Coffee shops and cafés are big business in the Middle East, combining to form a US$4 billion market in Egypt, Saudi Arabia, Israel, and the UAE. Deeply-ingrained coffee-drinking traditions have collided with investment from international brands and a growing desire among young consumers to partake in Western dining traditions, creating a thriving segment of modern coffee shops that are now battling with traditional cafés. Growth is high and competition is fierce, but unlike in most major markets, cafés and coffee shop chains are both finding impressive growth.
Much of this is due to unique conditions in the market. While in most markets, growth in modern coffee shops has been cannibalized primarily from fast food or cafés, in many Middle Eastern markets, the lack of a fully developed bars/pubs culture—and lack of alcohol consumption entirely—means cafés and coffee shops are free to compete for a much wider range of social drinking and dining occasions. This greater potential demand pool has allowed traditional cafés to continue to flourish even during the rise of modern coffee shops, making the market a rare exception to the rule that cafés are dying out in the wake of global coffee shop domination.
The New Era of Coffee
This is not to say that the traditional-to-modern shift isn’t happening in Middle Eastern café culture—far from it. While coffee has been a part of daily life for a long time, the tradition has historically been tied to independent cafés that serve low-priced coffee to customers—mostly men—who come in to relax and socialize. Now a transition is underway, and consumers not typically served by such cafés are helping to drive a movement toward more modern, Western-style coffee culture in the tradition of Starbucks or Costa Coffee. Such outlets serve a much wider variety of premium beverages and have become gathering places for women, students and other groups of young people seeking comfortable, premium social destinations.
The difference we’re seeing in the Middle East is that café chains are following the same path—invoking a more modern positioning and more premium outlets to find similar success with broader menus and a greater focus on dining-in traffic. In 2012, three out of the four major markets in the region saw higher percent growth in cafés as compared to specialist coffee shops. For the sake of comparison, worldwide the cafés market grew just 1% after three straight years of contraction or stagnation, even as specialist coffee shops grew an impressive 8% worldwide.
This continued dominance by traditional cafés is most apparent in Egypt, where café value still outranks specialist coffee shops by a factor of 12. In 2012, the former outperformed with 8% growth to the latter’s 7%. Even more notable, however, is how many chained café players are competing within the space. Egypt has at least eight different café chains, including Trianon, Grand Café and Beano’s, all of which are native to the region. These chains have managed to stay relevant by merging what has historically made traditional cafés so popular—comfortable, casual environments and broad menus with plenty of options for meal, dessert or snacking traffic—with the added branding and premium positioning of more modern cafés. Beano’s, for example, incorporates an extensive selection of premium coffee-based beverages such as lattes and mochas, in addition to smoothies and premium tea beverages. Grand Café also heavily promotes its beverage selection, but the strength of the brand is in its ambiance. Outlets are spacious and modern, with plenty of outdoor seating and stylish lounge-style furniture.
In this way, cafés in Egypt have been able to find modern success not because the market is so different, but rather because these chains have applied the same methods that have been so successfully leveraged by specialist coffee shops in other markets.
On the specialist coffee shops side, recent growth has been most impressive in the UAE, where the region’s high disposable incomes, diverse expat population, thriving nightlife, and general enthusiasm for premium, Western-style dining has made it particularly conducive to coffee shop growth. The UAE has seen US$122 million in modern coffee shop growth over 2007-2012, driven by major international chains looking to grow their local presence. Such shops have also come to serve as an evening alternative to the bars and pubs that are much more popular in many other markets, due to the UAE’s restrictions on the sale of alcohol. In a much more extreme version of this, growth has been similarly steep in Saudi Arabia, where the sale of alcohol is not only restricted but outlawed entirely. With no bars/pubs category in the market, specialist coffee shops have seen a CAGR of 14% over 2007-2012, and absolute growth of US$80 million.
Unlike the café segment, however, specialist coffee shops growth in the Middle East has been driven by international operators. Starbucks leads the category in both countries with shares of at least 20%, and the remaining leading spots belong to such competitors as Costa Coffee, Caribou Coffee and the Starbucks operated chain Seattle’s Best Coffee.
A New Competitive Dynamic
These conditions have set up an interesting dynamic in the Middle East, where rather than cafés and chains devolving into a faceoff of old versus new café culture, they’ve become a story about insiders versus outsiders. With the café category overrun with local chains looking to leverage a long-standing history of socialising over beverages, and specialist coffee shops growth being driven by international chains entering the market with similar goals but a less familiar application, both categories have somehow found a way to thrive, even as the fundamental basis of the region’s drinking traditions is shifting underneath their feet.
Much of this is due to one fundamental difference in the Middle Eastern cafés/bars landscape, and the same one driving specialist coffee shops growth in the UAE. Where in most markets, bars, pubs, cafés and coffee shops all battle for share of a larger pool of social drinking occasions, in the Middle East bars and pubs play a much smaller role. Instead, consumers do the majority of their drinking in cafés and coffee shops, even late at night and for all manner of social occasions. Cafés and coffee shops have responded to this positioning by going even more premium, stepping into the much broader role of “upscale evening social venue” and gaining a much larger presence in the total foodservice landscape. These cafés and coffee shops now serve a much wider demand that in other markets is served by bars/pubs and even casual full-service restaurants.