A Belgian Business Model for Making Dough

MTA staff member at a Le Pain Quotidien bakery on Novy Arbat bagging bread. The high rents at central locations are threatening to eat up profit margins.
Ian Zilberkweit understands how important bread has always been to Russians, and he is basing the success of his business here on the belief that he can do it better.

On Monday, Zilberkweit will open a fifth Le Pain Quotidien outlet, in Gorky Park, as he and his Russian partner, Gohar Gargossian, embark on a multimillion-dollar plan to open a new location every six to eight weeks for the next three years.

Going up against such ubiquitous cafe chains as Shokoladnitsa and Coffee House might seem daunting. But Zilberkweit believes that Le Pain Quotidien, a Belgium-based bakery and cafe franchise, has the formula for success. The full tables and repeat customers at his cafes suggest that he may be right.

"The market is full, so we will have to compete on quality," said Zilberkweit, an American who has spent most of his life in Germany and Britain.

The quality Zilberkweit speaks of is a mix of artisan breads and organic-styled dishes at reasonable prices served in bakeries with environmentally friendly interiors at high-end locations around Moscow.

"This is a branded restaurant and bread chain built around a theme," said Charlotte Philipps, head of AIG Interros Russia Century Fund, a private equity fund, which does not have a financial interest in Le Pain Quotidien but monitors the consumer market looking for bigger-ticket investment opportunities.

"This will work, in my view, because it has to do with the Russian soul. Bread is something extremely important. It is something respected here," she said.

While bread runs as something of a constant theme through the country's history, darker, heavier varieties have been the norm -- not exactly the stuff of cafe culture.

Zilberkweit produces and sells artisan, or handmade, bread, a process that starts at a central bakery with staff hand-kneading dough at 3 a.m. and then allowing it to rise for 14 hours. The company has had to train all of its bakers.

Beyond the menu, Philipps sees the company's strategy as a winner.

"They will be successful because they are able to supply high quality for a price below the segment they operate in," she said.

Zilberkweit, a former director at HSBC bank's corporate finance group, is following a model set by the franchise in 14 countries, and the model seems to have found a niche in Moscow. After spending between $200,000 and $300,000 on months of market research, Zilberkweit and Gargossian decided to go for the project.

Vladimir Filonov / MT
Zilberkweit grinding sea salt onto a loaf of bread at a Le Pain Quotidien cafe.

"We saw an opportunity to build a very substantial company -- probably the biggest in Europe -- because the market is so wide open and people love bread here," said Zilberkweit, who with another partner owns the rights to Le Pain Quotidien in Britain and Ireland.

Having opened its first location in February 2007, the chain now operates shops at the Yevropeisky shopping center, Novy Arbat, Kamergersky Pereulok and 1st Tverskaya-Yamskaya Ulitsa.

The average sale per customer at the bakery counter is about 280 rubles ($12), while the average cafe diner's check is about 500 rubles, midrange pricing for Moscow.

According to replies to questionnaires, 75 percent of customers are professional women aged 30 and under. The company serves 6,500 people a week in Moscow, 65 percent of whom are repeat customers, Zilberkweit said.

Taking a break from a lunch of soup, "something like a bruschetta" and vegetable juice at the Novy Arbat location, customer Alek Vernitsky said, "I could definitely see this place expanding.

"I've been trying all of the places on the block for lunch. There are a few chains I recognized on the Arbat, but this wasn't one of them," said Vernitsky, an American strategy consultant working in Moscow on an internship.

Along with competitors like Volkonsky Keizer, Le Pain Quotidien seems to be excelling in a small niche. The approach to brand quality brings significant costs, however -- especially because many of its products are imported or licensed and its locations occupy some of the most expensive commercial real estate in Moscow.

"Importing goods from outside of Russia is very tricky. A huge amount of paperwork and one mistake can hold up an entire shipment," Zilberkweit said.

To get around this, he said he was trying to source as much as possible from Russian suppliers.

Bureaucracy also has its costs.

Zilberkweit said only the Yevropeisky location has received a permit so far to sell the chain's organic wine, and authorities only recently authorized the Novy Arbat shop to put up awnings as signage.

"These are taking longer than we expected and take up a lot of resources, but nothing too dramatic," Zilberkweit said.

He shrugged off questions about official corruption, the bane of businesses in Russia, saying he had only faced some minor problems.

A bigger problem, Zilberkweit said, is the high cost of property, which threatens to eat up profit margins. Picking up a jar of preserves called "Four Red Fruits," Zilberkweit said the product had only a 30 percent margin, a low profit margin for an imported, organic-styled product.

"We don't want $100 checks. We want customers coming in three times a week," he said, describing this as the larger middle segment of the population, the growing middle class of busy professionals.

At the bakery counter, however, the sales are higher per person than anywhere else the chain operates in the world.

Zilberkweit said those sales had to be combined with volume, since the biggest cost for restaurants is rent. "The only way to get around that is to get lots of customers," he said.

Zilberkweit said he saw the company expanding soon into St. Petersburg and possibly into the other cities of Russia, though there were no firm plans yet.