Money growing: Online Food Stations

"The Internet cafe segment in Moscow is rather developed and the market is stable. But recently more and more citizens prefer to connect to a provider from their computers at home, rather than going to an Internet cafe. Now Internet cafes are already fading into the background, new concepts have not appeared recently, if we do not consider the possibilities of Wi-Fi in many institutions which are not related to Internet cafes," Vladimir Zhuravlyov, managing director of NAI Russia says.

In the opinion of Sergei Filchenkov, an analyst at investment company Finam, Internet cafes are already not located in business centers, or shopping and entertainment spaces "The majority of business centers are now equipped with Wi-Fi so that any owner of a laptop can log on to the Internet in a usual cafe or other convenient place. In shopping centers Internet cafes are also not in demand. It is possible to log onto the Internet at home, to eat in the food court, and play in the games center. An Internet cafe in this plan has no advantages," Filchenkov considers.

Complexity of arrangement

Experts pessimistically assess the future of Internet cafes, and to open such an establishment is not at all simple. First of all it is necessary to find a premises, which would correspond to a number of requirements. "An Internet cafe should be in the city center, in places where there are lots of passers-by and tourists, i.e. in the most important streets, in tourist zones, hotels, etc. Shopping and entertainment centers are also very accessible and quickly become popular. The scale of the project considerably influences criteria when selecting a premises. For an average Internet cafe that contains approximately 30-40 workplaces it is much easier to find a premises," Zhuravlyov says.

According to him, it is more preferable if the Internet cafe is located on the first floor of a building. "But, in principle, the floor is not the key factor, the problem of the second floor for a Internet cafe is irrelevant, if such places are visited by the target audience," Zhuravlyov specifies. However, in the opinion of Konstantin Korolev, head of the consulting department at Becar Commercial Property Moscow, the most favorable placement for an Internet cafe is in a fitted out or added to premises on the ground floor and with a separate entrance from the street.

Internet cafes focus mainly on a youth audience, therefore it is necessary to have them near educational institutions, youth shops, etc, Sergey Lobanov, director of the department for the management of actives at Miele - Commercial Real Estate, says. According to him, Internet cafes can be located in both separate buildings, or within the limits of an administrative or shopping center. For example, well-known Internet cafe Timeonline is located in Okhotny Ryad shopping center.

However there are some main requirements concerning the characteristics of a premises. "To offer Internet services greater electric capacities will be needed as many computers working practically round the clock will be in one place. In addition requirements of the restaurant business also need to be considered: additional energy capacities, extraction systems, fire-fighting systems, receipt of Sanitary and Epidemiologic Station sanctions, etc.," says Lobanov.

According to Korolev, "the requirements for an Internet cafe are based on the same regulative documents as other public catering establishments. However for small tables equipped with computers, additional requirements on light exposure, ventilation and electric safety should be observed. And, of course, broadband communications should be in the building."

For each group of clients the owner of the Internet-cafe should provide a set of services. "For an Internet cafe tourists are the most profitable. Here a visitor can send home photographs, read mail and even call home, having taken advantage, for example, of the Estonian program Skype. In turn, business visitors need an expanded range of other services, for example copying and printing documents, downloading files onto flashcards. Thus, in places of active business activity Internet cafes can also find clients. In a shopping center an Internet cafe should provide a wider spectrum of services or make the computer zone smaller than the zone with just usual tables, i.e. it should be more than simply a cafe with the Internet, and should resemble an average food joint," says Korolev.

There is one important restriction on the area. "An Internet cafe will only be opened, if there if there are no less than 30 workstations, therefore it is necessary for the potential investor to search for a premises measuring 300-400 sq.m," says Lobanov. Filchenkov agrees with this estimation. "As a rule, such establishments have a separate entrance though more often they are not located on ground floors. The typical placement is in an area with good pedestrian traffic, near to the metro, not directly outside but in a court yard or side street," he added.

On the whole, according to Finam, the cost of opening a cafe, excluding rental costs is $700-$1,200 per sq.m and is mainly spent on the purchase of equipment and furniture. "As a rule, one table takes up 5-7 sq.m. Denser rarely appears rational. It is necessary to buy appliances for offering additional services, to open a computer shop, a copy center and, perhaps, offer classes in computer literacy," Filchenkov says.

According to Ilya Shershnev, director of development at Swiss Realty Group, "equipment today can be easily leased, therefore the main costs will be on furnishings and rent, all the rest is insignificant." "For premises on the ground floor of buildings not in the first category rent will be approximately $400-$600 per sq.m however for a location, at Novokuznetskaya or in Okhotny Ryad, rates would be higher," adds Lobanov.

