Why Starbucks never made it in Israel

It’s an odd point of pride, perhaps, but Israelis take a strange satisfaction in the fact that their country is the only one where Starbucks, the international coffee giant, failed.

On social media, when the factoid is raised as part of a clever tourism marketing campaign or even an effort to tempt the company to try again, the reactions are fairly universal. We don’t want you here, people seem to say, we make better coffee on our own.

While the fact of the Starbucks Israeli failure is well known, the reasons behind it are less accepted.

Conspiracy theories abound. Did Starbucks quit the Holy Land because of politics? Is the absence of Israeli frappuccinos a secret win for the BDS campaign to boycott the Jewish state? Snopes, a website devoted to debunking Internet rumors, has an entire page devoted to dispelling myths about Starbucks’s political views on Israel.

The real story is less explosive, but no less fascinating and full of its own quirks.

It opens in 1998, in a scene that is unexpected indeed.

STARBUCKS CEO Howard Schultz is hanging out with former British prime minister Margaret Thatcher in Jerusalem.

They’re on a tour organized by Aish HaTorah, an initiative that brings influential people from around the world to Israel to foster a connection with Judaism and the Jewish state.

“Larry King was supposed to be in that group, actually, but in the end he had to have surgery so we beamed him in by live satellite hook-up,” says Ephraim Shore, who organized this trip.

The celebrity group visits the Western Wall, takes a helicopter trip to meet the King of Jordan, and meets religious leaders of all stripes, including Prime Minister Benjamin Netanyahu, then in his first term. He hosts them at the Knesset under the Chagall tapestries.

After dinner, Netanyahu requests a private meeting with Schultz and another business leader, the head of a frozen yogurt chain called Yogenfruz.

“He called them into his office and asked them a very personal request to consider opening up their businesses in Israel to help the Israeli economy,” says Shore.

The request resonates powerfully with Schultz, who is Jewish, belongs to a synagogue, and is moved by his first trip to the Holy Land, experiences from which he would continue quoting for years.

Speaking to The Jerusalem Post at the time, he says he is blown away, that he doesn’t think he’ll ever be the same.

So Schultz goes back to the King David Hotel, renowned for its luxury, and orders a fateful cup of coffee.

His conclusion, as reported by the Post at the time: “The coffee isn’t so good.”

Was it this bad Cuppa Joe, more like dirty dishwater than proper java, that convinced Schultz that Israel could do with a good dose of Starbucks? Possibly.

He certainly saw it as cause for optimism in bringing Starbucks to Israel, and a decade earlier, that assessment might have been right on the money.

For decades, Israeli cafés had been places for artists and politicians to meet and mingle, even if the coffee wasn’t great.

“In the ’90s, let’s say 25 years ago, the best you could hope for in Israel was some very mediocre version of cappuccino, usually with whipped cream, very weak and watery, or instant coffee or black coffee, a local invention known as botz (mud), which is basically ground black coffee on which you pour hot water and mix it,” says Janna Gur, editor- in-chief of gastronomic magazine Al Hashulchan.

But what Schultz didn’t realize at that moment was that just an hour away, in Tel Aviv, a food revolution was well under way that was transforming Israel’s culinary profile, including its coffee culture.

New reforms had opened up its economy.

Its tech sector was starting to thrive, and it was shedding the socialist roots it was built on. People were earning more, traveling more, and bringing back the best of what they saw abroad.

“The whole espresso revolution, I would say, started almost overnight,” Gur adds.

In 1992, the first Israeli espresso bar, aptly named Espresso Bar, opened its doors. Like Starbucks, it dreamed of bringing the Italian coffee culture to Israel.

Soon, many others were following suit, says Gur, “notably Arcaffe, which I think was probably the best one at the time.”

One market study estimated that 500 new coffee branches had opened in Israel in the three years before Schultz’s visit.

“And one thing they really had in common was that they all had really good coffee, good espresso, good cappuccino, relatively strong, especially compared to what Americans are used to,” Gur says.

In other words, Schultz may have underestimated how good Israel’s coffee culture had become. The Israeli consumer had begun developing a good taste for coffee, and lots of it. The average Israeli drinks an average of 110 liters (465 cups) of coffee a year, 83 percent more than an American and even 22 percent more than a European.

According to Arturs Kalnins, an associate professor at the School of Hotel Administration at Cornell University, overconfidence can be fatal for internationally expanding businesses. His study found that the companies most likely to fail when entering a foreign market were those that set out the most ambitious plans. Starbucks had planned to launch 80 stores in Israel, 10 in the first year, which, at the time, would have made it the country’s largest coffee chain.

Overconfidence was not the only factor at play, according to Kalnins, who co-authored a case study examining why Israel proved to be the Bermuda Triangle for Starbucks.

