Tchibo scales back in Western Europe

Author: Hope Lee

Date published: 27 May 2009

German coffee giant retreats from France and the Netherlands and scales down its UK business to concentrate on Eastern Europe.

Tchibo, the world's fourth largest coffee player by retail value, is reviewing its foodservice and coffee business strategy, which has had an effect on its financial performance. The latest financial figures show a 9% decline in revenue, to EUR3,223 million, for 2008. Operating income fell to EUR71 million. The decline is attributed to the restructuring of the company's retail outlet business, with a number of unprofitable shops being closed. The weak state of the German coffee market was also a contributory factor. Euromonitor International has observed that of the major European coffee multinationals, Tchibo's move is perhaps the most noticeable scaling back initiative to tackle the fall in demand.

Tchibo's Major Coffee Markets

RSP US$ Mn

Euromonitor International

Shutting down non-performing stores

An intrinsic part of Tchibo's business model is its foodservice channel presence, in which it combines a mixed café/retail hot drinks offer with the sale of non-food products. It is a top 10 player in the chained consumer foodservice sector and had 500 outlets in 2007, with foodservice revenues of EUR33 million. Traditionally, the company has focused on a low-pricing strategy, with its success based on it regularly changing the goods available in its shops.

However, a sharp downturn in economic conditions and rising competition in the foodservice channel, not least from Starbucks and the Kraft Foods-McDonald's vehicle McCafé, have forced a rethink in strategy. The company has exited the foodservice channel in France and the Netherlands and is reportedly giving serious consideration to doing the same in the UK, where it has 50 shops, following its decision to end its co-operation with Sainsbury and Somerfield, in which it operated a number of stand-alone sales points. It has also scaled back its foodservice presence in its domestic German market, citing rising competition from hard discounters.

As part of its “Stärken stärken” 2010 (“Strengthening strengths”) strategy, Tchibo is revamping its presence, ditching the low-pricing position, a standing which has been perceived as relating to lower-quality produce. The company is also renewing its focus on coffee in its foodservice outlets.

Euromonitor International believes that the decision to scale back its foodservice presence in Western Europe is probably a good one for Tchibo, with a growing trend among consumers to have outlet-style coffee at home hitting the sector hard. For example, Starbucks has been forced to close a large number of shops and enter the off-trade arena. Looking at the bigger picture, McCafé will benefit from Tchibo's retreat as it might have the ambition to snatch up locations for its outlet expansion during the recession, given its parent company McDonald's strong financial position.

Eastern Europe offers greater potential for coffee retailing

However, the change of business strategy for Western Europe does not mean Tchibo will withdraw from the global coffee market altogether. The company is set to strengthen its presence in growth hot spots, such as Eastern Europe. However, no detailed plan has been disclosed. Tchibo is reported to be concentrating its coffee growth plans on Eastern Europe, in which it ranked third in 2008 with a 10% market share. According to Euromonitor International's latest research, Eastern Europe is an increasingly important revenue generator for Tchibo's coffee retailing business, increasing its contribution from 47% in 2005 to 53% in 2008. In contrast, Tchibo has had a hard time in Western Europe, ranking in fifth place and recording a consistent decline in market share over the past few years. Overall, Eastern Europe's long-term prospects are positive, with Russia, Poland, Ukraine and Romania identified as major coffee growth markets in the global arena.

In the short term, however, the company's growth strategy for the East may be on the cautious side, especially given the growing contagion from the global economic crisis in the region, in particular in Russia, once a fertile market for such development but where falling consumer spending power is slightly changing the landscape.