Starbucks is a highly successful global coffee brand, with 32,900 stores worldwide. Yet it failed quite spectacularly in Israel, opening six stores in 2001 and closing all of them within two years.
Even though the Starbucks stores were in prime locations, as they are around the world, they remained empty.
This is the only case where Starbucks’ expansion into a new country has been a complete failure. Starbucks failed in Australia too, but learned from its mistakes and began to re-enter that market.
However, Starbucks does not seem to have any plans to re-enter the Israeli market.
Why Starbucks Failed In Israel
Starbucks failed in Israel for a number of reasons. The core idea of coffee-to-go couldn’t compete with the local cafe culture, where coffee shops are meeting places and hangouts. Starbucks coffee was too expensive and the taste didn’t appeal to customers. Starbucks failed to research the market and customer preferences, which led to financial losses.
Let’s look at all of these reasons in detail.
1. Starbucks Couldn’t Compete With The Local Cafe Culture
Israel has its own strong cafe culture and Starbucks couldn’t compete with it. Customers also have a strong loyalty to their regular cafe, and Starbucks wasn’t able to offer them anything to compete.
The two big selling points in favor of Starbucks coffee in other places are quality and convenience. The taste of Starbucks coffee didn’t really appeal to Israelis.
The convenience of coffee to go didn’t resonate with consumers either, since people in Israel prefer to consume food and drink in a leisurely setting.
2. Starbucks Coffee Was Too Expensive
The price of Starbucks coffee was too high compared to local alternatives. In some cases, it was 3 – 4 times the normal cup of coffee at a local cafe.
3. Customers Didn’t Catch On To Starbucks Culture
The Starbucks culture of exotically-named drinks and cup sizes and seasonal promotions never really caught on in Israel.
The seasonal promotions were never properly adapted to local conditions and customs. For example, pumpkin spice and lattes were quite meaningless in a desert climate.
4. Customers Didn’t Care For The Taste Of Starbucks Coffee
The taste of Starbucks coffee was quite different from what the Israelis were used to, and it didn’t appeal to them.
Among the types of coffee that Israelis are used to, at one end of the scale are the strong Italian and Turkish coffees that are widely available. And on the other hand, Israelis also drink a lot of instant freeze-dried coffee.
So Starbucks’ American style brewed coffee was a taste that just didn’t catch on. For most people, it was too weak and tasted like flavored water.
5. Israelis Don’t Drink Much Coffee Anyway
Israelis don’t drink much coffee compared to people in other countries. People in the US drink on average one cup of coffee a day, and the Dutch drink 2.4 cups daily, but Israelis drink just 0.4 cups of coffee a day.
So there wasn’t room for a new coffee chain, much less for its rapid expansion. Further, Israelis are used to coffee that is quite different from the Starbucks coffees.
6. The Local Partnership Didn’t Work Well
Starbucks entered the Israeli market in partnership with a local company, the Delek Group of Israel to form the Shalom Coffee Company. The partnership didn’t work out too well, and there were disagreements about the best way to win over the Israeli market.
Even though the Starbucks stores were empty, they refused to adapt their menus to local preferences. In the end, the Delek Group withdrew from the partnership because of financial losses.
7. Starbucks Failed To Study And Adapt To The Local Market
The biggest failure was that Starbucks didn’t research the Israeli market for coffee before setting up shop. Local cafes offer food alongside drinks and people expect to eat a full meal at reasonable prices when they meet up at a cafe.
Starbucks failed to research customer expectations in Israel in advance, and as a result, it failed to meet them.
Equally important was the failure to adapt once it became clear that the global Starbucks model wasn’t working in Israel.
What They Could Have Done Instead
Even though Starbucks failed in Israel and was forced to close its stores, there are other successful coffee chains operating in the country.
Chains like Aroma succeed in Israel because they meet customers’ expectations in terms of taste, menu offerings, and prices.
If Starbucks decided to return to the Israeli market, they would have to identify their target demographic and build the stores around their preferences. This would have meant changing menus and prices.
However, there are no signs yet that Starbucks plans to return to Israel.
The failure of Starbucks in Israel is one of those interesting cases when a giant company makes a major miscalculation. The basic mistake that Starbucks made was in failing to research the market and to build a store that would meet customer expectations.
Once it became clear that the global Starbucks model wasn’t working, they should have been willing to adapt to local conditions. That didn’t happen, and eighteen years later, Starbucks has no plans to return.