Will Europe Warm to Starbucks?

France's different coffee-drinking culture and a German partner bailing out are Continental challenges for its aggressive expansion plan

By Eric Wahlgren

Parisian Julien Grollemund is living proof that American coffee-to-go chain Starbucks (SBUX ) has a shot at taking hold, even in famously leisure-loving France. Once a week, the 25-year-old marketing executive buys his morning cup of coffee at one of the Paris area's 10 Starbucks stores -- all squeaky clean and smoke-free.

"Starbucks is great when I'm late for work, have my car, and want my coffee American-style," he says. But most mornings, Grollemund still gets his caffeine fix at a well-worn Parisian café like le Saint André, where he was sipping an "express" at the bar on a recent weekday. "Culturally, this is just an environment that I feel more comfortable in," he says, puffing away on a cigarette.


  Heating up European growth is one of Starbucks' main goals, and converting French coffee drinkers such as Grollemund is a key test. The Seattle-based chain's international operations finally turned profitable last year. But it's not clear whether its European business alone is making money. And overseas operations for fiscal year 2004, ending last Oct. 3, generated a mere $53.3 million in operating profit -- only about 6% of Starbucks' total for the year, excluding special items.

As Starbucks strives to maintain 20% annual revenue growth over the next three to five years, half of the 30,000 new stores it plans will be overseas. That's hugely ambitious, considering that Starbucks has about 8,500 outlets worldwide now. Moreover, it needs Europe to pull its weight. But as of the end of fiscal 2004, the Continent had only 539 outlets, about the same as the much smaller Japanese market.

In France, Starbucks hopes to benefit from cultural change in a country where lingering at family-run cafés is something of an art form. Since the company launched its first French café on the Avenue de l'Opéra on Jan. 16, 2003, nine more have opened in high-traffic locations around Paris.


  So far, Parisians don't seem to be balking at paying top-Euro for caramel macchiatos and other beverages in paper or plastic cups. Starbucks lines can be long at peak times, with seating hard to find. Reviews seem generally positive. "You're not sure to find a place to sit, but the service is good, and the coffee is good," says Martine Fouillaron, a 52-year-old teacher, nursing a Starbucks coffee at a café table along the Boulevard St. Germain.

However, making money across the Continent may be no easy brew for Starbucks, whose latest quarterly report will be out on Jan. 26. Starbucks is now in nine European countries, but its expansion hasn't been smooth (see BW Online, 6/9/03, "For Starbucks, There's No Place Like Home").

For one, Starbucks recently had to shore up operations in Germany, where it has the biggest presence on the Continent. In November, 2004, it acquired the 82% stake held by its German partner, KarstadtQuelle, which said it wanted to focus on its core department-store businesses. "Starbucks was never really profitable for KarstadtQuelle," says Stefan Weiss, a WestLB Equity Markets analyst in London who covers the German outfit.


  Starbucks wasn't necessarily in the red in Germany, analysts say. While a licensing deal could be a money loser for the partner operating the stores, Starbucks could still be reaping a profit, says Carl Sibilski, a Morningstar analyst in Chicago. Starbucks typically gets a cut of revenues, profits, as well as licensing fees, analysts say.

But Sibilski adds: "What really matters to be successful long term is that partners on the ground are also making money." At the end of fiscal 2004, the chain had only 35 German outlets, apparently not keeping pace toward its goal of 200 stores by 2006.

In an e-mail to BusinessWeek Online, Starbucks Chairman Howard Schultz says the company doesn't comment on its partner's business. But he says Starbucks has been well received in Germany, and the chain is now in more than 15 cities there, including recent additions in Munich and Nuremberg. "We believe [Germany] will be one of the strongest markets in Europe," Schultz says.


  In France, Starbucks is building its operation as a 50-50 joint venture with Spanish firm Grupo Vips, also the chain's partner in Spain. Analysts say France may present some of the same challenges Starbucks has faced in Germany and other European countries. For starters, real estate and labor costs are likely to be higher than opening a new outlet in, say, suburban New Jersey.

In Paris, Starbucks has set up shop in high-prestige areas such as the student mecca of St. Germain and the tourist crawl of Avenue de l'Opéra. "These are very expensive sites," says Luc Heitz, chief executive of Columbus Café, a French-run coffee-store chain.

What's more, France has notoriously tricky employment laws, making it hard -- and costly -- to hire and fire employees. Minimum wage here is currently $9.92 an hour, 93% higher than the U.S. hourly minimum wage of $5.15.


  Beyond this is the competition, and not just from the more than 50,000 traditional French cafés where coffee drinkers typically flock for their express -- a short and strong shot of coffee. These days, newer French-operated takeaway coffee stores like Columbus Café often sell lower-price beverages.

Privately held Columbus, with more than 30 stores in France, Belgium, and the Middle East, charges $1.75 for an express, vs. $2.40 at Starbucks. But many of the fancier coffee drinks cost about the same as at Starbucks. Columbus Café, after initially heavy startup costs, now turns a profit.

Schultz says he believes there's "plenty of room" for a variety of coffee retailers, but that he's mindful of France's historic café culture. "We realize that our success is not an entitlement, and we will continue to work toward building the trust and respect of our customers every day, one cup at a time," he says


  It's too early to tell if France's relatively positive reception to Starbucks so far is just a temporary fascination. "Starbucks has understood that society was moving in a different direction," notes Bernard Quartier, who represents France's café owners in the Union of Trade Workers & Hotel Industries.

But says Quartier: "Maybe there will be a more French chain that will respond to the change. Coffee and muffins are O.K., but we French have such good pastries."

Indeed, there's always the chance most French coffee drinkers will ultimately opt for something, well, more French.

Wahlgren is a reporter for BusinessWeek Online in Paris

Edited by Thane Peterson

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