Brewing Up a New Chapter at the Arcaffe Chain

Sarah Shemer is a very strict woman, perhaps too strict, she says. Arcaffe, the chain of coffee shops founded by Shemer eight years ago, now has eight branches. "A slow growth rate," she admits, "but that is the price one pays when one goes into detail, when one is not willing to compromise."

Other chains, not only in the food industry, have grown rapidly in recent years, via the franchise system. Sara and Jacob Shemer, however, chose to work on their own. "During our eight years of operation," says Sara, "we have been approached by hundreds of people who have wanted to buy a franchise and open an Arcaffe branch, but we decided not to go with just anyone."

Now the Shemers are changing direction, and have decided to sell a master franchise license to a group of investors headed by Tamir Barelko, who has been serving as the chain's CEO. While the group will open and run coffee shops under the Arcaffe name, the Shemers will continue to open additional branches and will soon appoint a new CEO.

Sara explains that the sale of the master license will allow the chain to expand faster. The group of investors will pay royalties to the Shemers and the brand will retain its quality because the Shemers will still be in control of it. Sara promises that there will be no difference between the branches opened by the Shemers and those opened by Barelko.

"Our role is to create growth channels," she says. "The new chain is another channel, as it provides the employees with another option for growth and advancement."

Shemer declines to disclose the franchise fee paid by the group of investors, or how much royalties they will pay, preferring instead to focus on what she says is the most important aspect of the deal and will ensure the level of quality - the sale of just one license and not the sale of many franchises to different people, as the Aroma chain did.

"The franchise system can create a problem," she says, "but in order to increase growth in a business rich in resources and employees, going it alone is impossible."

The average investment for setting up an Arcaffe branch is $500,000, says Shemer, who is unwilling to disclose the chain's revenues. Sources in the restaurant industry, however, estimate that in 2002, Arcaffe's revenues were NIS 55-60 million, compared to NIS 46 million in 2001.

"We are trying to grow in the best possible way - by granting a franchise to the man who was our CEO," she says. "We have the exact same understanding of the values of the brand. That cannot be said about anyone unless he has run a business with the owners."

The first Arcaffe branch was opened in 1995 and now, in addition to the eight branches in Herzliya, Tel Aviv, Ramat Aviv and Ramat Gan, the chain operates five stands at malls in the Dan region. In the coming months, two more branches will be opened - in Ra'anana and Netanya. In 2004, the owners will open three branches, as will Barelko's group.

Shemer does not mention her competitors, but it is clear that she is well aware of what is happening in the market. The Aroma chain has expanded rapidly via the sale of franchises, and currently operating 28 branches - 25 of which are franchises. An Aroma franchise costs $50,000 and royalties are 3-5 percent of turnover. It costs about $250,000 to set up an Aroma branch.

"Our relationship with our franchisee are very defined," Shemer says. "New branches will be opened only with our approval. We are taking assets that we have built up over the years and are planning to forge ahead with them."

Shemer notes that Barelko was a partner in the building of the infrastructure that now facilitates rapid expansion.

When asked how many Arcaffes she thinks the Israeli market can support, Shemer notes that there are thousands of cafes operated by independent entrepreneurs. "This shows that we have barely scratched the surface of our potential," she says.

Shemer rejects the notion that Arcaffe appeals mainly to clientele from northern Tel Aviv and the southern Sharon region. "The feedback cards filled out by our customers show that many of them come from Rishon Letzion and Netanya," she says. "We won't have to invest in order to succeed in those cities."

Shemer admits that Arcaffe's prices are high, but notes that the chain is not trying to court consumers with prices, but rather with quality. "We are operating in a competitive world and our customers are demanding, educated and knowledgeable. The have been overseas and know what they like."

Shemer says Arcaffe's secret to success is the perfect combination of Italian coffee, French baked goods, American service, an international atmosphere and, above all, an eye for fine details. She is proficient in everything that goes on at Arcaffe - from the design plans and through to the glass cups used for serving the chain's homemade yogurt.

At the Arcaffe branch on Basel St. in Tel Aviv, there seems to be no differences of rank in Shemer's relationship with the employees. The smooth management is not surprising. Shemer is a seasoned marketer who has a doctorate in mass communications; she used to manage the research and strategy department of the Gitam BBDO advertising agency and has worked in marketing consulting. When asked who Arcaffe's marketing manager is, she smiles and replies, "Me."

Arcaffe's headquarters has 19 employees who manage and provide services for the chain's branches and the production division, and also work on brand development, including quality and service control.

Arcaffe has a few strategic partnerships whose purpose is to maintain the quality of the products. In 1994, Arcaffe signed a strategic agreement with Arcaffe Italy and developed a special blend of coffee for the Israeli consumer. In 1995, Arcaffe set up its own roasting facility. And in 1997, Arcaffe's bakery was built and know-how agreements were signed with the Parisian Maison Kayser bakery and two Italian bakeries.

Arcaffe recently announced the investment of $2 million in the construction of a central production plant in Netanya. The 2,100-square meter plant will house a roasting facility, bakery and central kitchen. "The new plant will mean that we can expand our chilled and frozen baked goods operations," Shemer says, noting Arcaffe's unique self-sufficiency in providing its branches with all the products they need. "This gives us much more freedom in our development."

Arcaffe does not invest in advertising, apart from minor participation in a television advertising campaign for the Ramat Aviv mall. "We don't need advertising," explains Shemer, "because we meet with our consumers very often. Some 1,000 to 2,000 people visit each of our branches every day. We practice focused marketing because in our field, the customer's experience at the sales outlet is important."

Shemer views the opening of the Ben-Gurion 2000 project as a turning point for Arcaffe. "Our location in the departures terminal is worth more than 10 branches from the perspective of exposure to the brand. It is an opportunity for consumers from both Israel and abroad to meet Arcaffe."

The new airport terminal is due to open in 2004.

One of Shemer's future goals is to open branches of Arcaffe in New York and Europe, but she is waiting for the right business climate and the right local partner who can make such a move a success.