Kamath, Business Standard
30 September 2015
It might not exactly be a battle zone, but the historic south
Mumbai neighbourhood of Fort recently witnessed a quiet retail
war. Not very far from the Bombay High Court runs a busy street
that leads to US coffee chain Starbucks first Mumbai store.
Situated near Horniman Circle, a stones throw from the Bombay
Stock Exchange, the store experienced quite a crowd when it first
opened. Along the usually crowded street leading up to it are
a dozen other shops that jostle for attention, among which is
a store that has shut down and whose signboard reads The
Its not unusual to see a shut store in Mumbais many
alleys and bylanes, but whats interesting about this closed
outlet is that it used to be run by one of Indias oldest
and largest coffee chains Café Coffee Day (CCD).
The story goes back to October 2012, when Tata Starbucks, an equal-stake
joint venture between Tata Global Beverages and Starbucks Corporation,
opened its first store in India in the aforementioned locality.
CCD, owned by VG Siddhartha, wanted to take the fight to the enemy
camp. The Lounge was one such format aimed at countering the sophisticated
look and feel of Starbucks.
The nearly 2,000 sq ft outlet clearly was no match for the global
coffee giants maiden store. While business picked up for
the new store, customers deserted CCDs The Lounge, eventually
leading to its closure sometime in mid-2014. Although Starbucks
is a relative newbie on the Indian café circuit, its brand
recall and growing presence over 75 outlets in two years
is giving customers who grew up with CCD a chance to switch
Take Ratnesh Jain, 18, a college student who keeps track of every
penny he spends. Depending on how much time he has on his hands
and the location that is most convenient to him, Jain picks either
a CCD or Starbucks outlet to meet-up, although he says he clearly
prefers Starbucks, a departure from his choice in the past. Its
difficult to match the service and ambience of Starbucks. Not
just that, Starbucks delivers value for money in terms of a better
menu with larger and more delicious helpings, as compared with
CCD, reveals Jain while sitting at a CCD store in upmarket
Jain goes on to explain, For a very small portion of a
Dark Fantasy cake, CCD charges about Rs. 100, plus extra for toppings,
taking the entire bill to about Rs. 200. Starbucks, on the other
hand, charges around Rs. 200 for a similar dessert and offers
a much larger portion, complete with toppings. Jain doesnt
mind that CCD doesnt offer him free Wi-Fi, although he feels
the pinch of the coffee and food not matching his palate. Many
others like Jain have developed a newfound loyalty for Starbucks,
where they say they find better service and ambience. You
dont mind paying more in return for better ambience, lively
atmosphere and an eclectic menu. CCD got lucky as it had a first-mover
advantage and customers did not have much choice back then,
points out 20-year-old student Ketaki Sharma. She is a regular
at Starbucks and spends hours working on college projects there,
along with her classmates and friends.
Yet another Starbucks patron 20-year-old Damini Kane
says there is a clear difference between the service standards
of Starbucks and the rest of the café chains in India.
CCD should certainly focus on improving its menu, becoming
more customer-friendly and, importantly, make its cafes more inviting,
says Kane. At a Starbucks outlet, you might find everyone from
office-goers to students, tourists and the like making full use
of the uninterrupted free Wi-Fi.
In response, CCD tried to field the same proposition to draw
in customers and not all loyalists switched camps. Youngsters
like Pakhee Malhotra are clearly not buying into Starbucks
phoren halo. Starbucks doesnt sell good coffee. It
sells overpriced coffee. To pop about Rs. 200 for a Grande Caramel
Macchiato you must have a really rich dad. Hats off to you for
drinking away money like that, writes Malhotra in an article
on iDiva. Though this counterpoint seems to favour CCD, in an
age of growing competition and fickle brand loyalty, it needs
to look at ways to fire up its brand pull and improve customer
satisfaction. While the café chain has its task cut out
when it comes to creating a great consumer experience, the 55-year-old
Siddhartha deserves accolades for the manner in which he built
and, more importantly, ran profitably an enviable
coffee business for the past two decades.
The idea of setting up cafés was not even on the agenda
for Siddhartha, the son of a coffee plantation owner who is married
to the daughter of SM Krishna, the former chief minister of Karnataka.
Getting into the coffee business was incidental. We started
off exporting coffee and realised two years later that it would
not take us too far, says the reclusive billionaire as he
makes himself comfortable at the Lounge outlet at Nariman Point,
the central business district of Mumbai. It was in 1994 that he
came across an article on a German company called Tchibo, which
started off as a 10x10 store in 1949 to finally emerge as a chain
of coffee retailers and cafes.
I was inspired by that and started with 20 stores in south
India selling coffee powder. In 1995, we decided to take the café
route, since there was a bigger opportunity for value addition
there. In the coffee powder business, the mark-up is 100%, while
in the café business it is as much as 800-900%, points
out Siddhartha. Taking inspiration from how other international
brands went about building their businesses, Siddhartha and his
team started putting the company together.
