The popularity of coffeehouses is skyrocketing in Russia
Image courtesy of Vladislav Vorotnikov
Traditionally a fervent tea-drinking country, Russia is a promising emerging coffee market as consumers are embracing the Western coffee culture. But as coffee shop chains and independent coffeehouses continue opening steadily in major cities, the competition is becoming fierce. By Vladislav Vorotnikov
The combined sales of coffeehouses in Russia is set to jump from RUB 130 billion (USD $2 billion) in 2018 to RUB 1 trillion ($17 billion) in 2028, a marketing study conducted by London-based commercial real estate firm Knight Frank said. The growth is attributed to the urbanisation and the so-called ongoing Europeanisation of the citizens of Moscow, St Petersburg and other big cities, which means they are increasingly embracing the Western way of life.
As of today, the average Russian citizen drinks only 21 litres of coffee per year, Knight Frank estimated. This is significantly lower when compared to European countries with a similar climate, such as Finland and Sweden, where the average consumption stands at around 200 litres per capita, Knight Frank pointed out.
Historically in Russia, all big trends start in Moscow and then spread from there all over the country. In 2018, coffee consumption in Moscow was around 41 litres per capita, almost two times higher than the Russian average, Knight Frank said. The main cause for this is that citizens began drinking more coffee outside of their homes. This means that in Moscow alone, sales in coffeehouses could grow from RUB 30 billion (USD $480 million) in 2018 to RUB 120 billion (USD $1.9 billion) in 2028.
Viktoria Kamlyuk, director of the street-retail department of Knight Frank, said that there has been an overwhelming demand for new coffeehouses in the Russian capital. She added that coffeehouses were being built virtually everywhere, including in transport hubs, densely populated residential communities and near train stations, so the basic forecast is that by 2023 there would be three times more coffeehouses in Moscow than in 2018.
In Moscow, a half of the economically active population is purchasing coffee in coffeehouses, and 25 percent of consumers do that every day. Moscow, the coffee capital of the country (it accounts for around eight percent of the Russian population), houses 1,000 coffee shops. For instance, in 2018 there were 5,000 coffeehouses officially registered in Russia, according to Knight Frank.
It is remarkable that sales in coffeehouses have been booming amid the overall crisis in the Russian hospitality industry. The revenue of Russian restaurants and cafés shrank between 2014 and 2018, with thousands of companies in the industry closing their businesses during this period. Some stabilisation was recorded in 2018, yet it is too early to say that a recovery may be on the way, said Igor Bukharov, president of the Russian Federation of Restaurateurs and Hoteliers.
It was estimated that in the past few years at least 35 percent of restaurants in Moscow recorded losses, said the Russian Gazette, the official publication of the Russian government.
In 2018, the number of visitors in Moscow restaurants and cafés was 11 percent lower compared with the previous year. Conversely, in the coffeehouse segment, the flow of visitors increased by 23 percent, Knight Frank estimated. This statistical data could be attributed to a more dynamical lifestyle among young consumers and the reduced purchasing power of the population.
The main point is that a coffee-to-go is cheaper than a cup of coffee in café, Knight Frank stressed. The price is what really matters for Russians these days, since the purchasing power of the population has been gradually falling since 2014 – at least 40 percent of the local population reportedly must save money for food.
Almost all analysts in Russia believe that the domestic coffee market is set for the rapid growth in the coming decade, although there are differing opinions on the pace of that growth.
Mikhail Burmistrov, general director of the Moscow-based market research firm Infoline-Analytics told Russian newspaper Kommersant that the increase would be limited to 150 percent by 2025. Burmistrov said that in the next several years, the pace of growth in the industry was expected to be within 20 percent per year and it would be primarily driven by expansion in the coffee-to-go segment and the rising number of “discounter coffeehouses” – coffeehouses offering their products at lowered price under various promotional offers and discounts.
One important fact to note is that the past few years have seen a tremendous shift in coffee consumption in Russia. Earlier, coffee was considered as a side drink that was almost never ordered alone – without any food items – but now coffee is perceived as a fully independent product, Knight Frank explained. The culture of coffee consumption has begun to take shape in Russia, and it is expected that this process will continue to gain momentum in the country in the next several years.
Since Soviet times, Russians were tea lovers, but the new consumption culture is likely to change that, and so some forecasts predict that the demand for tea will shrink in the coming years.
