|19 August, 2019

UAE entrepreneurs brew success with specialty coffee shops, but risk market saturation

Customers' demand for a greater variety of coffee and more information about coffee sourcing has fueled the rise of specialty coffee shops

Roasted coffee beans are seen on display at a Nestle Nespresso event in Paris, France, March 22, 2019. Image used for illustrative purposes.

Roasted coffee beans are seen on display at a Nestle Nespresso event in Paris, France, March 22, 2019. Image used for illustrative purposes.

Reuters/Benoit Tessier

Homegrown specialty coffee shops are springing up across the UAE as entrepreneurs bet that changing consumer tastes will enable them to build long-term sustainable businesses.

These specialty coffee houses cater to a clientele that wants more than a just a morning caffeine kick, serving high-grade brews for a premium price. Many cafes have attracted a loyal following, which has lessened the impact of a prolonged consumer spending slump, but over-saturation could lead many to fail.

“The Middle East, especially the UAE, has been very much chain-led, but the new era is a more boutique approach--independents that are sophisticated in their execution, premium in their field and extremely good at their coffee,” says Jeffrey Young, chief executive of London’s Allegra World Coffee Portal.

“This is in line with global trends and what the millennial mindset is looking for--that doesn’t mean there won’t be a role for chains, but there’s this new emerging market and it’s getting bigger and bigger.”

Nine of the 10 largest UAE café chains are foreign franchises, according to a report by India’s Ken Research that predicts the UAE coffee shop market will be worth $885 million in 2021, up from an estimated $605 million in 2017. This notes that customers’ demand for a greater variety of coffee and for more information about coffee sourcing has fueled the rise of specialty coffee shops.

Such outlets, which make coffee made from rarer, high-grade beans, attract investors of varying backgrounds.

Sharjah’s CE-Creates, the internal business incubation platform of Crescent Enterprises, owns Kava & Chai, which operates five cafes in Dubai and Sharjah and launched operations in 2017.

Director, CE-Creates, Samer Choucair says his firm entered the coffee sector partly because of the market opportunity but also due to a desire to retell Arabia’s coffee history, which is largely unknown; the first coffee houses originated in Mecca around the turn of the 16th century.

Rival café Mokha 1450 lays claim to be the first coffee shop in the UAE to offer all coffee brewing methods. Mokha’s first café was in Dubai’s City Walk, while a second recently opened in Palm Jumeirah. It also operates several private coffee shops for wealthy clients at undisclosed locations.

Some of Mokha’s biggest customers have subsequently launched their own specialty coffee shops, while other entrepreneurs have followed suit.

“Many of the new entrants to the specialty coffee sector are not undertaking feasibility studies,” says Garfield Kerr, Mokha chief executive and co-owner along with several partners that include private equity investors.

“Some new entrants are taking a leap of faith and are confident they will be able to attract a significant market share. Their level of expertise will be the largest determinant factor as to their survival.”

Specialty coffee shops in the US have received huge backing from venture capitalists and although their UAE counterparts are unlikely to attract investments of that scale, Silicon Valley’s commitment underlines the potential of the high-end coffee sector should the UAE’s most successful brands succeed internationally. In September 2017, Nestlé bought 68 percent of Blue Bottle Coffee for $425 million, for example.

“The quality of some fitouts of independent boutiques in the Middle East would translate to other territories. It’s a stretch to say that a company from the UAE could immediately plug into London,” says Young. “That’s not to say it can’t work, but they first need to prove they can become regional champions.”

A September 2018 Allegra survey of 200 UAE coffee industry leaders found that 88 percent believe there is still plenty of growth potential in the UAE’s branded coffee shop market. Yet more than half of respondents said competition was the sector’s biggest challenge and although investors have bet big on specialty coffee boom, the industry consensus is that convenience remains the biggest draw for customers.

“Nearly three-quarters of industry leaders cite good location is the biggest factor behind coffee shop success – even ahead of coffee quality and service standards,” the report states.

Other industry data appears contradictory. Price consciousness was cited by 44 percent of respondents in

Allegra’s survey as the most important trend, while the growth in specialty coffee polled 38 percent.

UAE specialty coffee shops, which achieve gross margins of around 75 percent according to Mokha’s Kerr, are less profitable than conventional coffee chains, which generate margins of about 90 percent.

“Competing on price with the global chains is a losing strategy--you have to be competing on quality and customer experience most of all,” adds Allegra’s Young. “You have to think about your target audience and ensure you’re giving good value--the experience has to be worth the price the customer is paying.”

That many specialty coffee shops should launch amid a stuttering local economy may bode ill for their survival. Consumer spending in the UAE plunged from a six-year peak of $185.2 billion in 2014 to $156.6 billion a year later and has not topped $160 billion since, World Bank data shows.

“It has affected us, but much less than the F&B industry average because we do have those loyal customers,” adds Kerr. “The number of people in the UAE with disposable income and who want to visit a specialty café isn’t that large--it’s not as big as most people think. The market is over-saturated.”

(Writing by Matt Smith; Editing by Seban Scaria; Brinda Darasha)


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