Make Mine a Double Coffee

The Baltic states' answer to Starbucks, Double Coffee is the region's largest coffee shop chain
by Jason Bush

If there's one thing that symbolizes the social and economic transformation of the former Eastern Bloc, it's the coffee shop. Fast-growing economies, rising incomes, and changing lifestyles mean that networks of coffee shops are now becoming as much a part of the culture in Moscow, Kiev, or Riga as they are in New York or London. It's a trend that has meant runaway success for Double Coffee—the Baltic states' answer to Starbucks (SBUX).

Founded in Riga in 2002 by Latvian entrepreneurs Sergei Pushnoy and Nick Ustinov, Double Coffee has taken the three Baltic republics of Latvia, Lithuania, and Estonia by storm. With 45 outlets, it's already the region's largest coffee chain. Last year, the company's Latvian business, with 500 employees, churned out revenues of 4.7 million euros ($5.9 million). The group's overall sales were 9.5 million euros ($12 million) last year, which is expected to rise to 15.8 million euros ($20 million) in 2006.

Its rapid growth testifies to the huge gap in the market that previously existed for midrange cafés catering to everyone from students to businessmen. As well as 50 different types of coffee, the cafés also serve cakes, cocktails, breakfast, and snacks. "The main idea is that we aren't just selling coffee, we're selling the atmosphere," says Ustinov. "What we can offer is better quality. Because we're very big, we can put a lot of money into quality control and service," he adds, explaining why Double Coffee has proved such a hit.

BAPTISM BY FIRE
Pushnoy came up with the idea after living for eight years in Moscow, where Starbucks-style chains have become a major phenomenon in recent years, first appearing there in the mid-'90s. As marketing manager of a Moscow cinema, Pushnoy was surprised at how much money the cinema's cafés made—more even than its bar and restaurant.

That revelation gave him the idea of trying out the coffee-shop idea back in his native Latvia. He teamed up with Ustinov, a friend since his teens. Pushnoy's years in Moscow, including a stint in the metals trade, gave the budding entrepreneur a baptism by fire in the harsh world of Russian business. His partner, a graduate of the Stockholm School of Economics then working in the IT industry, brought experience of Western business culture to the company.

It proved to be a successful combination. Originally, the two friends planned to establish a chain of just five or six cafés only in Riga, with a total investment of around $300,000. But the business just kept growing. It proved so popular that within a year, Double Coffee expanded into neighboring Lithuania, entering Estonia in 2004, and Ukraine in 2005.

And the growth won't stop there. Now it's planning to add another 50 outlets over the next two years, mostly in Ukraine—a huge new market where the café culture has only recently begun to take off. It's also negotiating with partners in Poland and the Czech Republic, with a view to launching the Double Coffee brand through master franchise agreements. "Mostly we're looking not at Old Europe but at New Europe, because Old Europe is full of restaurants and it will be much harder to compete there," says Ustinov.

Bush is BusinessWeek's Moscow bureau chief.
Edited by Rose Brady

Wal-Mart With Wings

Unlike other discount carriers, Ryanair has stayed profitable by charging for every little bit of service
by Kerry Capell

Ryanair Holdings PLC (RYAAY) CEO Michael O'Leary makes no apologies for his penny-pinching. Want to check luggage? You'll pay up to $9.50 per bag for the privilege. Free drinks and snacks? Forget about it. Even a bottle of water will set you back $3.40. It's not just passengers who have to cough it up. Flight crew buy their own uniforms, and staff at Ryanair's spartan Dublin Airport headquarters must supply their own pens. After a customer sued Ryanair for charging $34 for the use of a wheelchair, the company added a 63 cents "wheelchair levy" to every ticket. Says O'Leary: "You want luxury? Go somewhere else."

Southwest Airlines Co. (LUV) inspired O'Leary to bring the first discount carrier to Europe. Now as the best U.S. discounters have fallen on hard times, it's Ryanair that is emerging as the model for how to run a low-cost airline. Southwest, JetBlue Airways (JBLU), AirTran Airways (AAI), and others have seen fuel and expansion costs take a big bite out of profits. At the same time, the majors, after years of struggling, have finally gotten their costs under better control and are often matching or beating the discounters on price.

To compete, U.S. low-fare carriers have taken the opposite approach of Ryanair, adding perks such as leather seats, live television, and business class. "All the low-cost carriers' costs have gotten a little out of control," says Tim Sieber, general manager of The Boyd Group Inc., an Evergreen (Colo.) aviation consultant.

CELL-PHONE MODEL

Not so at Ryanair. The short-haul carrier is making fistfuls of money, even as it slashes fares. Despite a 42% hike in fuel prices, Ryanair's profits for the six months ended Sept. 30 soared 39%, to $422 million, on sales of $1.6 billion.

O'Leary's secret? He thinks like a retailer and charges for absolutely every little thing, except the seat itself. Imagine the seat as akin to a cell phone: It comes free, or nearly free, but its owner winds up spending on all sorts of services. Last year, Ryanair gave away 25% of its seats, a figure O'Leary thinks he can double within five years. In the not-too-distant future, he wants all seats to go for free.

What O'Leary loses in seat revenue, he figures he'll more than make up by turning both his planes and the Ryanair Web site into stores brimming with irresistible goodies, even as he charges for such "perks" as priority boarding and assigned seating.

Outrageous? You bet, but the strategy is working. Although its average fare is $53, compared with $92 for Southwest, Ryanair's net margins are, at 18%, more than double the 7% achieved by Southwest. "Ryanair is Wal-Mart (WMT) with wings," says Nick van den Brul, an aviation analyst at Exane BNP Paribas in London.

O'Leary has plenty of clever new ways to make money. He has turned his planes into giant billboards, displaying ads for such companies as Vodafone Group (VOD), Jaguar, and Hertz. Soon, ads will also stare each passenger in the eye when their seat back trays are up. Once in the air, flight attendants hawk everything from scratch-card games to perfume and digital cameras. Upon arrival at some out-of-the-way airport (you may think you're landing in Paris, but it is actually Beauvais, 43 miles north of the City of Light), Ryanair will sell you a bus or train ticket into town.

Ryanair uses its Web site, with 15 million unique visitors each month, to boost ancillary revenues. The company gets commissions from sales of Hertz rental cars, hotel rooms, ski packages, and travel insurance. For the year ended Mar.

(Read More...)

Capell is a senior writer in BusinessWeek's London bureau
With Dean Foust in Atlanta

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