can escape the “complications” of concept-oriented chains. “we’re not an internet café... we just want to offer people a decent and simple environment where they can read a magazine and drink their coffee,” says kamal.

cilantro has no illusions. concepts may attract customers and keep them occupied, but in the end it all comes down to the product. “if the drinks we offer are not good then no one will come again,” admits roushdy. “that’s why we always try our best to satisfy our customers’ tastes.”

in its search for the perfect blend, cilantro has tapped illy, italy’s largest supplier of premium coffee beans and coffee equipment. columbus, meanwhile, imports the ingredients for its coffee drinks from france and the beans themselves from an exclusive supplier in the us. “there’s a special manufacturing plant [in france] that sends us the mixes for the drinks,” says helmy. “in terms of coffee, we import only the best a-class beans from the us, which is why the prices of our drinks are higher than most.”

costa, which prides itself on a special blend, imports its coffee beans from latin america and africa. its strength, says kamal, is the roasting process. “what really sets us apart from any other café is that we roast our coffee for 20 minutes, while other cafés usually do this process in 9 to 12 minutes,” he says. “this makes our drinks richer in flavor.”

but importing the best materials is not enough, says radwan of the coffee bean & tea leaf. consistency counts. untrained staff can make bad coffee with even the best beans. prior to opening, the bean sent its cairo management team to its regional head office in malaysia for a five-week training course. “all the outlets of our café around the world have to be consistent in terms of products and service. for example, if you have a cup of cappuccino in malaysia it has to taste the same as the one in egypt,” radwan says. “even special filters are used so that the water used in making the drinks does not affect the taste of the product.”

the malaysian trip offered more than just quality training. it prepared the bean’s staff for the pending arrival of its archrival, starbucks. the coffeehouse’s staff gained invaluable experience working in the “cutthroat” international market, learning how to react to ever-changing local market dynamics. certainly it will have its work cut out for it in egypt as the high-end coffeehouse matures.

competition is increasing as expanding chains vie for the same streets, squares and food courts. meanwhile, second cup, canada’s largest specialty coffee retailer, is reportedly mulling plans to open in egypt. costa’s kamal appears unfazed by the reports. “competition is always a healthy sign,” he says. “the more you have of it the better we all will become.”

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