“Why is Israel the exception to the rule? Ironically, I think for a few reasons, and I think a large part of it was because Howard Schultz wanted so badly to succeed in Israel,” Kalnins says. He argues that Schultz was so emotionally committed to the idea of opening up shop in Israel that he ignored the signs when things started going wrong. Despite mounting evidence, Schultz kept moving full steam ahead.

“What I call the commitment trap is that once it got out to the Israeli press that Starbucks was coming, my guess is that they didn’t feel like they could go back on this anymore.”

WHEN STARBUCKS opens up branches abroad, it doesn’t just paratroop in. It either buys a local chain, or finds a local company that already knows the lay of the land. But in Israel, Schultz had a lot of trouble finding the right partner.

Although he was convinced that Starbucks would open in Israel within two years, it took him that long just to find a local company that fit.

In the end he teamed up with a company that has financial muscle, but no experience in the industry: The Delek Group, an oil company that seemed to think Israelis would greet Starbucks as liberators from an under-developed coffee culture.

“Somehow they thought Starbucks would be instantly accepted,” Kalnins says.

Given the Israeli awe of big, foreign companies, that may have not seemed like a crazy assumption. But Delek translated that confidence into a marketing campaign that rubbed Israelis the wrong way.

“There were a couple of choice quotes from the leader of the venture that said they were going to educate Israel about coffee drinking. And the other one, he made the joke that coffee will be a great market for them because coffee and petroleum are both black liquids and so they will be good at that,” says Kalnins.

But there was also a third partner, Yair Hasson, a lone entrepreneur with experience in the Israeli food industry. He’d successfully brought foreign restaurants such as Burger King to Israel. In some ways, he was the brains while Delek was the financial muscle.

In contrast to the buttoned-up Delek executives, Hasson was a force of nature, a smooth-talking, chatty, charismatic salesman who liked to hold meetings, fittingly, in coffee shops. It was Hasson who presented Starbucks with a business plan for entering the Israeli market, and he clashed harshly with Delek.

Hasson pushed to adapt the product to fit local tastes. He wanted to get rid of large “venti” sizes, reduce the amount of milk, and focus on the espresso. To his dismay, Delek wasn’t prepared to retool, even though the market research showed Israeli tastes were more European.

Delek’s priority was to serve Starbucks in its gas stations. Hasson saw the service experience is paramount. After all, Starbucks’s philosophy is all about the cafe culture, and that’s what propelled it to success in so many places.

Delek and Hasson simply didn’t see eye-to-eye.

Fed up with the direction things were going, Hasson went to Seattle to give Starbucks an ultimatum: It’s either Delek or me. The Starbucks people were furious. Hasson ended up selling his shares of the joint venture to Delek, giving them control of 80 percent of the company. All that before the first Starbucks branch even opened in Israel, leaving the entire ground operation in the hands of an oil company.

To make matters worse, the second intifada was raging, and suicide bombers were regularly targeting Jerusalem, so Starbucks opened only in Tel Aviv, Israel’s beating culinary heart. There it went head-to-head with upscale Arcaffe.

Some of the other chains competed with Arcaffe by lowering their prices, but Starbucks didn’t feel the need to do so, making it an expensive option despite its misalignment with Israeli tastes.

Between 2001 and 2003, Starbucks managed to open just six of the 80 stores it had planned in Israel, losing $6 million in the process. At that point, it decided to just call it quits.

ONE QUESTION that lives on is whether the company should have given the Israeli market a second go, or pivoted instead of closing down. Part of the reason it didn’t could have been Israel’s size.

When Starbucks made similar mistakes by choosing a private equity firm as a local partner in China, or underestimating the advanced coffee culture in Australia, it managed to make changes and survive. In tiny Israel, it had less room for maneuver.

Starbucks did not respond to multiple requests for comment for this story, nor did the Delek group. Several people involved in the venture confirmed the details, but asked to remain anonymous for fear of harming future business relationships.

While Starbucks currently has no plans to try anew in Israel, it seems to have learned its lessons. Schultz recently announced plans to open in Italy, the country that inspired his vision for the coffee chain. Given its well-entrenched love of delicious coffee and role in inspiring Starbucks, a failure in Italy would be a body blow to Schultz.

Yet, he seems to have learned his lesson.

As the company prepares to open in Italy, they’re reportedly doing everything they can to move deliberately and cater to the local Italian palate and culture.

The New York Times described Schultz’s approach to the Italy expansion with one word: humility.

This story is based on a podcast originally reported with TLV1.fm, Tel Aviv’s English- language radio station and podcast network. It also appeared on the JPost Podcast. Additional reporting by Laragh Widdess.

Why Starbucks never made it in Israel

Israeli consumers ordered a big cup of ‘no.’