The situation in the Russian market for coffee shops, dessert cafés and bakeries has been rather ambiguous. Declining consumer demand has been putting strong pressure on projects with expanded menus and services, pushing forward the trend towards democratization.
Market operators are forced to react to new consumer requests and demands. For example, “Shokoladnitsa (Chocolate Girl)” Group is planning to upgrade the concept and brand of its “Coffee House” chain by the end of 2018. The project formerly involving full-fledged restaurants with an average check of 1,500 rubles will from now on operate as quick service caf?s. The share of takeaway orders at them is expected to reach 50%.
The need for a change was already apparent in 2016, when inefficient coffee shops began to shut down en masse. During the past 2 years, “Coffee House” chain shrank almost by half, going down to 82 establishments from 161. The unfavorable economic situation, which pushed the consumption model towards rationality, served as the main reason for financial losses. However, it could be that the decision on rebranding was also made in order to diversify the brand portfolio. The audiences of “Shokoladnitsa” and “Coffee House” are fairly similar, which provokes unwanted competition between the two projects. The new format at “Coffee House” may allow the company to avoid this negative effect through expanding the target consumer audience.
“Shokoladnitsa” itself, however, is also about to be rebranded in 2018: changes will include new logo and interior design as well as a new menu. It may be high time that the coffee chain implemented them: the past year was far from successful for it. From May 2017 to May 2018, 20 “Shokoladnitsa” coffee shops were shut down. The company’s revenue is no longer demonstrating its past growth rates. The renewal of the concept, corporate image and menu is intended to revive consumer interest and increase the chain’s turnover. However, the process of rebranding will take about 2 years; at the moment, only 4 out of the 356 existing “Shokoladnitsa” restaurants are operating within the new format.
Classic coffee shop chains have been developing at a varying degree of success lately. Competition in the market has been building up. The number of chain projects offering coffee and food to go has been on the increase. The market is being developed by franchisees who prefer investing in inexpensive Russian projects with fast payback: these include “Coffee Like”, “Bodry Den’ (Energetic Day)”, and “Pravda Coffee”. Throughout the period from May 2017 to May 2018, the projects mentioned had 107, 37 and 31 new establishments opened, respectively. More and more coffee takeaway projects have been entering the market. The “newbies” include “Bagginscoffee”, “TucanoCoffee”, “CoffeePreSS”, “Cupncup”, “Etloncoffee”, “Kstati (By the Way)”, and “LyudiLyubyat (PeopleLove)”.
Most players have been noting elevated competition. In summarizing the situation in the market, Alexey Balkin, co-founder of “Bodry Den’” coffee chain, reports that numerous companies operating within the coffee takeaway format have been emerging. Many of them have been using dumping as a strategy to achieve a quick start upon launching the franchise. Competitors that opened in 2012–2014, on the other hand, have been focusing on quality instead. Vitaly Zuykov, Franchising Director at “Coffeeshop”, also points out that the pressure from new local establishments has been increasing. He is convinced that, despite the “tendency to open and shut down frequently, (such coffee shops) take over part of the consumer audience”.
Indeed, demand for inexpensive coffee damages the turnover of American “Coffeeshop” and “Starbucks” chains, the average check at which is at least 20–30% higher than prices for coffee at startup projects. Therefore it is no surprise that the legendary coffee shops have had their growth rates decrease considerably. Only 4 new “Starbucks” coffee shops were opened in May–October 2017. “Coffeeshop” even had its chain reduced: from May 2017 to May 2018, 6 of its Viennese-style coffee houses across Russia had to shut down. According to “RBC Market Research”, the two projects currently have 115 and 90 establishments respectively across the country. The difficulties currently faced by these market players are temporary. Mistakes have already been corrected, and the companies are determined to continue their development in the Russian market.
“Coffeeshop”, for instance, has rebranded its establishments, having updated the concept in terms of approach, design, and menu. “Starbucks”, on the other hand, has been developing its Drive-Thru format: its first Drive-Thru facility was opened in Pushkino on Krasnoarmeyskoe Highway on March 2. The operator has also been focusing on developing self-service establishments in Russia. “Starbucks on the Go” is a concept involving self-service kiosks with a coffee machine, interactive display and payment options. Originally, 10 such establishments were planned to have opened in “Otkrytie” bank offices by the end of March 2017. However, according to “Yandex.Maps”, there is currently only one operational “Starbucks on the Go” facility, located at 11/19, Valovaya Street, Moscow. It appears that the project has not progress as far as intended.
