Sources inform “Globes” that Starbucks (Nasdaq:SBUX), which abandoned the Israeli market two years ago, following the failure of Delek Group's (TASE: DLEKG) franchise, is considering reentering the market by acquiring an Israeli chain of coffee houses.
Starbucks CEO and controlling shareholder Howard Schultz is Jewish. Starbucks once set up a cafe in Jerusalem, despite terrorist attacks. Schulz said he was partly motivated by Zionism. Associates said that Schultz was hurt that the only market that Starbucks was ever forced to abandon was Israel.
Israel's six large cafe chains are currently implementing aggressive development plans: Arcaffe, Aroma, Cafe Joe, Cafeneto, Cafe Hillel, and Ilan's Coffee. C Cafe, which has one outlet in Tel Aviv's Atidim industrial zone, has opened two cafes in New York, and plans to greatly expand in Israel.
The main barrier to penetrating Israel's café market is the battle for location. Developers tend to offer exorbitant prices that are not economic, in order to win desirable locations, especially in the center of the country, which has become especially saturated. This is why Starbucks is not ruling out acquiring an existing chain with locations and future leases for further expansion. Nevertheless, even under this scenario, Starbucks will have to rebuild its brand name, which was severely battered by its previous failure in Israel.
Representatives of Starbucks have already met the owners of some cafe chains. Cafe Joe owner David Klein told "Globes", "I had a very friendly talk with Starbucks. They're definitely seeking to reenter the Israeli market, or, as they put, they're examining options. They're considering buying an existing chain, but it isn’t worth their while to buy me, because we're a franchise-based chain."
Most Israeli coffee house chains use the franchise model, which facilitates rapid development. Only Ilan's and Arcaffe are mainly based on ownership.
Published by Globes [online], Israel business news - www.globes.co.il - on April 3, 2005