Thus, to open an Internet cafe on 300 sq.m $210,000-$360,000 at a rate of $700-$1,200 per sq.m should be spent. For the first year of rent to the owner of such a cafe it is necessary to pay $120,000-$180,000. In establishing a cafe with a larger area or with more a more expensive design the investor would need to spend a larger sum. "The level of investments in an Internet cafe can reach $500,000. Everything depends on the cuisine offered, the level of computer technology, the range of additional services, etc. In connection with the active development of cheap broadband Internet access the popularity of such cafes is decreasing and it is necessary for owners to develop new and original services: to organize training courses, seminars and even children development programs," Korolev says.

On the food side

In Shershnev's opinion, the market is divided into two segments. First, Internet cafes, and secondly, game clubs for young people which play a role in entertainment centers in sleeping areas. "They are different premises and are not absolutely connected with each other," Shershnev says. "If we are talking about specialization, these Internet cafes are more modern versions of computer clubs, whose popularity peaked about 6-8 years ago. Here the stress is on gaming entertainment. Other establishments offer the menu of a usual cafe with added opportunity of access to the Internet, not all tables in the cafe are necessarily equipped with computers. A visitor with a laptop or pocket computer can usually take advantage of Wi-Fi Internet access," Korolev agrees.

Recently, according to experts, the number of Internet cafes has steadily been declining. "At the start of 2,000 in Moscow there were about 500-600 such premises with a total area of 120,000-140,000 sq.m. Now in 2007 the number is estimated at 100-150 with a total area of 25,000-30,000 sq.m," says Zhuravlyov.

In the general opinion of experts, there are no global chains in this market in Moscow, some brands however stand out. "Such chains as Cafemax, Timeonline and Netcity, which have 3-6 clubs and offer a wide spectrum of electronic services are the leaders among Internet cafes on the Moscow market," Zhuravlyov adds.

Experts name Cafemax more often as the most popular chain of Internet cafes in Moscow. This chain, according to them, worked for rather a long time at the high end of the market, however then later has shown unprofitability of the segment, having moved to other segments of the market.

According to its press service, Cafemax was established in the autumn of 2000 in accordance with a business-plan developed by McKinsey & Company. The first full-scale Internet center of the chain was opened in July 2001, in the center of Moscow on Pyatnitskaya Street. The area of cafe was 1,200 sq.m in which more than 300 pc's were located. After several months, in September 2001, the company started a project to equip a web access points In Moscow coffee houses, and in total have opened in six caf?s of the Coffee House chain.

The second largest Internet center was opened in November 2001 in St. Petersburg, on the first floor of the Hermitage. In January 2002, a similar cafe was opened In the Ostankino television station, then in September 2002, another opened in St. Petersburg, near the Moskva station on Nevsky Prospekt. A little later Cafemax was opened at Vorobyovy Gory, on the territory of Moscow State University, and in March 2002 another Cafemax at Novoslobodskaya was opened near the Russian State Humanitariuan University.

Thus, the company has captured all potential clients: tourists - due to placement near stations and in the most important tourist spots, businessmen - in Ostankino and students - due to close proximity to Moscow State University and the Russian State Humanitarian University. At the start of 2003 the chain totaled six large Internet centers and six web access points. At this time, in the opinion of experts, was the boom of the development of this segment.

"The turnover of the market in Moscow now totals almost $6 million. It has gone through several stages of development. For example, the market actively grew at the beginning of 2000. In 2000 market turnover totaled $0.5 million while in 2001 it had doubled to $1 million, in 2002 reached $3.5 million, and in 2003 totaled $5 million. Then there came stagnation: in 2004-2007 the segment has almost not grown at all. The wide distribution of the Internet kills the business by virtue of a narrow menu made it difficult for them to compete with usual coffee houses. Most likely it will remain at this level or will even fall," Filchenkov says.

It is indicative, that after the sharp rise in the market the Cafemax chain has not opened any new large Internet centers. But it has started to develop new formats. Now practically in all of its Internet centers it has opened an independent food court, for example at Moscow State University - a sushi bar, and at Novoslobodskaya - cafe Pirogi za steklom. Thus, the company has developed the food component of its projects.