The skyrocketing demand for coffee in Russia is something that brings development opportunities for both existing and new market players. In the coffee-to-go segment, the entry ticket is very low. Knight Frank estimated that it takes only RUB 500,000 (USD $8,000) to purchase some basic equipment and open a coffeehouse. This is the lowest figure in the entire foodservice segment.
Given this, the biggest companies have been actively investing into expansion. For example, Traveler’s Coffee, one of the biggest coffeehouse brands in Siberia, increased its chain from 66 outlets in 2013 to 98 in 2018. Starbucks Coffee expanded its network in the country from 75 to 128 during the same period.
In addition, some major market players were established in the past couple of years. Moscow-based DoubleBe expanded its chain Moscow, which is considered the market leader with around 400 coffeehouses now, did not even exist in 2013.
The bright forecasts for the future of the Russian coffee market also open vast opportunities for some foreign investors. Israel-based coffeehouse chain, Cofix, recently unveiled plans to expand its presence in Russia by a factor of 2.5 times through 2020. As of 2019, the company runs 120 coffeehouses in Moscow. In the coming year, Cofix intends to open 160 coffeehouses in Moscow, and 20 in St Petersburg, Irkutsk and Kazan, Vladimir Sadovin, a spokesperson for the Cofix branch in Russia said.
According to the Russian think tank, RRG, which is a local partner of Starbucks, the Seattle, Washington-based chain estimates opening between 80 and 100 new coffeehouses in Moscow and between 20 and 30 in St Petersburg. The company is constantly looking for new opportunities to expand business in Russia, reported the press service of Starbucks. Additionally, Starbucks intends to open its first Starbucks Reserve Bar in Russia this year.
Another company, Yerevan-based Coffeecell, plans to invest USD $5 million into expansion in the Russian market. In the coming few years, Coffeecell expects to open at least 50 coffeehouses in the country, Narek Syrakanyan, a spokesperson for the company said. In the future, Coffeecell also plans to sell franchises in Russia.
Some Exceptions to the Coffee Boom
On the other hand, the coffeehouses of the classical format (those with waiter service like cafés) may be experiencing some difficulties on the market these days, said Maksim Makshanov, owner of the Russian coffeehouse chain Coffee Set. Basically, the growth pace in the industry is ranging between 11 and 12 percent per year volume wise, while in the coffee-to-go segment growth is close to 25 percent, he said.
There are changes in the industry such as coffeehouses of a smaller size gradually becoming more popular than those occupying larger spaces, Makshanov said.
Unlike most other coffee chains, Coffee Like has rather strong positions in Russian provinces, but is weak in Moscow. The company announced plan to invest RUB 10 million (USD $140,000) to open 10 new coffeehouses in Moscow over the next few years. Alexey Gusakov, director of the company said that the profitability of his business was around 40 percent. The net revenue in 2018 was RUB 1.3 billion (USD $20 million).
As of today, there are 18 coffeehouse chains in Russia that have a presence in more than one region and more than 100 chains in total. It is believed that both figures will grow rapidly in the coming years.
Despite growing sales and great opportunities in the Russian coffeehouse industry, competition is getting fiercer. In 2018, a coffeehouse in the Russian chain Academy Coffee was set on fire. The short investigation revealed the culprits to be employees of Traveler’s Coffee. On 2 October 2018 the local court arrested Anvar Piriev, co-owner of Traveler’s Coffee, for this incident.
Looking Beyond the Borders
Russian coffeehouses are getting stronger and are starting to look to markets outside the post-Soviet space. For instance, DoubleBe has opened coffeehouses in Prague, Czech Republic; Barcelona, Spain and Dubai, United Arab Emirates, and announced plans to launch projects in London, England and Berlin, Germany.
Another Russian company, Pravda Coffee intends to open its first coffeehouse outside Russia in the city of Almaty, Kazakhstan. Pravda Coffee said it was going to focus on expansion outside Russia in 2019 and 2020.
Several years ago, Traveler’s Coffee announced plans to open 500 coffeehouses in Russia and China. In 2015, however, the company reported that it had to close all locations in China since they were generating losses. There is no information whether the company plans to leave the Chinese market completely.
- Vladislav Vorotnikov is a Moscow-based multimedia B2B freelance journalist who has been writing about the tea and coffee industry since 2012.