Russian diners say "Nyet" to Soviet service

By James Kilner

MOSCOW (Reuters) - A frothy cappuccino or fresh mozzarella salad is no longer enough. Russia's growing middle classes now want service with a smile.

With much of Europe and North America saturated, the newly affluent among Russia's 143 million people are an attractive target for Western coffee shop chains eager for growth, and Starbucks and Costa Coffee are among brands now found in Moscow.

But where once any alternative to Soviet-style fried meats and dill-laced boiled vegetables was a thrill, increased competition now means superior service is important to attract and retain customers.

This is a challenge, says Ian Zilberkweit, an American part-owner of the Russian franchise for the Belgian coffee shop chain Le Pain Quotidien.

He and his Armenian-American business partner have drawn up bonus schemes and share plans to persuade staff to shake off Soviet habits and instil loyalty in a typically casual sector.

"The Soviet system meant there was no system for treating people nicely," said Zilberkweit, who has just opened his fifth store. "It was all about shifting products."

Cash from energy and commodity exports has boosted Russia's economy since a crisis in 1998. The World Bank estimates real incomes rose by 80 percent between 1998 and 2007 to nearly $8,000 per person -- roughly level with Mexico and Lithuania.

Data from Moscow-based Business Analytica shows the number of bars, cafes and restaurants in Moscow rose by a third between 2004 and 2007 to 6,600, with the fastest growth at the mid-priced level. Big chains now own around a third of the outlets in Moscow, double the proportion in 2004.

Starbucks Corp., which is closing shops in North America, opened its first branch in Moscow in 2007 with a Russian partner M. H. Alshaya Company W.L.L and now has five, and Costa Coffee, owned by British brewer Whitbread opened in March through a joint venture with Russia's Rosinter.

Starbucks declined to give details of its plans but Costa aims to open at least 200 cafes in Russia, a market analysts described as a major growth area.

"All companies are focusing on the Russian market in all leisure sectors, not just coffee. It's a country that Costa has to be in," said UBS analyst Stamatis Draziotis.

CROISSANTS, SOUP, FISH PIE

Le Pain Quotidien's Zilberkweit said the potential in Russia was just too great to miss out on.

"In Europe, real incomes are not going up due to rising prices, but in Russia it's different," he said, wearing a grey London Business School sailing club shirt.

"Because the domestic economy is growing like crazy, incomes are still going up like crazy."