Will They Vote With Their Feet?

Executives of cafe chains say customers are being patient about price increases due to pesky raw-material costs. At least for now.

Prices have been rising not only at the grocery, but at restaurants and cafes, too. A check by TheMarker of breakfast and coffee prices at the chains this week shows that most prices have increased since November.

cafe cafe - Daniel Tchetchik - July 8 2011
Daniel Tchetchik

By how much? At Greg, for instance, an "Israeli breakfast" rose from NIS 52 to NIS 56, an increase of 7%. At Cup 'o' Joe, the price rose from NIS 46 to NIS 52, a jump of 13%. At Aroma Israel, breakfast rose from NIS 51 to NIS 54, an increase of 6%.

During that time the consumer price index rose 2.2%.

The combination of a tuna sandwich and soft drink has also climbed. This comparison is from January 2010 to today. At Greg the increase was from NIS 49 to NIS 53; again, 7%. At Aroma Tel Aviv, the rise was from NIS 31 to NIS 33, or 6%. At Cafe Hillel, it was from NIS 38 to NIS 43 - 13%. At the Kakao chain, a tuna and soda soared 31%, from NIS 38 to NIS 50. Since January 2010, the consumer price index increased 4.5%.

The Kakao chain said that for three years, it absorbed the increase in raw-material prices and didn't raise prices at all. "The differences in prices you presented are due to a significant upgrade of the menu," the chain said. "Our prices today are not high relative to other cafes, and the meals, which stand out for their quality, can easily be compared with the best restaurants."

At many of the chains, we found that the price of a coffee and croissant combo hasn't risen at all, even though the cost of the raw materials, including wheat and coffee beans, has risen by a double-digit percentage. The cafes that have kept the price the same include Cafe Cafe, Cafe Hillel and Cup 'o' Joe. But at other places the price has increased by about 10%.

"We recently made the decision to raise prices to reflect the price increases during the last year, because we had no choice," said Yair Malka, chief executive of Greg. "We hadn't raised prices for a year and a half, and reached the situation that the cost of food came to 40% of turnover. We realized the time had come to raise prices. I think that if prices rise only once in a long while, the customer understands and it's okay, because it's in keeping with what's happening in the market."

The increase was 6%, Malka says, including breakfasts, carbonated drinks and some of the sandwiches and salads.

Cafeneto claims that although meal prices have increased by 6% on average, and coffee prices by 8% to 10%, turnover this June was 8% higher than in June 2010. The price revisions didn't deter customers, the customers were loyal and understood that prices in the market had risen, Cafeneto said.

aroma - Michal Fattal - July 8 2011
Michal Fattal

"I don't know if things will stay this way, but for now, it seems they appreciate the quality of the product," said Haim Malka, the chain's CEO. Cafeneto didn't raise prices on a whim; profits were hit because of the increase in the minimum wage, the rising cost of raw materials and higher production costs.

Aroma Tel Aviv said its price increase a few weeks ago was the bare minimum and hit only specific products, not the whole menu. "In the coffee category, for instance, we only increased the price of espresso, and that only by one shekel," said Nati Bar, the chain's marketing vice president. "Omelette sandwiches, tuna sandwiches and croissants haven't been increased at all."

She says Aroma Tel Aviv's prices are the cheapest around. "We don't feel a need to profit at the consumer's expense beyond what we can," she said. Some chains are taking advantage of the general increase in costs to raise prices across the board, "but not us," Bar said. None of the chains are losing money, she claimed; the question is how much profit they make.

But Ronen Nimni of Cafe Cafe says seven months ago, the chain revamped its menu and raised prices, and if costs keep rising it will have to raise prices again. Maybe people will vote with their feet, he said, but he hopes not. For the time being the company is heedful of consumer feelings about the price increases, but the chain may not be able to continue absorbing the price increases in the future, Nimni said.

He also begged to note that the prices suppliers charge the restaurants are higher than abroad. "Here the market is driven by monopolies," Nimni said. "A few companies raise prices, but we have to keep buying from them."

High price doesn't assure quality

After the price hikes, the differences between the chains have become all the more glaring. Which chains offer the most attractive prices? We checked three popular dishes - breakfast, coffee and croissant (take-away ), and a tuna sandwich with a carbonated drink - at eight leading chains in Israel: Cafe Cafe (104 branches ), Greg (66 branches ), Cafeneto (15 ), Cup 'o' Joe (64 ), Cafe Hillel (27 ), Kakao (26 ), Arcaffe (22 ) and Aroma Israel (107 branches ).

The price of breakfast is much the same at all. At six of the eight, the price ranges from NIS 52 to NIS 56. At Hillel it's less than NIS 50, but Aroma Tel Aviv is the cheapest, less than NIS 40. The priciest is Greg at NIS 56.

At Aroma Israel the base price is NIS 42, but it only includes one drink, hot or cold. At the other chains the breakfast includes a cup of coffee and a juice. So we added the price of another drink to the Aroma Israel price.

There is no question that price isn't the only parameter when choosing where to buy breakfast, or a coffee and croissant: Taste matters, too. A survey of cafe breakfasts by TheMarker six months ago rated Greg in third place, tied with Cafe Cafe. Hillel, where breakfast is cheaper, ranked second, indicating that price isn't a guarantee of quality.

In coffee & croissant we checked the price of take-away, which is generally cheaper than if the food is consumed at the premises. The best deal for a take-away coffee and croissant was at Aroma Tel Aviv: NIS 13. Cafe Cafe is also relatively cheap at NIS 16. The other chains charged NIS 18 to NIS 23, the costliest being Arcaffe.

Aroma Israel and Aroma Tel Aviv were the cheapest in the category of tuna sandwich and soft drink: NIS 33 to NIS 35. The difference with the other chains is large. But the two sell the combo with a 330-milliter can of Coca-Cola, while the other chains sell it with a half-liter can. Cafe Cafe and Greg were the most expensive, charging NIS 50 to NIS 52 for a tuna sandwich and soft drink. That's a difference of NIS 20 between the cheapest and the most expensive chain.