Why the high-profile difficulties that Starbucks and KFC encountered should not deter franchises from entering the Israeli market
So, the story goes that in 1998, Howard Schulz, the legendary CEO of Starbucks, sits down for a cup of coffee in the equally legendary King David Hotel in Jerusalem, and is shocked by the bland, flavorless brew he is served.
Assessing that Israel is a “coffee backwater”, he sets out to find a partner to open 200 Starbucks coffee shops. Fast forward to 2003. With just six shops opened, Starbucks withdraws from the market.
Starbucks never returned to Israel. But another high-profile company that withdrew from the market – KFC – is now making a fourth attempt to find success in Israel. KFC entered the market in the early 1980s. As opposed to Starbucks, whose entry was in response to a perceived opportunity to improve upon poor product offerings, KFC had a heavier lift because fried chicken on the bone was not a ‘thing’ in Israel. Fried chicken breasts (schnitzel) was an Israeli staple, however, and deep-fried foods were common. Unfortunately, like Starbucks, KFC failed dramatically.
The reason for both failures was strikingly similar: the basic assumption of the market was wrong.
A patriotic pioneer
I do not know if the story about Howard Schulz in the King David hotel is true. I do know this about Mr. Schulz: he single-handedly revived the coffee industry in the U.S.
In the early 1980s, coffee consumption in the U.S was in a freefall. Schultz, using a six-outlet S chain in Seattle as his laboratory, reinvented the category by focusing on two critical areas: a vastly improved product, and vastly improved customer experience. Just as the huge U.S. market had slowly discovered fine wine, Schultz brilliantly predicted that American consumers would embrace great coffee and the “romance” of the product. He was correct and the coffee culture in the U.S. will never be the same.
“The reason for both failures was strikingly similar: the basic assumption of the market was wrong”
So, how could he be so wrong about the Israel market? Schultz was correct in seeing that Israel was in the midst of becoming a thoroughly modern, technology-based, consumer-driven economy. The younger, educated, secular population was becoming increasingly sophisticated and worldly. This is driven in large part due to the fact that young Israelis, following their years of compulsory military service, will often spend a year traveling prior to entering university. These young Israelis return having experienced foods and cultures from the four corners of the globe.
Combined with the well-documented entrepreneurial/startup culture of Israel, the country was, and remains, ripe for a vibrant, sophisticated food revolution. So, Schultz was right about Israelis wanting better coffee. However, he was way off the mark in two areas.
Cafè casualty
The first was the state of the coffee market. There are those who maintain that if he stayed in sophisticated Tel Aviv as opposed to traditional Jerusalem on that 1998 visit, the tale would have ended much differently.
He would have found a quickly emerging coffee scene led by independent coffeehouses and two new at-that-time chains: Arcaffe and Aroma. Both offered (and still do) high quality, strong, primarily espresso-based coffees.
What he wouldn’t have found was the staple of Starbucks offering: large size, drip-style coffee available with many flavorings. He also wouldn’t find iced coffee, another Starbucks mainstay (although a whipped, sweet, “slush-like” drink called iced-coffee is popular).
“Israel represents an outstanding opportunity for franchising; particularly those seeking national or broad master agreements”
The second error was a misunderstanding of how Israelis consume coffee. Israelis tend to savor like Europeans rather than gulp like Americans. Add to that the food choices; all the successful Israeli chains feature fresh, prepared-to-order food. Grab-and-go is okay in a roadside rest stop but not in a coffeehouse.
Lastly, there are questions about whether Starbucks chose the right partner: a hugely successful company, but one which primarily operated gas stations and viewed coffee like gasoline – a basic commodity.
Keep it kosher… mostly
KFC, on the other hand, made what can only be referred to as a “rookie mistake”. It simply made bad decisions that a mature, successful organization shouldn’t have. Then it compounded them by committing a fundamental sin of poor marketing.
Israel is a complicated market because of dietary food laws. KFC probably did its research and found that a large number of Israelis – approximately 60 per cent – do not strictly observe kosher dietary law. Therefore, the issue of its fried chicken using milk as an ingredient (kosher laws prohibit the mixing of meat and dairy) would not be an issue with most Israelis.