The next stage was the creation of a brand that is not directly connected with providing Internet services. At the end of 2005 in the Evropa Building business center a coffee house and Coffeemax canteen were opened: the name of the new establishment was different from the Internet cafe by only one letter in Russian. Investments in the project have totaled almost $800,000.

Another new sphere was for the company was corporate catering. A Cafe-bar under the Coffeemax brand opened on June 1, 2007, and in the Internet center at Novoslobodskaya. Moreover, in the same location a sports bar opened enticing clients with live football matches.

Other Internet cafe chains also actively develop a grocery component, however they prefer to cooperate with already existing coffee houses. For example, Timeonline Internet caf? in Okhotny Ryad shopping center calls on its visitors to take advantage of Wi-Fi in the Shokoladnitsa located in the neighborhood. Each chain uses various advertising campaigns to attract clients depending on the target audience. For example, Cafemax runs Internet conferences with famous journalists, writers and musicians, and Timeonline organize computer game competitions.

Perspectives

In the opinion of experts, an active advertising campaign will not help the segment of Internet cafes to reach new highs. "Opening an Internet cafe in Moscow Is not needed now and is an absolutely unattractive business. Perhaps, one of the few niches where it can bring serious income is business centers where to increase your returns it is desirable to unite an Internet cafe with a copy center. Another promising line is in student halls and at stations," considers Filchenkov.

"For a business center the presence of an Internet cafe is a desirable component, but not obligatory. More pertinently if cafes providing access to the Internet are located in shopping centers, the basic target audience of the majority of shopping centers is young people, and the age category of Internet caf? users is from 16 to 35 years old, accordingly, the Internet cafes placement In a shopping center makes t possible to attract more potential clients," disagrees Zhuravlyov.

According to Korolev, "for a business a building can be more of a temporary office where it is possible to rent for some time a workplace with all the necessary equipment and software." Such service is often given in hotels for the business sector. "Basically, for business or shopping centers an Internet cafe is a plus, however its presence is not obligatory in both cases," he adds.

In Lobanov's opinion, the main obstacle for development of the segment is paradoxical, and is the development of Internet technologies. First, he says, with the development of Wi-Fi technology practically all restaurants or cafes can be called Internet cafes where it is possible to come with a laptop or handheld computer and connect to the World Wide Web for free. Secondly, Wi-Fi is appearing in shopping centers: for example, in Tramplin shopping center at Molodezhnaya metro station in the fast food such access is organized.

"Not so long ago Golden Wi-Fi company established substations practically across the whole of Moscow, covering more than 40 per cent of the city. Now It Is possible to connect to the Internet via Wi-Fi not only in cafes, but also simply in the street and even at some metro stations," the expert says.

According to him, Internet cafes that exist now, show low profitability, are and therefore rarely located in bustling brisk places somewhere in the center where rental rates are high. "As a rule, they exist in quiet areas of Moscow and near educational institutions. To keep profit at more or less a normal level, owners open Internet cafes with elements of a game club," he adds. In Zhuravlyov's opinion, "the life span of a small Internet cafe, holding up to 20 people and located, as a rule, in a quiet area, is short, they do not involve sufficient investments and seldom develop into a large chain, but such establishments can open in their tens every year ".

Internet cafes today are not a format for investment. I am assured that they will die as an independent business as has happened in all developed markets. Starbucks still has several computers, and to the others you can bring your own laptop and use Wi-Fi whilst drinking coffee. It is a world trend, for an Internet cafe there is no market niche, more precisely, it has become smaller, and such companies as Coffeemania, Coffetun, and Shokoladnitsa can exploit this trend," Shershnev considers. According to him, "game clubs will continue to survive until the market cannot offer youth other worthy entertainment."

However some calculations do not always confirm the statement about the unprofitability of Internet cafes. "One table with a computer can earn in 10-12 working hours almost $20-25, not including orders from the menu. Considering the high cost of one workplace and covering this cost, without granting additional services such a cafe in real terms is simply impossible," considers Korolev. However the example of the Cafemax Internet center at Novokuznetskaya clearly shows that 300 computers will bring $2.2-2.7 million, of which about 30 per cent will cover rent. Even considering tax payments and costs for updating computers, the profitability of providing only one Internet service, in the opinion of experts, is high enough.

Besides, according to Korolev, It Is too early to talk about the growing expansion of Wi-Fi: granting these services is still rather unprofitable. In any case, according to experts, all Muscovites are far from having their laptop and, hence, require the services of Internet cafes. This first and foremost applies to students and tourists who do not presume or prefer to carry a computer themselves.