Cheap Eats: Does Cofix Portend Rise of NIS 5 Menu?

Competitors write off new low-cost cafe chain, but it could shake up pricey market.

Over the last five years, the price of coffee has risen more than three times the pace of inflation - 25% compared with 8% - the business intelligence company BDI estimates. With a cup of coffee these day sometimes costing NIS 15 and salads three times that at most cafes, it’s no wonder that the launch of takeaway chain Cofix, offering a menu in which all items cost NIS 5, has drawn the attention of java afficionados and the media.

The effect Cofix will have on the prices charged in the cafe sector of the restaurant industry will depend largely on the chain's founder Avi Katz, an experienced discounter, whose other retail forays include Hakol Ba’dollar (where every item is sold for the shekel equivalent of $1) and the toy store chain Kfar Hashashu'im. He plans to open 100 Cofix outlets in the near future, followed by a second-stage expansion of another 300. He is off to a strong start: The branch that opened on Tel Aviv's Ibn Gvirol Street sold 15,000 of its NIS 5 menu items in its first five days in business.

“The next step is to open cafes like these in New York and other places around the world,” says Katz. “I met with a young guy who owns some dollar stores in Paris and wants to partner with us.”

Katz is confident he will fulfill his plans for Cofix. Kfar Hashashu'im, Hakol Ba’dollar and other retail chains he founded were successful enough for him to later sell them to Blue Square Israel for NIS 180 million. “I'm not a little child,” says Katz. “I’m a businessmen with experience who has operated 252 stores.”

The large increase in the price cafes charge for coffee in recent years runs counter to the decline in global coffee bean prices. According to figures from IntercontinentalExchange, the U.S. commodities exchange, arabica coffee beans have fallen 40% isince 2011, meaning that the price cafes are paying for their major input has dropped significantly. Nevertheless, those in the cafe business say the loud complaints about the high prices for a cup of coffee are not justified.

“Many of the small cafes and chain franchise holders are barely surviving these days,” says a senior executive in one of the major cafe chains. “The price of the coffee we buy may have fallen, but our expenses have risen by double-digit percentages.” He points to rising overhead and labor costs as the main culprits, which has cut sharply into profitability. “It used to be that if a franchise owner had a monthly turnover of NIS 200,000 he would make money. Today that's no longer true.”

If you can’t beat ‘em ...

Despite Cofix’s impressive initial sales figures, the major cafe chains vehemently assert that Cofix's entry into the market won't have a major impact. However, a week ago Wednesday a branch of Ilan’s House of Coffee on Ibn Gvirol Street began offering a special deal after watching the long line stretching out from the nearby Cofix outlet. The local Ilan’s is enticing customers with coffee for NIS 10 and a coffee and pastry combo for NIS 15, even as a sign by the cash registers still displays a pre-Cofix bargain of “coffee and a mini-sandwich for only NIS 25.”

Yaakov Luzon, owner of the Ilan’s chain, insists that the new deal offered at the Ibn Gvirol branch does not means the chain will be begin discounting all over the country.

“I responded only because they are a meter from my store, and I want to take from them 10% of the customers that are visiting them now,” says Luzon. “I don’t pretend to be competing with a chain that sells coffee for NIS 5. Our quality is much higher. His sandwich is bite-size, while the sandwich I sell for NIS 20 is four times that.” (In fact, the sandwiches Cofix sells for NIS 5 are identical in size to Ilan's NIS 20 sandwiches.)

Still, Luzon believes Cofix's days are numbered. “They won't even last a year,” he says. ”At McDonald's they also sell coffee for NIS 5 and nobody waits in line over there.”

The chain that could be hurt the most if Cofix rolls out nationwide is Aroma, with an estimated 40% of its sales coming from take-away. Just this August, Aroma Israel got rid of its separate price lists for sit-down and take-away customers and now charges customers based on the more expensive sit-down prices. The discount for take-away customers only remains for five items, including cappuccino, coffee with a pastry and ice coffee (a frappé style coffee made from espresso). The independently-run chain Aroma Tel Aviv has not taken any similar step.

A source close to Aroma, Israel's largest cafe chain, says it is not feeling the heat from Cofix. “All in all, they [Cofix] opened just one branch,” says the source, who asked not to be identified. “Today, nobody remembers Dunkin Donuts [in Israel], and no one will remember Cofix. ... They need at least 1,000 people coming in every day to survive, and no one will wait outside in the rain for coffee or a small sandwich for NIS 5.”

Rami Levy is impressed

The source says Aroma will not lower its prices in response to Cofix's opening, although it feels suitably threatened to offer a sandwich-or-pastry special for NIS 10.

Despite the disdain from competitors, other members of the business community believe that Cofix could be a success. “The idea to sell a lot and make a small profit is excellent and they have a good model: If you sell coffee and sandwiches without places to sit you can make a lot of money,” says Rami Levy, founder and CEO of the discount supermarket chain Rami Levy Shivuk Hashikma. “I believe that a lot of cafes will open now based on the same concept. ... I also believe that some of its competitors that sell take-away will lower their prices the more [Cofix] expands across the country.”

Rami Shavit, who controls the department store chain Hamashbir Lazarchan, also is impressed with the Cofix concept. “There is no reason that someone who gets take-away should pay the same as someone who sits in a cafe,” he says. “I think the cafes will soon have no choice but to create separate price lists for take-away and sit-down. That will turn take-away coffee and the mini-sandwich into loss leaders aimed at drawing in customers, just like the supermarket chains do with certain products."

Survey: The people demand cheaper coffee

Meanwhile, it turns out that most Israelis think the maximum price for a cup of coffee should be NIS 10.60, according to a survey conducted for TheMarker by Internet survey company Panels.

Among survey respondents, 87% had heard of the new cafe chain Cofix that sells a cup of coffee for NIS 5. If a branch of Cofix were to open near their home or workplace, 64% of respondents said they would go there regularly instead of to the cafe they currently frequent. Only 4% of those surveyed said they would not patronize the low-cost take-away cafe. Some 13% of respondents said they would patronize both Cofix and their current favorite cafe. Another 19% of respondents said they did not know which cafe they would go to.

“These figures point to a high degree of willingness among the Israeli public to adopt the Cofix cafe as a suitable alternative to other cafes today, and the prominent search of late for cost-saving alternatives,” says Panels CEO Sarit Sternberg.

Ofer Vaknin