Coffee to come – ‘Starbucks’ in Budapest

Though Budapest is rich in caf̩s, many people have been eagerly awaiting the introduction of international caf̩ chains Рnot only those who encountered them during their trips abroad, but the Budapest retail property market as well.

Rumours that a Starbucks (the “mother of all café chainsâ€?, operating 13,000 shops in 39 countries) was going to open in Budapest surfaced a few times, but they proved unfounded. Better late than never, though – Starbucks has signed an agreement with AmRest, operator of KFC and Pizza Hut restaurants in the CEE region, so that in 2008 you should be able to sip from an iconic green mermaid mug in Budapest too.
Eston International examined why this is such an important milestone for the market and the possibility of café chains becoming common in the streets of Budapest.

The concept

The first Starbucks shop was opened in Seattle in 1971, with the brilliant idea of offering Italian-style coffee (espresso, cappuccino, latte) and snacks in the United States, with the added American touch of coffee-to-go. Today, the concept has been broadened to include the sales of special coffee blends, barista equipment, a wide variety of quality sandwiches, salads, pastries, and of course, cakes. In spite of the commonly used ‘quick coffee’ image, more and more time is being spent there, thanks to an endless mania for novelty, which means that the coffee itself is lost somewhere amongst the syrups and froth.
No matter what, the lifestyle represented by these chains generates enormous demand worldwide. Their economic role is increasing; gourmet coffees are the fastest growing segment of the beverage market. Their presence in a country measures the globalisation of the consumer market, which influences, (if not directly), the interest of other international chains and also has an impact on tourism.

Where we can already have our cuppa

McDonalds introduced “McCafésâ€? to Budapest in 2003, followed by other foreign Starbucks clones such as Stardust, which operates four shops under its suggestive name, the California Coffee Company, with one shop on the Ring Road (Nagykörút) and another in the Premier Outlets Center on the outskirts of the capital, and the Coffeeshop Company on Múzeum boulevard. The biggest name is Gloria Jeans, an American chain that found success in Australia. They are active in 20 countries with 470 stores, and chose the Mammut Shopping Center for their first Hungarian outlets. Plans call for more openings, since typical regional franchise or license agreements require 5-15 stores to be opened in 5-10 years.
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Potential newcomers

Besides Starbucks, a number of other chains may decide to come to Budapest. For example, Coffee Republic, the number one café chain in London, which has already opened two stores in Bulgaria, intends to open more in the region. Barcelona’s Jamaica Coffee Shop is also interested in international expansion. Le Pain Quotidien from Brussels, which is not a real café but a superb alternative with top quality organic coffee and homemade bread and pastry, has not directly targeted the CEE region, but is already present in Moscow and Istanbul.

Cultural differences

The reason Budapest is lagging might come from fundamental differences between Anglo-Saxon and Hungarian coffee cultures. A similar justification is behind the well-founded decision of not opening Starbucks in Italy or Portugal, since the whole concept was (successfully) based on cultivating Mediterranean coffee culture in Anglo-Saxon markets.
The area’s first café opened in Buda back in 1579 thanks to a strong Turkish influence (Buda was occupied by Turks between 1541 and 1686), while London saw its first café almost 70 years later. However, drinking Vienna-style coffee became widespread in the country, with a flourishing world of classic coffee houses by the turn of the twentieth century. Italian-style became dominant starting in the 1930s, with the advent of espresso machines. These machines kept the passion alive during the years of communism, going semi-clandestine in bars and patisseries. In the mid-1990s there was a renaissance of almost exclusively Italian-style cafés, when numerous small, 40-60 sqm shops with a terrace opened all over the city.

Will the price be paid?

Another significant doubt from international café chains is uncertainty about solvent demand. Will people in Budapest be willing to pay standard 3 dollar (U.S.) price per mug? Though we should not forget that not only are coffee prices lower than in the U.S., but expenses (labour cost, rental fee, etc.) are too. Thus, selling at a lower price might still be profitable. Currently, the Budapest market apparently accepts a HUF 350-500 (USD 1.75-2.5) price/mug, the level set by McCafés. At this price, however, the demand is huge for both coffee and the lifestyle it represents. Besides strong demand from locals, major international chains would count on a large number of foreign tourists visiting the Hungarian capital conveniently opting for brands they are familiar with.

Dream locations

When a chain enters a new market, one of the most crucial points in the decision-making process is finding the right site for the first store. It usually takes up to 9 months to find a place that satisfies everything on the long wish-list of the licensor. There is a strong focus on the promotional value of the store: it should be located in a high-prestige area, with significant pedestrian traffic and at least a 7-meter long portal. Regarding space requirements, most business models work best on a 100 sqm site, though in some cases this can go up to 250 sqm, or down to 80 sqm if the location is in a shopping centre.
The same models usually allow rental costs amounting to 8-13% of sales. Consequently, with € 25,000 of monthly sales achievable under optimal circumstances and a 100 sqm store, we end up with € 20-33/sqm/month – a rental fee level hardly achievable in high streets or in top shopping centres. Future operators should prepare to pay higher fees, about € 40-50/sqm close to Váci utca or Andrássy út, or € 50-100 in shopping centres.

In that case, where?

Locating an initial flagship store in the vicinity of the special microclimate of Liszt Ferenc square or Ráday utca might be worth the higher rents, though we believe such café chains are better suited to shopping centres. Alternatively, they can find a nice and lucrative niche in the office hubs of the outer districts, or the new office axes that are growing in several parts of the capital, for example along the Hungária Ring. Office buildings and hubs close to universities (Studium at Corvinus University, Millenium Towers at CEU, or Infopark at ELTE and BME) may also be promising locations.

Looking several years ahead, the planned complete refurbishing of the Nyugati Railways Station, the development of the neighbouring Eiffel Square, or the already-announced new city centres such as the Corvin project or Duna City may also provide good entry points for café chains. Once in Hungary, expansion into other towns, (preferably ones with lots of students) is a clear option.

All in all, we expect that more café chains will enter Hungary in the coming years, with their first stores opening downtown or in shopping centres, and subsequent expansion into office hubs and new city centres.

The analysis has been published in the freshest issue of Property Watch.