Closure of Branches and Simplifying of Menus: Israel's post-COVID Café Industry

Turnover in cafés cratered from 6 billion shekels ($1.8 billion) in 2019 to 2.75 billion shekels in 2020

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A pedestrian walks past a closed cafe in Tel Aviv.
A pedestrian walks past a closed cafe in Tel Aviv. Credit: Moti Milrod

Cafés were one of Israel’s growing industries before the pandemic. Dozens of new ones, mainly from the chains, opened yearly. The successful chains launched different brands as cafés expanded their menus beyond pastries, sandwiches and coffee.

The pandemic caught the cafés off guard. Restricted to takeaway and deliveries, the chains found themselves losing clientele to their colleagues offering Asian food, hamburgers and pizza. Months of inactivity led to a significant chunk of them collapsing – 1,000 cafés have already closed or won’t reopen the moment the economy returns to full activity. Turnover in cafés cratered from 6 billion shekels ($1.8 billion) in 2019 to 2.75 billion shekels in 2020.

While cafés that haven’t gone under expect to reopen in the coming months, the crisis will linger long after the coronavirus pandemic leaves Israel. Hundreds of other cafés are expected to close in 2021, and the survivors will have to reinvent themselves. The pandemic hit the cafés hard because the industry already suffered from high overhead costs and cannibalization. The franchising system through which chains constantly opened new branches made the field vulnerable.

“The franchising system ran its course in the past two to three years, and many chains look the same and offer the same thing,” says a chain executive. “The industry should have reinvented itself before coronavirus, and it didn’t happen. Now there’s no choice, and the results will be cruel.”

Surge of branches

The chains saturated the market by doubling the number of their branches in the last decade. Meanwhile, the number of private cafés remained stable. A survey by consulting firm Czamanski Ben Shahar for TheMarker shows that the chains operated 438 branches in 2009 and 927 in 2016. Growth slowed afterward, such that there were 941 branches just prior to the pandemic. Over the past decade, Landwer spiked from six branches to 70, Greg went from 31 to 140 branches using two brand names, Aroma grew from 50 to 90 branches. Cofix, which opened in 2014, soared to 116 branches and now has 85. Roladin expanded from 20 to 90 branches.

Some chains recognized the saturation and pulled back before the pandemic. Café Café closed some outlets and branched into other food service areas. Fierce competition among discount cafés drove Cofix and Cofizz to close some branches.

Czamanski Ben Shahar expects the industry to end 2021 with turnover of 3.5 billion shekels, on condition cafés reopen by late April, and 2.25 billion shekels if they only reopen in late June.

Making adjustments

Cafés that continue to operate will have to adjust to the new reality. They will probably return to being just cafés rather than resembling mid-priced restaurants.

“All the chains, including us, are working on formats that can work if we get caught in ‘Coronavirus 2’ and that will be adapted to changes in consumption habits from the coronavirus period that will persist,” says Ronen Nimni, Café Café’s owner, which has 15 branches in the catering business, including Café Café, Lehem Erez and Fresh Kitchen. “That means less food, more counter sales, and less seating,” adds Nimni. “There was demand in recent years for cafés offering a variety of restaurant food, but new chains arose over time, each one opening a branch in every mall, as regulation tightened.” He says the recent result has been chains like Arcaffe turning into pastry shops and Roladin moving toward bakeries and away from cafés.

Shai Berman, director of the Israeli Restaurants and Bars Association, says the transition of cafés to being more like restaurants was meant to increase volume, but wasn’t economically advantageous. “One the one hand, cafés must sell meals at a 20% discount compared to restaurants,” he says. “On the other, they were burdened with endless regulation – permits from the Health Ministry, licensing, adding fume hoods in the kitchen and chimneys on the roof, plus more.”

He says: “Cafés did well in the mornings, but weren’t profitable in the afternoons because of business lunches. In the evenings they couldn’t drive enough traffic. When the coronavirus hit, they simply couldn’t sell because people wouldn’t order food from a café they’d sit in, but rather from a restaurant.” Berman foresees many cafés giving up on the restaurant part in 2021.

‘Many closures’

Many restaurateurs believe the chains’ future depends mainly on their pre-coronavirus situation. Chains that were leveraged will struggle to make the necessary changes to help their franchisees.