Along with the American company, a number of other players announced the launch of self-service coffee kiosks. In particular, “Shokoladnitsa” expressed interest in the concept. “Chainikoff” is another, fresh, example of self-service development, also aiming to switch to digital platforms in the future. Mikhail Guseynov, General Director of “Chainikoff”, states that 20–30% of the chain’s revenue is expected to be generated through self-service kiosks and mobile applications. The implementation of such terminals will undoubtedly allow market operators to lower the product costs, which would possibly affect prices for coffee as a result. However, the latter is not always true in practice.
Apart from the higher level of competition and growing demand for cheaper coffee, market players have been reporting that the Russians have been increasingly demanding to product qualities and services. In addition to being selective, visitors at coffee shops are becoming more aware and competent, e.g. knowing the difference between Robusta and Arabica coffee. Vitaly Zuykov confirms the trend, “All in all, it is apparent that coffee shops have been focusing less and less on introducing new sweet beverages and paying more attention to coffee varieties instead”. Said transformation is not only taking place in the capital. Anna Tsfasman, founder and General Director of “Double-B” is confident in that. “It is no longer as important to develop in the center of the city. The culture of coffee consumption has spread across the outskirts, where quality coffee has also become part of daily life. This is most definitely a positive trend for us and for other coffee shops: we have the space for further growth”, she says. Along with coffee varieties, consumers have been experimenting with milk. Numerous coffee shops have been offering fat-free, soy, almond, cocoa or lactose-free milk in addition to the regular option.
Competition in the segment has not only been growing due to higher numbers of coffee shops themselves, but also due to the availability of the standard coffee range, takeaway included, at most establishments, from fast food facilities to casual dining restaurants. According to Anna Tsfasman, the HoReCa segment has been demonstrating a significant increase in demand for good coffee as well. “Double-B” has developed a special solution for the B2B segment, based on operators’ higher requirements.
It is obvious that, as standards and demands regarding coffee increase, coffee shops have to not only be convenient to consumers geographically and to maintain an appropriate quality/price ratio in order to retain their traffic, but also to create added value for their visitors. The recipe is roughly the same for everyone: in order to stay relevant and attractive to consumers, a number of companies have focused on mobile apps as well as social media communications, and have attracted celebrities. Market operators are striving to work with the young audience, including Millennials and Generation Z, who have been adopting Western standards most actively and tend to eat outside the home more frequently.
Bakeries and dessert caf?s have been using similar approaches, developing around the same trends and tendencies as coffee shop chains. One of the fairly successful projects in the market is “Tseh (Shop) 85”. The company was formed in 2017, and so far, during the short time period, 28 “Tseh 85” bakeries have been established around Saint Petersburg. Marina Yakovleva, Commercial Director of the chain, reports that “old marketing tools are no longer effective, and one has to be creative, stand out, and surprise”. It is possible that the operator in question has been paying particular attention to social media for this purpose. “We have an Insta blogger on our team: she keeps up with trends and informs us on what is currently popular and relevant. Of course, we are also keeping an eye on our Western colleagues as well as competitors. Our audience is fairly young, and the goods we produce catch on rather well on social media. The feedback rate on these platforms is high, which lets us react fast. Very soon we are launching a mobile app, which will fit perfectly into the new consumption culture of Generation Z”, Marina Yakovleva shared with us.
Staying oriented towards the younger audience, analyzing reviews and other feedback, working on mistakes, and developing within relevant trends allows the company to outline ambitious plans for the chain. By the end of 2018, the chain is to open at least 50 more “Tseh 85” bakeries. The company is planning to expand to Leningrad region and Moscow next.
Just like in the coffee shop segment, the more “democratic” dessert cafés and bakeries have been developing the most actively, as demand for them is stable and high among both consumers and investors. For instance, “Kuzina” chain is aiming to double the number of its establishments as a result of franchisees’ interest in the project. Around 30 new shops are planned to be set up by the end of the year. In order to achieve the goals set, the company has been purchasing equipment that would let it expand its production in Novosibirsk and Moscow.
Due to the overall format democratization, turnover in the market for coffee shops, dessert cafés and bakeries has been growing at rather slow rates. According to “RBC”, operators’ total revenue in 2017 increased by 1.4%, amounting to $ 104.2 billion. The number of coffee shops and cafés owned by chains has been growing at higher rates. During the period from May 2017 to May 2018, 346 establishments within the format were opened. In relative terms, growth in the number of establishments equaled 7.5%.
Head of Analytical Group
“RBC Market Research”