MOSCOW (Reuters) - A frothy cappuccino or fresh mozzarella salad is no longer enough. Russia’s growing middle classes now want service with a smile.
With much of Europe and North America saturated, the newly affluent among Russia’s 143 million people are an attractive target for Western coffee shop chains eager for growth, and Starbucks and Costa Coffee are among brands now found in Moscow.
But where once any alternative to Soviet-style fried meats and dill-laced boiled vegetables was a thrill, increased competition now means superior service is important to attract and retain customers.
This is a challenge, says Ian Zilberkweit, an American part-owner of the Russian franchise for the Belgian coffee shop chain Le Pain Quotidien.
He and his Armenian-American business partner have drawn up bonus schemes and share plans to persuade staff to shake off Soviet habits and instil loyalty in a typically casual sector.
“The Soviet system meant there was no system for treating people nicely,” said Zilberkweit, who has just opened his fifth store. “It was all about shifting products.”
Cash from energy and commodity exports has boosted Russia’s economy since a crisis in 1998. The World Bank estimates real incomes rose by 80 percent between 1998 and 2007 to nearly $8,000 per person — roughly level with Mexico and Lithuania.
Data from Moscow-based Business Analytica shows the number of bars, cafes and restaurants in Moscow rose by a third between 2004 and 2007 to 6,600, with the fastest growth at the mid-priced level. Big chains now own around a third of the outlets in Moscow, double the proportion in 2004.
Starbucks Corp., which is closing shops in North America, opened its first branch in Moscow in 2007 with a Russian partner M. H. Alshaya Company W.L.L and now has five, and Costa Coffee, owned by British brewer Whitbread opened in March through a joint venture with Russia’s Rosinter.
Starbucks declined to give details of its plans but Costa aims to open at least 200 cafes in Russia, a market analysts described as a major growth area.
“All companies are focusing on the Russian market in all leisure sectors, not just coffee. It’s a country that Costa has to be in,” said UBS analyst Stamatis Draziotis.
Le Pain Quotidien’s Zilberkweit said the potential in Russia was just too great to miss out on.
“In Europe, real incomes are not going up due to rising prices, but in Russia it’s different,” he said, wearing a grey London Business School sailing club shirt.
“Because the domestic economy is growing like crazy, incomes are still going up like crazy.”
By the end of this year, Le Pain Quotidien aims for eight outlets in Moscow, rising to 50 within four years. Sales now stand at about $5 million but are targeted to rise to $20 million by 2009, said Zilberkweit.
A former investment banker at HSBC bank, he said competing in Russia’s lucrative dining market is further complicated for foreign firms because spending patterns and business costs differ from those in the West.
Le Pain Quotidien projects itself as part-bakery, part-cafe, part-restaurant.
The interiors are wooden, a counter sells freshly baked bread and pastries — supplied by a bakery which Zilberkweit part-owns — and the menus are based mainly around soups, salads and light main meals.
But Russian customers spend their money differently from people in other countries.
About 50 percent of Le Pain Quotidien’s sales are from food in Russia compared with 35 percent in Britain, for example. Rent is by far the biggest expense in Russia while staff salaries are the main expense in Europe.
Its prices in Russia are similar to the rest of Europe — $3 for a croissant, $7 for a bowl of soup and $17 for a fish pie — and diners usually add on a tip of around 10 percent.
With prices high and rising, Russian customers are no longer willing to stomach slow, erratic and surly Soviet service.
“If I see a new place which I want to go into, I do worry what the service will be like,” said Natalya Miloserdova, 27, puffing on a cigarette outside the tour agency where she works.
“You pick a place to eat where you know the service will be good.”
Zilberkweit said service has been a neglected aspect of retail in Russia as most staff grew up without experiencing any.
“We were unbelievably frustrated two years ago because we would get these people in and we would just want them to smile and they wouldn’t even know why,” he said.
Smiling staff can make the difference in Russia’s increasingly crowded cafe sector.
“The customer, five years ago, in Russia would have been only too happy if within five minutes’ walk there was a place to have a coffee latte,” he said. “Now, he has 10 choices and demands much more.”
Another Soviet hangover Zilberkweit has had to confront was a drop in an employee’s work ethic after promotion.
“In Russia, the moment you give somebody a title they stop working,” he said. “Now, we give people more money and more responsibility but not a new title.”
The security cameras on the ceiling also play a role. “We have to do this for security reasons,” he said, adding that pictures are beamed to a control room in every restaurant.
“But the main reason is to watch the staff.”
Additional reporting by Matthew Scuffham; Editing by Sara Ledwith