Starbucks' Little Greek Problem -- Mikel

Starbucks SBUX +1.02% Corporation has fared extremely well in many overseas markets, but not in Greece.  Why?

Intense competition from local upstart, Mikel Coffee Company.

Mikel seems to be a popular destination for young people in Greece, helping the company spread buzz and grow by leaps and bounds, beating Starbucks by a big margin. In just eight years, Mikel has opened 84 stores and another 25 under way, while Starbucks has stuck with 30 stores.

In the northern city of Thessaloniki, Mikel already has 20 stores and Starbucks only 4—with some Mikel stores located right next to Starbucks.

The rapid spread of the new chain seems to have put Starbucks on the defensive, fueling a price war not seen in other overseas markets.

When I first visited a Mikel store in Korai Street, Athens last June, I got the impression that it was a localized replica of Starbucks: comfortable stores in central locations, a variety of coffee and juice drinks, and well-trained employees. With one difference — the color of the uniforms…green for Starbucks and black for Mikel.

This view changed dramatically during my second visit last August, when I had the opportunity to sit down with Mikel President Eleftherios Kyriakakis and Director Chrysa Gerolymatou, and discuss the history of the company and business model.

Eleftherios grew up in Larisa—a northern Greek city where coffee drinking is a daily ritual in the scores of traditional coffee shops and cafeterias. That could perhaps explain his affinity for coffee shops, which began at the age of 16. By the age of 18 Eleftherios had opened his first coffee shop, his second at 19, a bar club at 22 – and the first Mikel at 26, which he turned into a franchise chain by the age of 31.

Eleftherios’ business experience with coffee shops and bar clubs sheds light on Mikel’s business model: namely, the bundling of several different traditional concepts that occupy different time slots in the business day:

A traditional coffee shop (kafeneio), which opens early in the morning and offers sit-in coffee services in a plain environment;

A traditional cafeteria, which opens later in the morning and offers sit-in coffee services and juice drinks in a more relaxed environment under the sounds of soft music;

The coffee stand, which offers coffee to go;

And the club bar, which opens in the early evening hours and offers alcoholic beverages under dimmed lights and loud music.

Mikel’s stores open 6am and close 10am. They serve all kinds of coffee varieties; and offer a 35 percent discount for coffee to go—in a paper cup rather than a foam cup, as it used to be in the old days. Lighting and music is adjusted during the day to cater to different crowds — and they serve alcoholic beverages in the evening.

Elefterios further explains how Mikel’s business model differs from that of Starbucks.

“Starbucks is a one person self-service show,” he argues. “The barista performs every task — taking orders, preparing drinks, and collecting the money.”

By contrast Mikel, he points out, is a multi-person sit-in service enterprise. “Each store has its own manager who greets and sits customers. We have waiters who take and orders, baristas who prepare the product to be served by waiters, and cashiers who collect the money. Also, Mikel has its own R&D facility that has developed a portfolio of 180 drinks.”

What do these differences cost to the bottom line? How does Mikel’s operating margins compare to those of Starbucks and other coffee chains?

Unfortunately, I couldn’t get an answer to these questions, as Mikel isn’t a publicly traded company like Starbucks.And though I don’t want to downplay Eleftherios’ genius, Mikel’s success could be attributed to a number of favorable trends—tailwinds to its phenomenal growth in the last two years.

First,declining commercial property values helped the chain open stores at an affordable rent in central locations.

Second, soaring youth unemployment rates helped the chain recruit university graduates at low wages. Third, the rise of nationalistic sentiment among Greek consumers—a “buy Greek mentality” as a way of expressing their solidarity with fellow Greeks during the recent economic crisis.

Still, Mikel has a sound business model, which could be replicated in other countries provided that the right adjustments are made — including Starbucks own home-turf the US. That would turn Starbucks’ little Greek problem into a big problem.