Why Starbucks Failed in Israel

The Shekel Before the Storm
Why Starbucks Failed in Israel and why the falafel ball need not worry about
being replaced anytime soon
By Stephanie Freid
GA Magazine/Ha'aretz
15/11/2008

In my parallel-universe food fantasy, a dream day goes something like this:
Get the morning going with a kick start from sugar-glazed dough-nut holes,
washed down with a Starbucks grande non-fat latte, hold the foam. At midday,
order a thin-crust, vegetable-loaded extra-cheese pizza. For dinner, it's
off to KFC for a bucket of crispy chicken with a side of mashed potatoes and
gravy.

Of course, my fantasy world doesn't include cellulite.

But real-life fat content isn't the only obstacle to the fulfillment of my
cravings, which took root in the red, white and blue land of fast food,
where I was born and bred. That's because I live in Israel now, and although
Israelis tend to embrace American music, fashion and popular entertainment
trends, American food chains have not always fared favorably in the land of
milk and honey (not to mention falafel and shwarma).

Ben & Jerry's shops, Dunkin' Donuts and Starbucks have all made an
appearance on the Israeli victuals scene, only to quietly fade away shortly
thereafter.

Other restaurants, like Pizza Hut and Kentucky Fried Chicken, are still in
business but have either shut down many of their branches or never quite
managed to penetrate the market.

"In my opinion, the secret to success or failure is simple: If any chain
tries to come into Israel's market, they have to adjust to local tastes,"
says Arnon Volosky, chief executive of Israel's Ethnic Restaurant
Association.

One important element that distinguishes Israeli food habits is kashrut.
Even though a minority of Israelis consider themselves religious, many more
adhere to traditional practices like not mixing meat and dairy. "If a
cheeseburger is a best-seller in the U.S., logic will tell you that it
probably won't go in Israel," says Volosky.

Another aspect of the munchies market here is the Mediterranean palate,
which some see as being at odds with the high-fat junk food so popular in
the United States.

"It's a hot country, so we don't eat a whole lot of greasy food. Even
deep-fried falafel, prepared properly, isn't greasy," says Nir Zook, chef
and owner of Jaffa's prestigious Cordelia Restaurant and Noa Bistro and host
of Israeli cooking show "Zookaria."

Three years ago, there were only two KFC branches, down from eight at its
peak, says Udi Shamai, the CEO and owner of the Pizza Hut and KFC Israel
franchise. But although he says the number of branches is climbing again, up
to 10, existing branches are continuing to shut down - even if other ones
are opening elsewhere - which may be contributing to the widespread view of
the chain as a failure in the Israeli market.

Dunkin' Donuts broke world chain sale records when it opened its Tel Aviv
branch in August 1997, selling 3 million donuts in the opening month.
"Israelis do not stop eating doughnuts," Tel Aviv operations manager Asa
Reshef told The New York Times at the time.

But Dunkin' Donuts franchisees folded their pastry-chef whites a mere five
years after opening. Apparently, Israelis do in fact stop eating doughnuts -
usually right around the end of Hanukkah.

American chains like Ben & Jerry's, Kentucky Fried Chicken and Pizza Hut
arrived here in the late 1980s. Nowadays, you can buy your B&J ice cream in
pint form at the supermarket, but gone are the branch stores selling
chocolate-coated cones filled with generous dips of chunky monkey or
chocolate chip cookie dough. And while there are still 24 Pizza Huts across
the country, that number is down by roughly half since its peak (though the
franchise owner wouldn't give an exact number).

Starbucks was perhaps the biggest surprise when it comes to failed chains in
Israel. Half a dozen branches opened in 2001, but the caffeine didn't
provide enough energy to keep the chain running more than two years.
Starbucks "lacked a marketing strategy specific to this region. They were
relying on their reputation to pull it off, and it didn't pan out," one ad
executive said. "They came into Tel Aviv, where coffee-chain competition is
already at a premium."

Indeed, the country is chockablock with competing cafes; one popular chain,
Aroma, has been so successful it decided to branch out to New York. Unlike
the local cafes, Starbucks also offered too limited a choice of foods, some
say.

Local competition and Israeli culture aside, it appears that at least some
of a chain's success may be due to timing and luck. After all,
California-based The Coffee Bean & Tea Leaf has about a dozen branches in
Israel, and the country has been home to McDonald's for years. But time and
again, food experts and amateurs alike pointed to the failure of some
American fast foods to adapt to the reality of life in the Middle East,
where falafel, it seems, is in little danger of being replaced by the burger
or the chocolate-frosted doughnut.

In Israel, "you wait a really long time for American fast food to be ready,"
says Ra'anana resident Peggy Weinreich, a translator who moved to Israel
from Ohio in the late 1970s. "Israelis are used to fast food that is really
cheap, like falafel and shwarma."