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Cafes are cool, business is hot

business Updated: Oct 29, 2011 02:12 IST
Rachit Vats
Rachit Vats
Hindustan Times

In a nation largely comprising of tea drinkers, it is hardly surprising that coffee culture took time to gather steam. With Barista, Cafe Coffee Day and Costa Coffee wooing customers with wi-fi access, sandwiches and books, coffee shops have become the favourite hang-out spots for Gen X. As the world’s largest coffee chain Starbucks gears up to enter India, incumbents are pursuing aggressive expansion plans.

Things have come a long way for VG Siddhartha, who owns the Amalgamated Bean Company that runs the Café Coffee Day chain of coffee shops. This week, he popped up in the Forbes magazine list of India’s wealthiest people with a personal net worth of $595 million (R2,900 crore).

Growth has been dizzy since he opened the first CCD in 1996 at Bangalore’s trendy Brigade Road. CCD is gearing to face the challenge of the world’s leader in the business, Starbucks, which is set to expand into the world’s second-fastest growing major economy.

Consumers under 35 years who comprise 50% of India’s population are taking to the coffee shop culture strongly. Demand for coffee beans in India has more than doubled in the last 10 years. Industry officials say coffee chains are present now only in 180 of 5,000 towns in India, signaling potential for growth.

With an estimated coffee chain market of R1,000 crore poised for further growth, the homegrown café chains are expanding furiously to be ahead of Starbucks. CCD is joined by Delhi-born pioneer Barista, which is now part of Italy’s Lavazza after changing hands twice – once in a partnership with Tata Coffee and the second time in a stake sale by the Tatas to high-profile investor C.Sivasankaran.

By 2014 Cafe Coffee Day aims to have 2,000 outlets, adding 900 outlets across 330 towns in India over the next three years. It is also betting big on its premium offering The Coffee Lounge. It now has 20 lounges and 100 more are planned. The lounge format will help it target the premium clientele and position itself as a competitor to Starbucks.
Britain’s Costa Coffee, which entered India in 2005 has been cautious. It now has 85 stores and plans to raise the number to 300 in three years.

“The industry is growing at 40% annually and right now the issue is not of competition but expansion. Henceforth, the coffee chain culture in India will all be about a better experience,” said Ramesh Srinivas, executive director and head, consumer markets, at KPMG India.

Starbucks has a lot of hard work ahead.

“Their spacious, well-designed and free wi-fi service is sure to attract the business crowd. For other segments, pricing has to remain competitive to attract mass markets,” said Devendra Chawla, president of the Future Group’s food business.

Brotin Banerjee, who heads the Tata’s real estate division and earlier headed Barista, said the business needed scale to be profitable and new comers need to expand fast. Often, café chains need buying power for coffee, sugar and other inputs to keep costs low, as real estate costs are high.

Most chains settle for high traffic options such as highway petrol stations and malls to get high volumes.

“Unless you are growing coffee it is very difficult to break even. In our case we have our logistics and back-end taken care of and that significantly adds to profit,” said K Ramakrishnan, President, marketing, Cafe Coffee Day, whose parent owns large plantations.

Lavazza officials declined to speak to Hindustan Times for this story.

Costa Coffee shut many shops when it entered India. It is now looking at re-entering smaller towns. “Our plan was to go from tier 1 to tier 2 towns. The strategy did not work as the towns were not ready then. Now we are looking to re-enter Punjab and debut in newer cities,” said Santhosh Unni, chief executive officer, Costa Coffee.

Costa Coffee has barely shut shops in the last 18 months and instead doubled presence from its 40 outlets in 2009.
The average café bill is between R100 and R150, and Starbucks may raise the amount.

“Pricing coffee (and other things) beyond a price point does not work for a brand. It has to be about experience,” said Banerjee.

While an official confirmation is awaited Starbucks (in alliance with Tata Coffee) is expected to debut at Mumbai’s Taj Hotel in Colaba. Starbucks did not respond to the queries on their India expansion plans.

Sanajay Coutinho, former chief executive officer of Barista, said the Tatas, with their knowledge of real estate and coffee growing may be the right partner for Starbucks.
A lot will depend on how the giant adapts to local demands.

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