Cup 'O' Critical Mass

The Cup 'o' Joe chain has shown it doesn't need a branch on every Tel Aviv corner to expand its business. And don't expect any risky adventures abroad.

The story of the Cup 'o' Joe chain (known as "Cafe Joe") is the story of Israel's whole cafe industry. A decade ago there were only private, single-branch cafes dotted here and there throughout the land. Today those are the minority: The sector is dominated by chains.

The first Cafe Joe opened in 1997 on Hahashmonaim Street in Tel Aviv. By 2002 there were five. Now there are more than 60 outlets around the country. "During the first five years, our main job was to market the coffee we produced to restaurants," recalls David Klein, one of the chain's owners.

"Then we identified the need to define ourselves as a chain. Once people would choose their cafe by the brand of coffee served there. Today they choose by the name. We saw that to head off a conflict of interest, we needed to sell the coffee to fewer places and reduced our delivery from 120 restaurants and cafes to 30."

These days Cafe Joe produces 12 tons of coffee a month. Most of that is served to people at the chain's outlets, but some still goes to Dan hotels and certain other cafes. "I'm not sorry," says Klein. "A cafe is much more profitable."

The chain turns over NIS 220 million annually, plus NIS 50 million a year comes from its production plant.

Klein, 43, made aliyah from the United States in 1994, before which he ran the Giorgio Armani brand in Boston. He was about to do the same in Denver. But when visiting his sister in Israel, he met his future wife and stayed. He worked as a maintenance man at a date production plant, without a specific plan for the future. Then opportunity beckoned. A friend, Dov Goldfarb, suggested they open a cafe. The very next day they started looking for a location.

What race against Aroma?

It took a while for them to decide to open more. "When we began, cafes were practically all in the cities and most were privately owned," he says. The statistics were unpromising: Half would close inside a year.

Chains stood a better chance. By 2007, Cafe Joe numbered 20 outlets. In the life of every chain, there comes a phase when you need critical mass; it's the most financially hazardous time. Klein is glad that's behind him. By now, Cafe Joe has a strong brand and that risky time of needing to open branches just for the sake of reaching critical mass is over.

The past year was characterized by smaller chains trying to outdo Aroma, which has more than 100 branches. Cafe Cafe, for instance, plans to open 20 more branches by year-end, adding to its 96.

But Klein harbors no such ambitions. Aroma is no yardstick for him. He sees no particular upside in upstaging Aroma: Cafe Joe only opens branches where it feels it appropriate. It has 62 outlets, of which five opened in 2009. This year it intends to open 10, maybe more.

And no, Klein isn't afraid of lagging behind. He feels fine sitting at an Aroma cafe at a mall. "We compete but don't get in each other's way because our clientele is very different," Klein says. "Cafe Greg and Cafe Cafe got into the industry after us. Our advantage is seniority."

Over the years, Cafe Joe has built a diversified, unique menu, he says, without compromising on the quality of its coffee. "People still come to us to drink coffee or to take coffee home. We didn't forget our roots."

So how does Cafe Joe plan to contend with the trend among people in central Israel, mainly Tel Aviv, to prefer neighborhood cafes rather than chains?

"The outlets we open this year will be mainly in the periphery," Klein says. Tel Aviv is chock-full of cafes. A chain has to appeal to the broad population, while a neighborhood cafe can adapt to appeal to local tastes, be they artists or gay people or whatever, he explains. But he begs to correct a misconception: It isn't true that Tel Avivians don't like chains. A Cafe Joe outlet sells 10 times more than a neighborhood cafe in Tel Aviv. People appreciate the consistency, Klein says, playing down the need to expand in Tel Aviv.

"There's a limit to how many branches you can open in one city. I don't need 60 branches in Tel Aviv to cover the city and I don't want to cannibalize myself."

The missing second cup

For all that the chain continued to expand last year, the cafe industry felt the recession. If 2008 hadn't been such a bonanza year, the last one would have been harder, Klein says. "Suddenly, after growing like crazy, we felt a decline, so it was dramatic. In 2009 our same-store sales fell by about 9%."

But restaurants, fashion stores and the like suffered more than cafes did, he says. What the cafes lost was people buying a second cup of coffee. People might come in at 8:30 A.M. for a cup of joe and not stay to buy another - they'd have their second coffee at the office.

The chain coped by thinking of cheaper dishes and increasing its range of business deals. Branches that hadn't offered business lunches began doing so, Klein says.

Although stock market players may say the recession is over, the cafe industry isn't so sure. "People are still cautious," Klein says. Moreover, the chain can hardly roll back the business deals or meals for NIS 19 that it offered during the hard times.

Not all has gone smoothly for Cafe Joe. It opened an American diner-style restaurant in Herzliya Pituah in 2008 that closed after six months. It was a pilot that didn't take off, Klein says. The menu had been based on grilled food, hamburgers and french fries. They invested NIS 2 million but they had to offer mainly business lunches to the business crowd, profit was thin and the concept didn't work. They haven't abandoned the idea completely but have to rethink it with Israeli tastes in mind.

And while Cafe Cafe and Aroma have spread their wings and attacked foreign markets, Klein says Cafe Joe has absolutely no intention of doing so. "We're not a brand abroad," he says. "I don't feel like starting from scratch overseas. Just as Starbucks didn't make it in Israel because it didn't adapt to local tastes, I'd have to adapt the chain. The American market is packed and is dominated by the taste of Starbucks." There are also enough diners.

He sees more potential in Europe, but it's a question of focus, Klein explains. Some chains may want to go there, but he doesn't understand what's driving them. "We think we have plenty left to do in Israel," he says. He enjoys taking everything he's done and learned over the years and making money on it. It's good.