Coffee giants eye Gulf growth

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The coffee houses of the Middle East have been part of Arabic culture for centuries, but may now be threatened by international branded stores.

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Economic slowdown in the US and Europe is hurting big retail coffee brands as spending declines and customers look for a cheaper caffeine hit. But help could be at hand in the Middle East where consumers are thirstier than ever before and new retail outlets are mushrooming.

The days when howard d schultz could take time to while away the hours sipping latté in any one of his 15,000 Starbucks worldwide are drawing to a close.

Instead, the founder of the world's largest coffee empire is busy reviving the fortunes of the company as Americans tighten their purse strings.

The slowdown in the US economy has left a large chunk of US consumers hesitant at pulling $4 out of their pockets for a cup of steaming Starbucks coffee.

"The economic situation in the United States has most definitely had an impact on Starbucks trading in the country. I think most importantly because their pricing is quite premium," says Jeffrey Young, managing director of London-based consultancy Allegra Strategies Limited.

Starbucks posted its first quarterly loss as a public company in July and lowered its 2008 profit forecast, saying it planned to minimise the number of its US stores in the year ahead as its customer base in the country diminished. The group's shares were down about 24 percent in the year to September 1.

But the Middle East may provide some relief for Starbucks and rival groups including Costa Coffee, Caribou, Second Cup and Gloria Jeans. Alshaya Group, the sole franchiser of Starbucks coffee in the region, operating more than 250 stores across the Middle East, says the outlook is positive.

"This year, Starbucks stores in the Gulf region increased by 17 percent with 37 new stores opened up to date. But despite the recent closures in other markets, we are growing in the region," says spokesman Martin Norris.

The coffee chain's largest regional market is the UAE with 67 outlets across the country. Saudi trails behind with 62 stores.

"In 2007 we opened 44 stores across all nine markets, while this year we opened 37 stores so far and are planning to open more before year's end," says Norris.

After over a decade of uninterrupted growth, Starbucks is tripping on slowing sales and increased competition.

"The economic environment is definitely hurting Starbucks. They basically got too far out on the curve on growing their stores. They grew too fast and we are seeing the effects now," says John Langston, a senior analyst at Hodges Capital Management.

Starbucks almost tripled the number of its stores worldwide in just five years, from 5886 in 2002 to 15,011 in 2007. Last year, it earned $673m in profit on $9.4bn in revenue.

But sales growth has been slowing in the US for over a year and the crash in the housing market only made the situation worse. The summer of 2007 was the first time Starbucks saw its customer traffic decline since it went public.

2008 was a new chapter in the company's life. CEO James L Donald saw the end of his career with the coffee house while founder Shultz resumed his old post in an attempt to save the day.

He started by shutting down 100 underperforming stores across the US and cut back on the rate of store openings domestically. He also axed 600 jobs.

Now the company is looking overseas to compensate for declining sales at home.

"They realise that there's an enormous amount of growth outside the US and the Middle East is clearly a very big growth area for Starbucks and for coffee chains in general," says Young.

Beyond the Middle East, Central and Eastern Europe may also hold potential for the group.

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