AOL LEAVES BRAZIL, STARBUCKS ARRIVES

UNCLAS SECTION 01 OF 02 SAO PAULO 000216 SIPDIS DEPT FOR WHA/BSC, EB, D - RMILLS STATE PASS TO USTR FOR MSULLIVAN NSC FOR SUE CRONIN TREASURY FOR FPARODI USDOC FOR 3134/USFCS/OIO/WH/EOLSON USDOC FOR 4332/ITA/MAC/WH/OLAC/MWARD SIPDIS E.O. 12958: N/A TAGS: EINV ECON ECPS ETRD ASEC BR SUBJECT: AOL LEAVES BRAZIL, STARBUCKS ARRIVES SAO PAULO 00000216 001.2 OF 002 ¶1. SUMMARY. After six years in Brazil, bankruptcy crises at parent company America Online Latin America have forced America Online Brazil to cease operations. Meanwhile, American retailer Starbucks will soon set up (coffee) shop in Brazil, with the first store scheduled to open in Rio de Janeiro, April 2006. END SUMMARY. -------------- AOL LEAVES BRAZIL -------------- ¶2. After six years in Brazil, U.S.-based Internet giant America Online (AOL) has decided to shut down its operations in the country. The company plans to cease operations in Brazil next month and shift its subscribers to Terra Networks, a subsidiary of Spain's Telefonica. AOL-Brazil placed ads February 7 in major Brazilian newspapers to announce plans for a March 17 shutdown. ¶3. AOL entered Brazil in late 1999 when the dot-com boom was still going strong, hoping to make South America's biggest and most populous nation the cornerstone of its operations in the region. Unfortunately, AOL-Brazil never became a major competitor in the country's ISP market, and the broader financial crisis at America Online Latin America (AOLA) spelled the end for the Brazilian venture. In May 2005, AOL-Brazil laid off 80 employees at its Sao Paulo headquarters, and moved in November to dissolve its partnership with Brazil's second-biggest bank, Itau, which held 12 percent of AOLA. At that time, AOLA ended its marketing alliance with Banco Itau, with the bank agreeing to pay USD 3.7 million to AOLA and AOL-Brazil to escape potential liabilities under the marketing agreements. More recently, AOLA agreed to a severance package with CEO Charles Herington, who will receive a USD 538,000 severance payment, as well as USD 461,000 as a bonus for 2005. ¶4. The decision to pull out of Brazil comes as AOLA struggles to emerge from bankruptcy, and was made possible after a U.S. bankruptcy court ruled in January that AOLA could transfer its subscribers to Spanish ISP group Terra. AOLA first sought bankruptcy protection in June 2005, and in December asked the court to allow it to transfer its clients in Brazil to Terra. The main shareholders in AOLA are AOL, the Venezuelan group Cisneros, and Banco Itau. ¶5. While AOL-Brazil's recent ads did not mention Terra, a statement on the AOL-Brazil Web site urged subscribers to open an account with the Spanish internet service provider (ISP). "In fact, an accord exists whereby subscribers who pass from AOL to Terra have access to a series of benefits," said Terra Brasil spokeswoman Luciana Lima. A document filed with the U.S. Securities and Exchange Commission certifies that Terra is prepared to pay between $760,000 and $1.9 million to acquire AOL-Brazil's client base of roughly 150,000. The final amount of the payment will depend on how many AOL-Brazil customers actually sign up with Terra. Terra Brasil currently has more than 2 million subscribers. -------------- STARBUCKS IN BRAZIL -------------- ¶6. After five years of rumors, the U.S. coffee shop Starbucks arrives in Brazil and is confronted with its first dilemma even before acquiring the site where it will install its first shop - how to charge USD 4.50 for an espresso as it does in the U.S. without reducing its target clientele. Starbucks plans to open 100 shops across the country over a two-year period. Half the initial USD 20 million investment will be provided by the Brazilian couple Maria Luisa and Peter Rodenbeck. The Rodenbecks were responsible for bringing Outback Steakhouse to Brazil in the 1990s and McDonalds in the 1980s. The first Brazilian Starbucks is expected to open in Rio de Janeiro by April. ¶7. Founded in Seattle in 1971, Starbucks was named after Starbuck, a character in Herman Melville's novel Moby-Dick. According to the SAO PAULO 00000216 002 OF 002 company's fact sheet, in 2005 Starbucks had 5,715 company-operated outlets worldwide: 4,666 of them in the U.S. and 1,049 in other countries. In addition, the company has 3,956 joint-venture and licensed outlets: 2,222 of them in the U.S. and 1,734 in other countries. ¶8. COMMENT. Starbucks has pursued an ambitious campaign of expansion in international markets, establishing coffee shops in 32 countries beyond its U.S. base. As such it has come to be regarded, particularly by the anti-globalization movement, as a flagship of globalization and a prime example of the ills some feel globalization promotes. Several groups maintain websites decrying the company, criticizing its labor relations, environmental impact, and holding it as a paragon of what some see as U.S. cultural and economic imperialism. Branches of Starbucks have been attacked during protests, including those against the WTO meeting in Seattle. While no public outcry has risen up against Starbucks' plans in Brazil, Brazilian demonstrators have attacked symbolic U.S. businesses in the past. For example, shortly after the commencement of Operation Iraqi Freedom in March 2003, anti-war protestors stormed a McDonald's franchise (twice) on Paulista Avenue (Sao Paulo's financial district) causing serious damage to the restaurant, and threatening workers' safety. END COMMENT. ¶9. This cable was coordinated with Consulate Rio de Janeiro and Embassy Brasilia. McMullen