Moscow's coffee business

Issue Number: 
519
Author: 
Maria Popova
Published: 
2003-03-31


Though all the rage in Europe and the United States, coffeehouse chains still don’t mix well with many Russian customers. But that may be changing.

It is well past midnight and there is a queue in front of the sales counter at Shokoladnitsa, a crowded coffee shop in central Moscow on a square dominated by a statue of Vladimir Lenin. "I am a regular here," says Anna, a six-foot tall blonde woman who says she drops by almost every other day with friends or family. "It used to be so boring to sit home in front of the TV all the time because going out was such an effort and so expensive."

Not anymore, Moscow is becoming the coffee shop capital of east. Today Anna is with another friend who works for a multi-national firm and travels frequently to Europe and the United States. "I don’t like Starbucks, we prefer the private British or Parisien coffee shops in Russia. Shokoladnitsa is the best of Europe and Russia. American coffee shops like Starbucks are too cheap, in my view, in atmosphere."

It is understandable why. Moscow coffee shops have wall-to-wall wood paneling, and teak and mahogany furniture. Best of all, the range of cakes and "torts" is likely to get any health conscious European in a fit.

Before 1995, Muscovites’ idea of coffee came from a jar labeled "instant," and was drunk in the kitchen at home. Meeting up at a cafe or stopping in for a morning or lunchtime espresso was an exotic European habit, which Russians couldn’t imitate even if they wanted to because at that time, there were no coffeehouses in Moscow.

This began to change with the opening of Coffee Bean, a cozy coffee shop on a fashionable street in Moscow – Kuznetsky Most. It was opened by an American citizen, Jerry Ruditser, who said that the idea of setting up the cafe came to him in 1995.


Chains cashing in on coffee

Name of chain Number of outlets

Idealnaya Chashka one in Moscow and seven in St. Petersburg

Coffee House twenty one

Coffee Bean five

Coffee Zen two

Coffee Tun two

Shokoladnitsa eight

Coffemania three

"It was very easy for us to think of the name. It was logical because we do sell coffee beans," he said. "We took the American pattern of cafe industry development as a model and proceeded from the experience gained there. For us, it was both the source of inspiration and the example to emulate. It was the American company Starbacks, which was the first to combine two lines of business – a coffee shop and a cafe – in one. We took this approach for our basis when setting up Coffee Bean."

It was an instant hit. Russians had never seen democratic and friendly cafes where they could sit for hours and enjoy a quality snack while leafing through a book or newspaper. That the idea worked was obvious within days as customers flowed in to buy coffee beans and sip a cappuccino.

Russians were always known to have a sweet tooth. Shokoladnitsa (translated Vase for Chocolates) was started by a young Russian named Alexander Kolobov. He claims, "When the idea of a coffee-shop chain first occurred to me, there was only Coffee Bean in Moscow, but I didn’t even know about it. When I began preparing for the project, I visited it, and I liked it a lot. I figured the market was prepared for coffee-shop chains because Coffee Bean was so popular. So, we found a place for our first store, and we were satisfied with the first results and decided to go on with the project."


Coffee costs:

Average-quality coffee beans cost

$18-$20 a kilogram.

One 25-gram espresso uses seven

to eight grams of coffee

(3.5 rubles).

An espresso in Moscow costs

on average 35-50 rubles.

One kilo of coffee makes

around 140 cups of espresso.

A small cafe sells on average

50 kilos of coffee

(7,000 cups) a month.

 

By 1998, the coffee business was beginning to come to the attention of investors, but then the August 1998 financial crisis intervened and the resurgence started. By the end of 1999, the sector was booming, and the number of cafes in Moscow had risen from seven or eight to more than 30.

Cafe chains started becoming very visible in 2002. They include Coffee Bean (five shops), Zen (two cafes), Shokoladnitsa (eight cafes), Coffeemania (three cafes) and Coffee House (21 cafes). St. Petersburg’s most prominent chain is Idealnaya Chashka, one of the biggest cafe chains in the country with eight coffee shops.

Analysts forecasted that another 10-12 independent cafes and at least two more chains would open in Moscow within 2003. Coffee shop owners say that up to 25 percent of Muscovites (from a city of 12 million) regularly visit Coffee Shops.

If Moscow’s trend is to be believed, a market with at least 20-25 million coffee drinkers around Russia is waiting for the next Coffee Bean or Shokoladnitsa to come next door.

The Rosinter restaurant chain, which owns 59 restaurants and franchises in Russia, the C.I.S. and Europe, also plans to enter the cafe market with a chain of cafes called Barista. The company, according a spokesman, will spend up to $500,000 of its own money on the first three outlets. After the initial set-up, Rosinter plans to either attract outside investments or take out a loan to expand.

Montana Coffee, a Russian company with 100 percent U.S. capital, also plans to enter the Russian market, spending $3 million developing its chain. The company plans to open 22 cafes in Moscow, St. Petersburg and perhaps other Russian cities over a period of three years. Company representatives say each outlet should pay for itself within one-and-a-half years if it has 300-400 customers a day.

Analysts say that a successful and profitable cafe depends above all on having a good location. Busy central city streets are the best option, but businesses have already taken up virtually all the available real estate in these areas, and finding premises in the center can be very difficult.

The other problem is that these prime locations all come at a high price. Rents within the Garden Ring vary between $500-$2,000 per sq. meter a year, with tenants paying an annual $1,000 per sq. meter for space on pedestrian streets such as Old Arbat.

Renovation work costs an average of $500 per sq. meter, while complete interior design work with tables, a bar, kitchen and so on can cost up to $1,000 per sq. meter.


Cafes generally pay for themselves within 12-18 months.

Muscovites spend $11 million a year in cafes – as much as comes from gasoline sales.

Every day in Moscow’s 40 cafes, 10,000 people spend a total of around $30,000 on coffee.

Analysts say that, within five years, Muscovites will spend 10 times more – up to $300,000 a day – in cafes.

The number of cafes in Moscow is expected to rise to 200 in the coming years.

Industry insiders say unlike restaurants, cafes are not so costly to equip in terms of specialized equipment. And that is one of the reasons the business is becoming so popular. Basic equipment includes a professional coffee machine costing around $5,000, a coffee grinder for $300-$700 and additional equipment such as mixers, blenders, cups and so on and refrigeration equipment for roughly $1,000. The total investment could be as little as $50,000.

A manager at Coffee Bean told Russia Journal that for a cafe not to make a loss, it only has to sell 250 cups of espresso a day. Cafes make a considerable amount of their income through selling coffee beans with an average markup of 30-50 percent.

Alexander Kolobov, manager of the Shokoladnitsa cafe chain, said that the main things for a cafe to survive in today’s increasingly competitive environment are a high level of service and quality, good location and individual character.

All industry insiders agree that the boom is just beginning and the potential for growth is enormous. But Kolobov said that, if the current growth rate in the sector continues, this could change soon, notwithstanding the braking factors such as high rents and a shortage of suitable premises.

Domestic cafe chains began appearing in Moscow starting in 2000. They include Shokoladnitsa, Coffee Bean, Zen, Coffeemania and Coffee House. St. Petersburg’s most prominent chain is Idealnaya Chashka, one of the biggest cafe chains in the country.


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