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Can Starbucks Blend into France?

It's springtime in Paris. Like the cherry trees lining its boulevards, the city's caf?s are in full bloom. Peppered among them, though, is an incongruous sight: 23 Starbucks outlets, the beginnings of what Starbucks hopes will one day be a massive invasion. At first glance, Starbucks (SBUX) appears to be catching on. On a sunny Saturday afternoon in April, people are lining up out the doors of one of the Seattle-based coffee chain's stores in the trendy fourth arrondissement. The scene is the same across town in the tourist-packed sixth arrondissement.

Starbucks, of course, has been successful in lots of places. But France isn't just another country, and how far the coffee chain can go in one of the world's most traditional caf? cultures is anybody's guess. A rich, dark espresso sipped under a haze of cigarette smoke at a zinc bar or at a tiny cramped sidewalk table is about as quintessentially French as it gets. Starbucks' bright, upbeat image, with its large white paper cups of takeout brew, big sticky snacks, and no-smoking policy, feels a million miles away.

That's one big reason Starbucks may find it tough to expand beyond a few dozen stores. The French, for all their love of cutting-edge clothes, food, and film, are a very conservative people with deeply held traditions. During the protests over the new job legislation back in February and March, it seemed as if French students approached the protests as a rite of passage in much the same way that their parents took to the streets in May, 1968.

"OVER THE TOP." McDonalds' (MCD) success in France would appear to pave the way for Starbucks. However, the two U.S. companies target very different crowds. While McDo, as it is known in France, attracts the lower classes looking for a cheap meal, the Seattle-based company aims for a high-class clientele. At Starbucks France, young rich kids from the city's best universities mix with American and Asian tourists, and happily pay $5 for a Frappuccino.

French coffee drinkers who have ventured into a Starbucks are clearly among the minority ready for something completely different. One of those breaking away from tradition is Martine Puis, a 25-year-old student at the Sorbonne university. "I usually order the most over-the-top drink I can," says Puis, sitting at the packed Starbucks on the Boulevard Saint Germain sipping an iced caramel mocha topped with whipped cream. Conversely, the American and Asian tourists, who make up at least half of the clientele, opt for European drinks like espressos and cappuccinos.

Nevertheless, the U.S. giant has had to adapt to local tastes. Alongside the blueberry muffins are Franco-friendly caramel flavored ones. And though the smoking rule is strictly upheld inside the stores, many of them have pavement seating where the French can happily puff away.

SIZE MATTERS. But if Starbucks is finding its niche in the City of Light, is it profitable? The company, which runs the French arm as a joint venture with Spanish retail specialist Grupo Vips, won't say, but others are doubtful. "I think it's losing a phenomenal amount of money here," says Ralph Hababou, co-founder of Columbus Café, a French coffee store chain and Starbucks' chief rival in France. "The cost of hiring employees and buying leases is simply too high."

Columbus Café, meanwhile, has had a rocky ride. Established in 1994, the branded coffee chain expanded slowly to just over 30 outlets in 10 years, but has struggled financially. Last year it made $6.8 million in sales, but was still losing money, says Hababou. When Starbucks entered the market, it briefly considered buying Columbus, but decided against it, partly because the French company's stores were too small.

Instead, Starbucks set about moving into Columbus' territory. Today, the French company has scaled back to 24 outlets. Many of the stores it closed over the past year were in areas where a Starbucks opened.

NO CULTURE. One wonders why Starbucks, which counts more than 11,000 stores worldwide, is bothering with France in the face of such high operating costs and cultural resistance. "It's partly about brand building in areas of high tourist traffic," says Jeffrey Young, managing director of London-based retail analyst firm Allegra Strategies. In the tourist capital of the world, he maintains, the high cost of doing business is a worthwhile investment in marketing.

With slow and steady expansion over the next few years, Starbucks France could build up a nice business, says Young. But it is unlikely ever to be as important as markets like Britain, where the company is about to open its 500th store. Allegra expects branded coffee chains to represent just 250 outlets by 2008 in France, compared with the 55,000 traditional cafés. When it comes to coffee, at least, French purists need not worry about a U.S. cultural invasion.

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