Stung by Brash New Competitor, Israeli Cafe Chains Mull Lower Prices

Industry executives and analysts say some prices have room to fall now that Cofix is offering a flat low rate for everything.

With the new Cofix café chain offering everything on its menu for NIS 5, the question arises – once again – whether the large chains can lower prices. The large chains have been saying that Cofix won’t survive very long, and that their prices reflect their hefty costs. Still, the income they derive from their franchised branches is far from negligible.

The companies that control the country’ two largest chains, Aroma and Café Café, collect up to around NIS 2.5 million a month from their franchisees, or up to NIS 30 million a year, according to a study for TheMarker by research and consulting firm Czamanski Ben Shahar. For the third largest chain, Café Greg, these numbers are up to NIS 2 million and NIS 24 million respectively.

Franchisers’ income is composed of several elements; for example, franchisees at several chains have to buy their ingredients and supplies directly from the chain, which sometimes provides the franchisers a healthy spread between what they pay suppliers and what they charge franchisees. Also, an additional 1% to 1.5% of sales is collected from franchisees to cover advertising costs.

Average monthly revenue is up to around NIS 400,000 at an Aroma branch, and up to around NIS 350,000 at the other large chains, according to Czamanski Ben Shahar. Some branches top NIS 700,000 a month, while others struggle.

The expenses borne by franchisers are very low, says Tamir Ben Shahar, a principal at Czamanski Ben Shahar. Franchisers admit to handsome profits, and Yariv Shefa, who owns 38% of Aroma Israel, concedes that prices charged at the counter could be lowered.

“Our sales this year will total around NIS 600 million and royalties average 5%, so we’re left with about NIS 30 million. We collect 1.5% of sales for advertising, which is NIS 9 million, but this goes for ads and not into our pockets, and we don’t clip any coupon on products bought from suppliers and sold to franchisees,” says Shefa.

“Net earnings in 2013 are expected to reach about NIS 28 million for the entire group, including a coffee plant, a dough factory, a food-processing plant and overseas branches. I think net earnings for the chain in Israel will be around NIS 20 million.”

Death by high rent

Ronen Nimni, the owner of Café Café, begs for a little understanding. “I’m not coming crying and I profit nicely, but these aren’t large sums, and maintaining a professional chain involves insane costs. I spend NIS 700,000 a month just on the head office,” he says.

“There are branches that need assistance, and there’s a constant need to make sure the chain thrives by adjusting the branding, menus and the stores’ appearance. This costs millions. You can raid the cash register, but when you constantly want to breathe air into the chain, it costs money.”

The owner of a mid-sized chain says the large chain owners profit excessively and that their big money comes from ingredients and other inputs sold to franchisees. By contrast, many of his franchisees need help from the head office.

“I just gave a franchisee NIS 200,000 because he’s in a mall that’s killing him in rent,” he says. “There are chains that won’t survive,” he adds, referring to the many small and even mid-sized chains he says are struggling.

Yaakov Luzon, whose Ilan’s operates 14 cafes around the country, says the business is profitable, but he doesn’t earn the money that the large chains do. “My chain’s branches are owned, not franchised, so my life is harder,” he says.

“The chains that operate through franchises get money even if the outlets are suffering losses. I don’t. No chain has a 100% success rate, and if someone has 100 branches, probably 30% of them are faltering. Thankfully, we’re profitable, but I don’t make the money that the majors do.”

According to another mid-size chain owner, until a chain reaches 10 branches it doesn’t earn money because tens of millions of shekels are needed for development. “If you’ve gone through the whole process and branded the chain so that it’s prosperous, as in the case of Aroma, Café Café and Greg, well, I tip my hat to you. You deserve to profit like that.”

Caffeine buzz

Shefa at Aroma, at least, has some praise for Cofix. “We’re still checking the possibility of reducing prices, and I’m sure we’ll lower them for takeout. If someone’s new concept can work, we’ll have to take this into account. Although [Cofix] has one branch, it’s doing nice work and there sure is a buzz,” he says.

“Now a customer coming to Aroma and paying NIS 11 for takeout coffee feels like we’re cheating him, and we don’t want him to feel that way. We won’t lower takeout coffee to NIS 5 because that’s not a price you can live on, but we’ll bring down the price so the customer feels better.”

According to Nimni of Café Café, prices can’t be lowered “even by one agora.” He says his company’s price rises haven’t covered 10% of the cost increases.

Still, it’s feasible to reduce prices in the café industry, says Meyrav Einstein Siano, a vice president at Czamanski Ben Shahar.

“There’s no reason for a piece of cake to cost the same as an entire cake. But unfortunately, Israeli culture rewards the quickest possible and the most possible,” she says. “A faulty choice of locations leads to low turnover that doesn’t make room for profits. In such cases, cafes can’t lower prices.”

Some companies are already offering discounts. Besides Aroma’s price-cut announcement Tuesday, Lia Chocolate’s 10 branches are offering coffee for NIS 5. The first cafes to come out with a temporary NIS 5 promotion for takeaway coffee are the ones at Givatayim Mall. But Yehuda Oren, the mall’s CEO, says the chains weren’t in favor of the campaign.

Daniel Bar-On