Capturing India's Percolating Coffee MarketPublished: July 01, 2011
The Café Coffee Day (CCD) location in Mumbai's upmarket Lokhandwala area is a favorite haunt of 23-year-old television actress Sweety Sangar. She visits this coffee shop, part of India's leading café chain, at least twice a week with her friends. "I love the ambience and the crowd here," says Sangar, sinking comfortably into a lounge chair. "I even discuss films [for possible work] with Bollywood directors here."
Just across the road is Barista, another popular coffee outlet. Two 30-year-old friends-cum-entrepreneurs dig into rich chocolate brownies in between working on their laptops. They are waiting to interview a candidate for their start-up. "This is a cool place to grill someone," says Tejas Mahurkar, one of the pair. In the same neighborhood is Café Mocha, yet another coffee shop. Like CCD and Barista, it too is a favorite with college students and young adults.
According to New Delhi-based research and consultancy firm Technopak Advisors, there are over 1,500 coffee cafes in India at present; of these, around 1,000 have opened in the past five years. Valued at around US$185 million, the organized café market in India is estimated to be growing at a compound annual rate of 25%.
The Coffee Chain Refuge
Stirring up the market is India's growing youth segment: around 50% of India's 1.2 billion people are 25 or younger. By 2015, this is expected to increase to 55%. For this segment, particularly those with steady, disposable incomes, coffee shops serve as a social hub. "Coffee chains offer a basic emotional need -- refuge. They are brands between home and office," according to Shripad Nadkarni, managing director at Mumbai-based business and marketing consulting firm MarketGate Consulting.
"The growth [of cafés] has been triggered by rising youth spending, paucity of alternative hang-outs and an increasing number of new office complexes and colleges," adds Arvind Singhal, chairman of Technopak. The market, he says, has the potential to touch US$800 million to US$900 million with a total of 5,000 cafés by 2015. "The sector is wide open," agrees Gaurav Marya, president of franchise solutions firm Franchise India, which has six café clients.
It's not just local coffee chains that are looking to get a seat at the table. With growth slowing down in developed markets, India is fast becoming a hot spot for coffee retailers across the globe. Some, like the U.K.'s Costa Coffee and Gloria Jean's of Australia have already gained a foothold. They set up shop in India a couple of years ago and are now in the process of expanding. Among those waiting to make a splash in the Indian landscape are players like U.S.-based Starbucks and Dunkin' Donuts, London's Coffee Republic, Australia's Coffee Club and France's Alto Coffee.
India's coffee consumption pattern gives a clue to the potential that the market holds. The nation's per capita consumption of coffee is just 85 grams, compared to 4.5 kilograms in France, 4.6 kilograms in Japan and 6 kilograms in the U.S. The Indian Coffee Board's numbers reveal that while India is the sixth largest coffee producer in the world, with an annual output of 300,000 tons, domestic consumption is only a third, or 100,000 tons. That's because like most of Asia, India is predominantly a tea drinking nation. Coffee is a staple only in the southern part of the country.
Till the mid-1990s, coffee consumption in India stagnated at 55,000 tons annually. It has doubled since then because of the growing coffee café culture led by domestic brewers CCD and Barista. Over the years, others like the Coffee Bean & Tea Leaf, The Chocolate Room, Qwiky's and Café Nescafe joined the party. Hindustan Unilever, the Indian subsidiary of Unilever, is currently pilot-testing Bru World Café in Mumbai with four outlets.
Consultants believe that the entry of global heavyweights will change the game further. "The entry of Starbucks and Dunkin' Donuts will energize the cafe market," says Harish Bijoor, a brand consultant and visiting professor at the Indian School of Business in Hyderabad. According to Bijoor, there is bound to be a deeper degree of investment by the existing cafe players, which will help broaden and deepen the base for coffee in India. "Add to it the different formats that will enter. Dunkin' Donuts worldwide is a pick-and-go play. On-the-go coffee consumption is still nascent territory in India, despite the population being peripatetic within cities. This will add more zing."
Creating New Entry Points
With 17,000 stores in 55 countries, including 426 in China, Seattle-headquartered Starbucks brewed an agreement with Tata Coffee, India's largest coffee producer, in January. Starbucks will source and roast green coffee beans from Tata Coffee and will also set up retail outlets in partnership with the Tatas. In an interview with Reuters, Starbucks CEO Howard Schultz, said the company is "enthused" about entering the Indian market. According to Schultz, Starbucks will look to create different entry points for different demographics and "will create food relevant to Indian consumers that [it does not] provide anywhere else."
Starbucks had in fact begun scenting opportunity in India much earlier, and initially wanted to make a solo entry. But the company's effort was stalled by FDI regulations -- India does not allow 100% foreign ownership in single-brand retail outlets -- and was compelled to take the partnership route.
For Dunkin' Donuts, too, it's been a long journey. In February, following two years of groundwork and negotiations, the company announced a master franchise agreement with north India-based Jubilant FoodWorks, which operates the Domino's pizza chain in India. "We will raise the bar for existing players," says Ajay Kaul, Jubilant's CEO, who will oversee Dunkin's expansion.
Meanwhile at Gloria Jean's, regional general manager Tony White is also gearing up for a marathon. Gloria Jean's currently has 16 outlets in Mumbai and Delhi. White is looking to increase that number to 25 by year's end across other metros, and then jump eightfold to 200 by 2014. "Once we establish beachheads, we will go to smaller towns," he says.
With more players entering the arena, the challenges around managing costs, even as one strives to deliver the best international standard of cafe experience, will only intensify. Indian consumers, however affluent, have always put a premium on value-for-money offerings and, as White notes, in order to be successful, every player will need to strictly adhere to the "trifecta of product quality, value-for-money pricing and customer engagement. It will be difficult to scale a large business without the calibration of all three components," he says. Adds Franchise India's Marya: "It's time for everyone to tie up the loose ends and take consumers to the next level."