A closed cafe in Jerusalem, last fall.Credit: Emil Salman

“We’ll see many bankruptcies in the coming months, including among the chains,” says Nimni. “Everything’s on hold now – they’re not paying rent or debts to suppliers, but when business reopens we’ll see many closures, I’m afraid.” He adds that cafés have no doubt been hardest hit in the catering industry. “Our group has some 150 branches among three chains, and only a handful continued to do deliveries,” he says. “Our other chains selling Asian food, pizza and hamburgers remained strong.”

Nimni says only four cafés went bankrupt, but it won’t end there. “We had a franchisee waiting list before coronavirus, but in today’s reality I doubt we’ll find new franchisees. Perhaps we’ll convert one brand into another.”

Tal Ben Dayan’s café in Kiryat Ono is one among hundreds expected to collapse this year. Owners of the shopping center where his Bleecker Bakery branch operates petitioned the courts to evict him. “I paid on time for years, but I’ve been behind since October because I’m waiting for the grants I’m supposed to receive from the tax authority,” says Ben Dayan, 38. “The grants arrive within 100 days of filing the request. I’ll be able to pay another 50,000 shekels this week. The owner already impounded a 100,000-shekel guarantee, and that doesn’t suffice him. I brought renters to replace me, but he’s demanding 77,000 shekels a month from them, compared to the 47,000 I pay.”

Ben Dayan is a father of three, including a disabled 4-year-old who needs many treatments. “I invested 2.2 million shekels in acquiring the franchise and establishing the branch,” he says. “I’ve paid 400,000 shekels in rent since the coronavirus hit. I just want the owner to give me a month or two to work to repay some of the debts. He’s been paid over 2 million shekels since the café opened. Eviction over six week’s rent of under 100,000 shekels in such a period is simply bullying.”

Shlomi Dvash, VP of marketing for Matzlawi, rejects the claims. “Ben Dayan didn’t pay consistently and wanted to leave before the coronavirus,” he says. “We tried to help him, bring alternate renters, but he demanded high fees to move out. We cut rent 50% during the crisis, and we agreed to postpone the rest by a year, but he didn’t meet this either. When we told him we’re prepared to give up on a month’s rent if he’d move out, he refused. He still owes us 100,000 shekels.”

Danny Katz, one of Bleecker’s owners, says: “Other property owners helped renters, but we got almost no consideration at the center where Ben Dayan operates. It’s infuriating.”

‘I’m done with this business’

Daphna Cohen, 56, closed in June her Café Louise, which she operated for 14 years, offering a mix of café and health food. “Our industry was hard even before the coronavirus, given the high costs of personnel,” she recalls. “We had 12 branches at our peak and six entering the coronavirus. The chain never reopened after the first lockdown.

“I’m done with this business. Coronavirus showed us that cafés and restaurants can earn from food sales, and you don’t need all the dining experience that requires many workers and isn’t economically feasible,” she laments. “The industry will keep heading in this direction. It doesn’t interest me.”

A former nurse, she now volunteers at Rambam Hospital giving vaccine shots. “I’m also a personal trainer and considering projects in the medical world,” she says. “Luckily, I was left with only small debts.”

‘They’ll come back’

Tamir Ben Shahar, owner of Czamanski Ben Shahar, says the café market became overcrowded relative to population growth. “Dozens of unprofitable branches closed in recent years, and they struggled to find new places with high returns,” he says. “Finding franchisees also became a harder mission. Franchisees understood that the odds of being profitable were low.” He expects 200 cafés to close in the coming year, half of them from the chains.

Yair Malka, owner of the Greg and and Biga chains, is more optimistic. “It’s true cafés were badly hurt by coronavirus, but I believe people will miss the experience and will want to go out,” he says. “Moreover, café prices suit everyone’s pocket, so the economic situation won’t suppress demand.”

Malka doesn’t think the market is saturated. “Cafés that won’t survive weren’t in good shape before coronavirus,” he says. “We are opening 11 new Greg and Biga branches.”

Despite the optimism, Malka is also adjusting. “I’m opening two branches in the new pastry shop format – with a counter and without waiters or seating,” he says.

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