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Germany’s Tchibo expands from coffeehouse to general merchandiser

By Mark Faithfull

Just because Tchibo is the world’s fifth-largest supplier of coffee doesn’t mean the company relies on java alone to keep customers returning to its 1,206 stores across Europe. Apparel, electronics, housewares, jewelry, sporting goods — all these are on the menu too, and at aggressively low prices. By introducing a new assortment of nonfood products each week, Germany-based Tchibo maintains a level of surprise and anticipation among shoppers that has created something of a cult following, not to mention $4.5 billion in annual sales.

Pronounced “chee-bo,” the chain started out as a mail-order business in Hamburg in 1949 and is still controlled by the family of founder Max Herz. In 1956 Tchibo opened its first store, in Hamburg, selling fresh-brewed coffee as well as beans and ground coffee that customers could brew at home. In the 1970s Tchibo looked at the coffee store format and decided to make use of the dormant selling space, but not just by stocking caffeine-related accessories. Instead, it developed a quick-change merchandising system that involved introducing a new 30-item collection of Tchibo-branded items each week. On Wednesdays the new merchandise collection rolls out simultaneously at all the Tchibo stores. By producing a limited supply of each collection, the chain ensures that the crop sells quickly.

“Tchibo was basically the first company to say ‘Hey, couldn’t we do something with all that space on the other side of the counter?’” said Henry Jackson, managing director of the global consumer group at Deutsche Bank.

The strategy is effective, if demanding. The products are produced exclusively for Tchibo and developed by a team of product managers, quality controllers and buyers. Shoppers have to visit the stores often to keep up with the new products. Product rotation equates to about 1,500 products a year in an approach that Tchibo dubs a “department store with a twist.”

The eclectic nature of Tchibo’s offer actually makes it tough to make price comparisons with rival retailers but typically the retail offer will include bigger ticket items such as sewing machines at $120, garden loungers at $50 and dining sets at $80 with such staples as three-packs of cotton T-shirts at $12 or rucksacks at $14. As a guide, these prices are between 20 and 50 percent below the majority of the High Street and comparable with suburban supermarket offers.

“The refreshing of products weekly almost forces you to come back, and what’s not to like about good value products and good coffee?” Jackson asked.

Tchibo’s store base is concentrated in northern Europe. Beyond Germany, the only market in which it has franchises as well as wholly owned outlets, the chain operates wholly owned stores in Austria, the Czech Republic, the Netherlands, Poland, Switzerland and the U.K. In France it trades through consumer-goods subsidiary L’Homme Moderne. Expansion continues. At the end of last year, Tchibo announced plans to open 15 stores in Scotland and has been in talks with Irish department store group Dunnes.

“It is part of our business expansion strategy to take our unique retail scheme to the international level,” said Sophie Dargel, a spokeswoman. “Our main criterion for identifying potential locations is the location itself, whether it is a crowded area, a High Street or a shopping center, and the size of the shop for presentation of food and nonfood, as well as for the coffee bar area.”

This approach has meant that in Europe, Tchibo generally looks for sites close to other high-repeat-business retailers. In the U.K., for example, it tries to sit near book and magazine retailer WHSmith or market-leading pharmacy chain Boots. David Haimes, Tchibo’s U.K. managing director, estimates that 85 percent of the company’s customers visit weekly.

Jackson calls the chain “one of those concepts that works regardless of geography.”

The Tchibo approach is flexible, too. In Germany, Austria, the Czech Republic, Hungary and Poland, Tchibo is market leader for roasted coffee. In the U.K., however, the chain is more popular for its product mix than its coffee. In fact, in a typically unconventional move, Tchibo has even opened half a dozen stores in the U.K. that do not include the trademark café, though in some you can still buy coffee to consume off the premises. The company says this is not part of a new strategy, but simply reflects site-specific issues.

“It is pretty much immune to competitors, because I certainly can’t think of another retailer that offers the same mix as Tchibo,” said Jackson. “That said, I prefer to see the stores with the full offer, including a café.”

A typical store is about 1,000 square feet with a food and beverage counter at which purchases can be consumed inside if not directly outside the store. Fresh packaged coffee is available to take home. About two-thirds of the interior is devoted to the nonfood lines. Perhaps the most remarkable achievement of this odd co-existence is that Tchibo has established separate but complementary credibility for both its coffee and nonfood items.

The smell of coffee in the store adds to the ambience. “Perhaps the most noticeable difference between us and discounters like Aldi is that we have a very nice environment for people to shop in,” Dargel said. “The offer has to be more than great value. We like to sell things that people had not thought of before. If you’ve had a bad day, you pop in and see something and think, ‘Why not?’ ”

Germany remains the company’s biggest market, accounting for about 950 stores, but Tchibo does not operate solely from its own stores. It runs units inside grocery stores too, such as the ones it operates in 160 of U.K. supermarket chain Somerfield’s stores.

Such in-store units feature a modular, concession-style format in different sizes corresponding to the various host store footprints. “In bigger stores it is a circular unit that people walk inside, which includes the coffee, nonfood and the coffee bar, all in our environment,” said Dargel.

Despite impressive growth, the company stays cautious, says Dargel. “We don’t enter a new market with a thousand stores, we simply look out for new opportunities,” she said.

Increasingly, those opportunities are in Central and Eastern Europe, where Tchibo is concentrating its activities not surprisingly on affluent metropolitan areas. Spending power in such cities as Prague is fast gaining on Germany’s, says Dargel.

Tchibo also runs mail order and Internet channels, a multidistribution strategy that has built up 60,000 points of sale worldwide and made it the second largest e-commerce provider in Germany last year, according to Nielsen NetRatings. In addition, Tchibo supplies professional coffee machines and coffee to business clients in the catering trade and in hotels and offices. Sales channels for its coffee are also established in the Czech Republic, Hungary, Poland, Romania, Russia, Slovakia and Ukraine.

The multichannel sales system is backed by an extensive logistics platform with numerous distribution centers and warehouses. Tchibo exports to 40 markets, including the U.S. and Canada. In 2003 the company inaugurated Europe’s biggest high-rack warehouse in Bremen, Germany, where over 6,000 pallets of goods are handled daily.

Should we expect this unconventional brand to establish units in the U.S.? Certainly the format size, offer mix and presentation look tailor-made for the North American sector, though this would be a far more competitive and mature market for its mall café than in Europe, although the retailer says it has no plans for stores in the U.S. at present. But there is nothing quite like Tchibo. And if you don’t see what you like, come in again on Wednesday.