But in Israel, there is also another barrier to entry: the power of food traditions. Most Israelis – kosher or not – still adhere to the three key tenets of kosher law: no mixing of milk and meat, no shellfish, and no pork products. McDonald’s and Burger King simply eliminated cheeseburgers from their menus. Domino’s Pizza and Pizza Hut do not offer pepperoni. Since Israelis had no experience or taste for those, it largely did not matter. And by eliminating just toppings, the basic product remained unchanged. Which leads to mistake number two.
The second error magnified the problem. KFC attempted to re-enter the market with a reformulated recipe that used a soy-based recipe in place of milk. This fundamentally changed the product. It was not as good – neither as crispy nor tasty. Simply put, it was not Kentucky Fried Chicken. To compound this error, the substitute product costs more. It didn’t take long before KFC went packing once again.
All is not lost
There are rumblings that Starbucks may give Israel another shot. It’s a much more crowded market now which eliminates Starbucks’ ability to “define the industry” as it did in the U.S.
There is also a matter of Israeli pride. Israelis are fiercely proud of their successful companies. The Israeli “David vs Goliath” mentality is a bedrock foundation of the country’s economic success and there are many Israelis who delight in slaying a foreign dragon. Starbucks simply became the butt of too many jokes in Israel.
KFC is giving it another try with its original formula but will focus on cities in Palestinian areas. Only time will tell. Given KFC’s brilliant resurgence in the U.S. and worldwide, I would not bet against them.
Areas of growth
As the Israeli economy grows, driven by the highly successful tech sector, there will be many opportunities for new franchises to enter the market.
Israeli society is fast-paced with many high-stress, demanding jobs. Many Israelis suffer from extreme demands on their time caused by intense jobs, increasingly maddening traffic, and shortened weekend schedules. Brands that help simplify hectic lives are positioned to do well. Also, Israel has many fragmented markets: a franchisor’s dream. The following industries look prime for growth:
• Quick oil change and auto repair
• Janitorial and home cleaning
• Decorating, remodeling, and renovation (interior)
• Beauty and hairstyling
Additionally, there are two lifestyle segments which have great prospects:
• Fitness, particularly the small studio models
• After-school education and programs – particularly STEM programs.
Israel is a vibrant, thriving market with a young and increasingly prosperous population. Its worldly and sophisticated consumers are seeking innovative products to improve their lives and make their hectic routines simpler.
Despite the high profile failure of two iconic brands, Israel represents an outstanding opportunity for franchising; particularly those seeking national or master agreements.
THE ISRAELI ONE-AND-A-HALF-DAY WEEKEND
The workweek in Israel is Sunday through Thursday. The school week is Sunday through Friday (Friday is a half-day.) This leaves Friday and Saturday as the weekend.
However, since Saturday is the Jewish Sabbath, many stores and restaurants are closed. And because the Sabbath begins at sundown on Friday, most businesses close at 2:00 pm to 3:00 pm on Friday.
What does this mean for franchises? Any business that simplifies life and gives Israeli consumers some relief from time pressure is well-positioned to thrive, while leisure-based businesses will need to fight to carve out time.
FIVE CRITICAL CONSIDERATIONS FOR F&B FRANCHISES
1. Kosher dietary laws which prohibit mixing meat and dairy, and forbid shellfish and pork products, remain largely observed even by nonreligious Israelis
2. Israeli produce is of extraordinarily high quality and freshness, and Israeli consumers will not tolerate lesser quality substitutes
3. Building is expensive and available real estate is hard to find in key markets. Freestanding restaurants with parking lots are rare in Israel
4. Israeli portion sizes are very large. Like Europeans, Israelis tend to eat one large meal per day with small breakfasts and dinners so restaurant meals tend to be substantial
5. Spicy is great. Sweet is ok for desserts, but not for meals
TWO UNIQUE REGIONAL ADVANTAGES
1. Israel is a relatively small country with approximately eight million inhabitants and a very small footprint, roughly the size of New Jersey. This makes Israel a highly efficient advertising market as television stations cover the entire nation, as do newspapers
2. Israel has received much scrutiny regarding the small number of importers that control the market. This often results in relatively high pricing. However, because their products do not go through the normal channels of distribution, franchises are well-suited to offer outstanding value to consumers
THE AUTHOR
Bruce Weinreb is president and founder of ZIZE Franchise Advisors, LLC, which is based in New York, with an office in Israel. He has been involved in several traditional start-ups in the U.S. and Israel.
