Ukraine Coffee Houses Feel the Heavy Impact of Crisis
There are significant differences in beverage preferences among Ukrainians living in the eastern and western regions.
By Vladislav Vorotnikov
Ukraine’s coffee houses are struggling for survival due to an economic crisis, armed conflict that embroils the eastern portion of the country, and a sharp decrease in the purchasing power of virtually everyone.
Despite these troubles, market participants look to the future with some optimism, claiming that the wave of revival is already under the way.
According to Olga Nasonova, c.e.o. of Restaurant Consulting, nearly 1,500 food service outlets closed in 2014. Include the Crimea and the embattled east and the figure climbs to 5,000. Nasonova estimates that in the past two years the number of coffee houses operating in the Ukraine declined nearly 25%. McDonalds Ukraine, which operates 79 restaurants in 23 cities, closed its Crimean restaurants.
“I do not want to exaggerate, but the restaurant market is on its knees, with a serious number of closures,” says Kyiv restaurateur Elena Dtolyarova, adding that coffee houses as well as other food service businesses suffer from a number of systemic problems related to the Ukraine economy.
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“Among the factors that mostly influenced the catering market in Ukraine there are: a lack of reforms in tax system, a lack of available loans, high tariffs on communal services, devaluation of the hryvnia (currency), as well as significant reduction in the number of companies-importers of food and as a result - the lack of competition on the market of imported products, which leads to a permanent increase in the cost of raw materials,” she added.
According to Nasonova, the rise of rent is the single biggest problem as most fees are tied to hard currency. The Ukraine hryvnia has dropped nearly 2.5 times against the dollar and euro since the beginning of the crisis. For coffee houses in particular the rise in the cost of imported coffee beans is compounded by the fact that most citizens cut back their spending on coffee out of home.
“Coffee shops are completely dependent on the price of the dollar and the euro,” said Alexandra Lazar-Borovitskaya, the owner of the Mindal Coffee Room, a chain of coffee shops.
“Coffee machines, we have to buy with euros at new exchange rates [after the collapse of Ukraine currency]. Coffee beans are priced in dollars. An even greater problem than currency is suppliers: due to currency fluctuations they are starting to postpone deliveries,” he said.
There are record numbers of Ukraine coffee houses up for sale or for rent, as owners who launched in better economic times have since failed to figure out how to keep their business profitable.
“The number of ‘handed for rent’ places for cafe and restaurants, often with all equipment, clearly shows that not all caterings were ready to cope with the challenges of the crisis,” said Andrei Papko, c.e.o. of the MAFIA caterings chain.
Ukraine Coffee Houses Feel the Heavy Impact of Crisis
Most Ukranian coffee houses have expanded food menus during crisis
Young market
The first coffee shops in Kiev opened in the 1990s shortly after the collapse of the Soviet Union. This segment of the food service market remained largely unexplored for a long time, especially in the east. Market participants noted important cultural and taste differences between Ukrainians in different regions. This influenced the expansion strategy for most coffee chains with ambitions to serve the entire country.
“While in the west of Ukraine there are a lot of coffee shops, far more than in the eastern and central part of the country where their numbers are still rather small. In eastern Ukraine, due to its proximity to Russia, there is a strong tea tradition. Demand for coffee in general is weak. Consumers in the east, most often drink instant coffee. People are not going to a catering (food service outlet) simply to buy coffee, they are going out to get some food,” explains Yaroslav Volynets, director for economy and foreign economic relations of Galka Ltd., the largest coffee manufacturer in the country.
In the west, in cities like Lviv and Lutsk, the coffee house segment is still rather new. Since 2014, when the average check was stable the local currency has been reduced nearly two times (UAH130 is now worth only US$5.00), leading to significant losses to shop owners who must still purchase coffee beans with hard currency.
