Capturing India’s Percolating Coffee Market

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%.

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. “Foreign retailers have seen the phenomenal growth of homegrown brands like Café Coffee Day and Barista with increased out-of-home consumption of food. These companies have already established the café concept [in India], and the market is now beginning to look attractive to every coffee maker in the world. They feel they don’t have to start from scratch,” says Ramesh Srinivas, executive director at consulting firm KPMG.

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.

Increasing Coffee Consumption

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.”

MarketGate’s Nadkarni points out that the entry of big global brands like Starbucks and Dunkin’ Donuts will address consumers who are already exposed to those chains. “That could be a threat to existing players who will have to work harder to retain customers,” he says.

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.

Dunkin’ Donuts, which is known globally for pairing coffee with donuts and bagels, is banking on food to grab a bite of the Indian palate. “Unlike others who are pure cafes, the Dunkin’ story is about all-day food, donuts and coffee for premium and middle-class consumers,” notes Kaul. While coffee and other beverages bring in 60% of Dunkin’s revenues in the U.S., in Asia, food accounts for almost 80%, with beverages contributing a mere 20%. “There’s a big opportunity for both coffee and food in India,” Kaul adds. Dunkin’s Westernized menu will gradually expand to include Indian fare. According to Kaul, plans are to look at all formats for the new stores, including 100 to 150 square-foot kiosks. The first Dunkin’ store is expected to open in the first quarter of 2012. The target is to open 30 outlets in three years and increase to 100 in the next five years.

Expanding the Network

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.

White is also tweaking the company’s sourcing strategy for the Indian market. For the first time, Gloria Jean’s is sourcing and roasting coffee beans outside of Sydney; in this case, in India itself. That’s because coffee attracts a 112% import duty in India and in a price sensitive market like this, passing on the extra costs to the consumers would be suicidal for any player. “It just didn’t make sense importing them,” White notes. “We want to be at the upper end of the mainstream market and have to be cost effective.”

At Costa Coffee, the target is to take the 73-store tally to 300 by 2014. Australia’s The Chocolate Room (TCR), which set up shop in 2007 with two Indian techies as master franchisees, is aiming to go up from the current 40 outlets to 50 next year, including standalone shops and kiosks in malls. “We will spend a lot on marketing and visibility,” says L. Chaitanya Kumar, managing director of TCR India.

But Venu Madhav, chief operating officer of market leader CCD, is not unduly worried about competition. He believes that there is scope for another 4,000 to 5,000 new outlets over the next five years. “The category is still small. There’s room for everyone,” he says. Madhav expects the market to grow by 40% in the coming years. “New [consumers] are entering the segment and there’s a relatively [higher] degree of comfort in visiting cafes today.”

The market leader by a huge stretch, CCD currently has 1,132 outlets in India and 15 overseas. Madhav is now looking at opening another 250 outlets this year and 1,000 in the next three years. He is also experimenting across different formats — the regular neighborhood CCD stores; Coffee Day Squares that offer coffee from around the world for discerning consumers and the spacious Coffee Day Lounges. Madhav has also revamped the menu at the CCD outlets. While outlets along National Highways serve Indian staples like idlis (rice cakes), dosas (rice crepes), paranthas (stuffed flat bread) and biryani (vegetable rice) to travelers, CCD Lounge customers can cook up their own treats with a do-it-yourself menu. “Earlier, the functional need of consumers was coffee and conversation. Now, the consumer is spoilt for choice,” he says. To ensure that footfalls remain high, Madhav has recently signed up consulting firm Landor Associates to engineer a rebranding exercise for CCD.

At Barista, India’s second largest coffee chain, which since 2007 had been part of Italy’s Lavazza Group, a key part of the growth strategy is to target customers on the move. Barista plans to increase its number of outlets from 230 at present to 500 by 2014. A majority of the new locations will be located on the highways. Interestingly, both Barista and CCD have signed deals with leading oil companies — Indian Oil, Hindustan Petroleum and Bharat Petroleum — for setting up cafes in gas stations across India.

Other domestic players are also gearing up. Like CCD and Barista, the cafe chains are getting into newer territories, like highways, and captive locations such as hospitals and college campuses; experimenting with scalable new formats including kiosks and coffee carts; firming up on supply chains; refining and expanding menus, and also upping the overall experience quotient.

India’s coffee café story has its outliers, however, like Java Green from the Reliance Group. Java Green began life as a cyber café in 2003 to support the Reliance group’s telecom business and is now part of Anil Ambani’s empire. The strategy at Java Green is to open stores in locales like colleges and office campuses that have a captive audience. In exchange for free space and electricity, the institutions demand a 10% to 20% discount on all of Java Green’s offerings. The idea is to generate volumes for Java Green and also bring in subscribers for Reliance Telecom. But experts point out that this agenda has made Java Green a fringe player in the café sweepstakes. “The store has a good brand name and beverage range, but needs an aggressive owner. It’s a miniscule business for Ambani,” according to Chennai based G. Giridharan, who was closely associated with the brand during its initial days.

Roadblocks Ahead

Even as the market gets more competitive, there are strong roadblocks ahead. Take the price of roasted coffee. It is currently at an all-time high of US$7 to US$8 per kilogram, up 60% since last year. Then there is the huge real estate cost. For most foreign players, the rent-to-sales ratio in India is one of the highest across their global markets. With all players targeting a similar profile of consumers, zeroing in on the right location is crucial. Gloria Jean’s White points out that the mix of high rent costs and low menu prices puts tremendous pressure on the business.

Manpower is yet another challenge. Much of the success of a café depends not just on the quality of the products it serves, but on the overall ambience and guest experience. This requires trained staff. But vending coffee is not a highly skilled job and is low paying, which often results in high turnover. With every player on expansion track, there is a scramble for putting together the best team. Some brands like CCD and Gloria Jean’s have set up their own training schools, but for others it’s a tough task.

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.”

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