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Thursday 8 December 2016

Bitter taste as Starbucks fails in bid to repeat global success here

US chain is forced to scale back on its operations, leaving domestic rivals still dominating the Irish market

Published 03/06/2010 | 05:00

THERE was trepidation among Irish coffee sellers back in August 2005 when US coffee giant Starbucks opened its first coffee shop in the capital's Dundrum Town Centre.

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The Seattle-based coffee retailer came with a fearsome reputation for destroying local competition by snapping up some of its rivals and defeating the rest -- despite high prices and a sometimes bitter tasting coffee. It was widely assumed that Starbucks, with its distinctive green-and-black signs, would become the category leader in Ireland much as McDonald's had done in the fast-food sector.

The chain said at its Irish launch that it wanted to repeat its London success where on some streets there is an outlet almost every 100 metres -- all selling lattes, cappuccinos, frappuccinos and mocchaccinos.

But something strange happened along the way and five years later Starbucks was forced to announce that five shops would shut in a retrenchment which leaves domestic rivals still dominating the Irish market. These closures, which still left the chain operating some of the most beautiful coffee stores in the capital, came despite a pick-up in Britain where the company has weathered the recession well.

"Prior to their arrival people were already quite sophisticated," says Harry O'Kelly, the chief financial officer of Insomnia, the country's largest chain of coffee shops. "I'm not sure they filled a need."

Value

It is almost impossible to place a value on Ireland's coffee business. Some estimate it to stand at around €280m but this figure does not include the thousands of small coffee shops dotted around the country or coffee sold in supermarkets.

In Dublin, Starbucks, O'Briens, Insomnia, Cafe Sol and West Coast Coffee occupy hundreds of sites in the capital alongside old favourites such as Bewley's. Outside Dublin, UK-based Costa, Insomnia and O'Briens vie for control of the country's main thoroughfares and shopping centres.

A trawl through the recent results of the various chains -- filed with the Companies Office in Carlow -- shows that the coffee chains are hurting as the recession bites. Starbucks' main holding company made a loss of €5.46m on sales of €17.3m in 2008, the most recent year for which figures are available.

Accumulated losses stood at €7.6m, including an impairment charge of €3.97m due to underperforming stores. Other household names have also seen profits fall although they appear to have remained profitable.

Closures

Losses at Starbucks were followed by an announcement late last year that the chain was closing cafes in the Dublin suburbs of Ranelagh, Dundrum, Swords, Dalkey and Tallaght as part of a programme to shut 100 coffee shops outside the US.

The company, which runs its Irish operations from the UK, did not respond to a request for an interview from this newspaper -- but a statement at the time of the closures said they were "an effort to prepare for the future and to ensure we have a strong foundation to support our long-term goals". It added that the chain remained "committed to the Irish market and will emerge from the review that we have undertaken with a stronger store portfolio focused on providing the best possible service and value to our customers".

When Starbucks tried to sell the 20-year leases to the stores through CB Richard Ellis it was revealed that the coffee giant had been paying €110,000 a year in Dalkey, €131,622 a year in Ranelagh and €155,000 in Tallaght.

Mr O'Kelly -- a cofounder of Insomnia which counts RTE's 'Dragon's Den' presenter Bobby Kerr among its owners and has 56 stores and franchises -- believes the reasons for Starbucks's failure to gain traction in the market is due to several factors -- the biggest being that the giant company, which has 17,133 stores in 49 countries worldwide, has been unable to respond to local conditions in Ireland.

Irish people still drink a lot of tea despite the recent rise in popularity of coffee but Starbucks has continued to focus on iced drinks such as frappuccinos, popular in Britain but which don't sell well here.

"Iced drinks make up 20pc of the market over there," Mr O'Kelly says. "It's nothing like that here. You know our summers."

The US giant's biggest mistake, however, was a failure to respond to the country's changing economic situation, according to both Mr O'Kelly and Cafe Sol founder and owner Emmet Daly.

Insomnia calculates that 70pc of products bought in its stores are part of some kind of special offer. The problem with Starbucks is that "nothing is on deal and it's really, really expensive," says Mr O'Kelly.

Cafe Sol, a smaller but rock-solid chain of stores established by Emmet Daly in 1998 which has a strong presence in south Dublin and makes tens of thousands of fresh sandwiches everyday in its rambling basement headquarters, located on Baggot Street, has also successfully withstood the challenges posed by Starbucks over the past decade.

"It's all about relating to the customer and value," says Mr Daly, whose stores regularly offer deals on soups, sandwiches and coffees.

Irish people have "finally become real shoppers", he notes approvingly. "You could say we should have been like this as a nation previously but we are now," he adds.

Mr Daly believes that Cafe Sol's strong blue-and-yellow branding has also played a role in protecting his business from the opposition. He points to other coffee shops he admires such as London-based Pret A Manger -- which almost single-handedly created the takeaway sandwich and coffee category in the UK during the early 1990s -- and Dublin-based Butlers which sells high quality chocolates and coffee.

"People like brands as long as they are supported by good quality," he says. "Butlers, for example, is a very strong brand."

Conversely, one Irish coffee chain that has struggled in recent years is O'Brien's -- the sandwich and coffee chain set up in Dublin in 1988 by entrepreneur-turned-politician Brody Sweeney.

O'Brien's became a global player with almost 300 stores in 13 countries at one stage but has since run into well-documented problems, including closures, with many owners of individual stores being left extremely unhappy.

While the problems O'Brien's encountered were complex and varied, there are interesting and obvious parallels with Starbucks's failure to expand here and in many other European countries.

Coffee and sandwiches may be popular in almost every corner of the planet but how we like our coffee -- the strength, the temperature and the blend -- vary strongly from country to country while our sandwich preferences appear to be almost as idiosyncratic.

The world may be flat, in writer Thomas Friedman's famous phrase, but it is not without the odd contour when it comes to the small things that really matter.

Irish Independent

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