Last week’s visit to Israel by representatives of Starbucks (Nasdaq: SBUX) may lead to a new turn in the relations between Starbucks and the Delek Group (TASE:DLEKG), its partners in Starbucks Israel. Sources inform “Globes” that Starbucks may dissolve the partnership and withdraw the right to use the Starbucks brand name.
Delek is expected to continue operating the chain of cafes already operating, but under another name. Dissolving the partnership will save Delek’s money-losing chain sizeable royalty payments, and it will no longer be forced to use the expensive raw materials insisted on by Starbucks.
The main obstacle to dissolving the partnership is the dispute over compensation for the investment in the set-up costs in Israel. Delek tried in every way possible to sell its share to Starbucks, but Starbucks refused to buy Delek’s share. It is possible that Starbucks’s exit from the partnership will not include any monetary payment.
No response to the report from Starbucks was available as of web posting.
Delek has not met the terms of the original agreement with Starbucks. Instead of opening 20 branches in the first year, only six were opened, which lost far more than stipulated in the business plan. The chain’s development momentum in Israel was stopped when the plan to open a branch in Jerusalem was abandoned, following the terrorist attacks. A series of ongoing lay-offs, which began at that time, cause a panic among management, which reached the store managers, who were left without authority.
Delek sources told “Globes” today that the strategy of using questionable locations was one of the main problems in Starbucks attempt to penetrate the Israeli market. In retrospect, they admit they should have set up small branches of up to 70 sq.m., mostly in outlying areas, not in Tel Aviv. They also say that Starbucks’s inflexible standards forced them to offer weak coffee, which is unsuitable to Israeli tastes.
Published by Globes [online] - www.globes.co.il - on February 5, 2003