Nasonova estimates there were close to 20,500 foodservice locations in 2014, a number that by the beginning of 2016 has dropped to 15,000. She said 15-20% of this total is coffee shops with chains like Double Coffee closing as early as 2014. Currently, with a population of 42 million she estimates there are 24 coffee houses per 1,000 citizens, a number believed to be much lower than in neighboring Poland and Romania, but still a little bit higher than in neighboring Russian regions.
Experts estimated that coffee houses account for 20-30% of overall coffee consumption. Prior to the crisis the number of shops was growing steadily at 7-8% per year. Margins rose to 15% for shops with wise management, while the average check in 2013 was about UAH120 (US$9.50).
Despite these challenges business owners are trying to stay optimistic about the current prospects of the market, since Ukraine is still one of the most promising in Europe. As the harsh times end, they predict a wave of revival that may bring good money to the companies that survive.
“We believe that now it is really a good opportunity to start business. The market will inevitably grow, as recession necessarily will be followed with a rise in spending. I hope it will not be more difficult than it is now. Starting a business during a recession is justified because the threshold of investments in the business entry is lowered,” said Inna Sosnovskay, co-owner of the coffee houses chain EspressamenteIlly.
“Right now we see the time period of getting business to the payback point is increasing. At the moment [for coffee houses] it is almost impossible to earn. We believe that only the strongest companies will get through the current challenges. Only those who will invest in services and products will survive. Those that do in two or three years will see a very good result,” she added.
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Ukraine Coffee Houses Feel the Heavy Impact of Crisis
Ukranian coffee houses sees sharp reduction in number of clients.
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Ukraine Coffee Houses Feel the Heavy Impact of Crisis
Ukranian Coffee market in the country is going through hard times.
Coffee shop to simple cafe
Every company has its own recipe for dealing with the current crisis. One important trend is to expand the menu, a technique employed by a large number of coffee houses.
“A coffee house in a pure form is quite a risky format for Ukraine since its clients are mainly coffee gourmets and there are only 2% of them in the world. In the Ukraine this figure is even less. As the result, the client-base is being created rather slowly, while profitability of such business is only about 10% [even in better times],” Nasonova explained.
“After the beginning of the crisis we saw the steady decrease in profitability, by mid-2015 we were operating with losses. Approximate estimations show that we should go bankrupt within 6-8 months. As the result we expanded the menu, introducing a limited range of food, as most of our coffee houses didn’t have large kitchens. This brought a good result and now we are at least managing to make both ends meet,” reported a spokesperson for one coffee house chain who wished to not be named.
Managers estimate that food sales generate up to 45% of the whole profit of these businesses and during the crisis this figure is growing. As the result, most are adding more food to the menu. Still, some experts warn that this approach might bring negative impact to the long-term strategy, since coffee shops that operate as cafes risk losing their identity.
“One of the most important marketing rules is the rule of brand positioning. Studies in this area show that the expansion of the product range of goods does not lead to an increase in the number of clients. Therefore, for the coffee brand, first of all, it is important to adhere to the standards set by the brand name, and not to turn the coffee shop at the simple café,” says Olga Paly, owner of the Golden Ducat.
Another challenge is the emergence of mobile kiosks and coffee bars on wheels (coffee carts). According to Alexandr Voevodin, owner of the MyCoffee chain of coffee bars, there has been a sharp jump in the number of orders for franchising mobile coffee carts in different regions of Ukraine.
“I’m pretty sure that in the times of crisis large numbers of people are reducing activity saving money on advertisement and business promotion, so as the result competition in this period is significantly lower. Many businessmen are not opening anything new, trying to hold on during harsh period, while for others of them this is a period of opportunities, as people never stop drinking coffee,” Alexandr Voevodin explained.
With no rental fees, lower taxes, and the opportunity to deliver quality coffee right to the offices and homes of the clients, rolling coffee bars lure a significant number of clients from coffee houses. Experts suggest that this trend may push segment further into recession, even after an overall restoration of the country’s economy.