Starbucks to Make a Comeback

Starbucks is not giving up. Its first attempt to penetrate Israel failed miserably, but the coffee house chain is trying again. The company has hired MAN Properties Real Estate Consultants to handle a deployment strategy for branches, and it is looking around for a partner-manager. MAN Properties declined to comment.

The Dan chain, which has 12 hotels in Israel, also had thought that Starbucks might like to return. A hotel industry source said that talks with Dan had been very preliminary, but the chain decided Starbucks would be non-core. Dan refused to comment for this report.

The chair of the Coffee Association and owner of Ilan's chain of cafes, Ilan Shenhav, said that everywhere in the world, Starbucks operates through partnerships with a local body that can contribute its experience. Starbucks usually owns only 20 percent of the business, leaving the other 80 percent to the local partner, although Starbucks retains an option to buy up to 50 percent of the business.

Starbucks left Israel in April 2003 with its tail between its legs, and its partnership with the Delek Group was dismantled. Delek had invested $17 million in the venture, and wrote off NIS 7 million in its 2002 financial statement.

The start of the venture had looked promising: Delek and Starbucks planned to establish 80 outlets in five years with a $30 million investment. Delek owned 80.5 percent of the partnership, and Starbucks had an option to increase its share to 50 percent.

In their official closure announcement, Starbucks and Delek placed blamed on the country's security situation. But they ignored the fact that other chains, like Ilan's, Arcaffe and Cafe Joe, simply hired guards. At first, times were tough but eventually they flourished anew.

When Starbucks arrived, Cafe Joe had six branches - now it has 22. Arcaffe also had six at the time, and now has 26, while Ilan's has doubled its stores to 12 outlets. Aroma has more than 50 branches. Their spread will make it all the harder for Starbucks to wedge its way in. Almost every mall already has a coffee shop and so do the country's main streets.

Starbucks had always said it would return regardless of the fate of its Delek partnership. But this time, it had better factor in the taste of the Israeli consumer of coffee, who simply did not like the chain's coffee the last time around. Israelis have become used to the taste of Italian coffee. And it has to get over the bad name it left behind when it threw in the towel the last time around, Shenhav said.

No comment could be obtained from Starbucks for this article.