While exports continue to be a part of the business, the coffee
arm today comprises a café network, which includes the
value format of CCD, The Lounge for trendy and affluent customers
and The Square for coffee connoisseurs. While Lounges (between
1,000 sq ft and 1,300 sq ft) and Squares (between 2,500 sq ft
and 3,000 sq ft) are located at expensive locations that attract
more affluent clientele, the CCD outlets are at more affordable
Besides, the company also sells vending machines to institutional
and individual clients, sets up kiosks and is selling brewed coffee
powder through Fresh & Ground branded outlets. (See: A distinct
flavour) When CCD entered Mumbai 14 years back, it opted for smaller
stores as the team wasnt confident that the market was ready,
apart from the fact that rentals were too high even back then.
Had we opened 1,500-sq ft stores in Mumbai at that time,
we would have gone bankrupt. Our key competitor at that time was
paying 70% of revenue only towards rent, points out Siddhartha.
Interestingly, CCD did not opt for expanding through the franchisee
route and instead chose to spend its own capital. However, to
counter high rentals, it entered into revenue-sharing agreements
with corporates as well as fuel stations. At present, 25% of its
outlets are run on a revenue-share model.
We have five to seven corporate relationships where we
only have revenue-sharing agreements. For them, CCD becomes a
complementary service, mentions Siddhartha. Highlighting
the ownership approach, the companys draft prospectus mentions
that complete ownership allows it to control all the operational
aspects of its café operations, thereby, ensuring that
it is able to deliver a consistent experience to its customers.
From a one-store-one-outlet (Coffee Day Cyber Café) format
in Bengaluru to around 1,500 stores, CCD today has a stranglehold
over the café market. Over the past two decades, quite
a few players have come in and set up shop, but none could match
the speed and scale at which CCD grew. Barista, which set up shop
in 2000, is a distant second with 169 outlets, followed by Costa
Coffee with 89 outlets.
Although Barista initially started operations with premium pricing,
it rejigged its strategy mid-way, making its menu more affordable.
But that has not worked for the coffee chain, which has already
changed hands twice. The other fringe players in the café
business include the California-based The Coffee Bean and Tea
Leaf and home-grown Mocha. Australias Di Bella Coffee, which
had a troubled presence in the country after exiting a JV in 2013,
is now re-entering the market with a new licensee, Electel.
Putting CCDs growth in perspective, Saloni Nangia, president,
market research, Technopak Advisors, says, Café Coffee
Day had a very aggressive expansion strategy and it looked at
smaller cities, too. It did not limit itself and adapted formats
depending on the size of the location, thus, ending up in all
sorts of nooks and corners.
Pricing is another aspect that CCD built its plank on. For a
little perspective, a small portion of cappuccino at Starbucks
is priced at about Rs. 129, while it comes for Rs. 79 at a Café
Coffee Day outlet. A sandwich at Starbucks, however, costs no
less than Rs. 170, while at Café Coffee Day one can have
it for Rs. 89. Today, unlike Starbucks, the café network
has four different price points.
For instance, what it charges at an uptown Mumbai outlet will
be very different from what it charges in Navi Mumbai, a Greater
Mumbai Metropolitan suburb. On average, however, CCD is still
the cheapest among the café and quick service restaurant
(QSR) chains. We are 57% cheaper than the competition. Will
they reduce prices by 40% and still be able to pay their rentals?
quips Siddhartha. While he does have the upper hand over his rivals,
CCD has its own share of problems.
Storm in a coffee cup
Over the past four years, the vertically integrated CCD has had
to shut over 300 stores, even as it opened close to 700 stores
over the same period. A record 175 outlets were closed in the
nine months of FY15 alone . The companys draft prospectus
mentions that in 2014, it undertook a strategic review of its
café network and decided to close certain cafés
due to their smaller size, lower levels of performance and higher
rentals on renewal of leases.
Putting the development in context, Siddhartha explains, In
Mumbai, 10-12 years ago, we took on lease 400 sq ft stores, which
does not make much sense in todays day and age. Also, ahead
of the listing, we wanted to do a one-time clean-up. Incidentally,
amid the closures, CCDs average sales per day (ASPD) per
café grew by 3.9% from FY12 to FY13 and by 11% from FY13
to FY14, further increasing by 13% to Rs. 13,505 for the nine
months of FY15.
With an average store size of 1,700-2,000 sq ft and average spend
per person of Rs. 175-200, Starbucks delivers ASPD in the range
of rs. 60,000-65,000, nearly four times that of CCD and Barista
(See: Far from hot). Industry observers believe the spurt in CCDs
average customer spend could partly be because of the high level
of closures in FY15 and the fact that it has opened just 79 outlets
in the nine months of FY15 against 158 for the whole of FY14.
Siddhartha, however, is not giving up on his expansion plan.
The company plans to spend Rs. 88 crore from the proposed IPO proceeds
to set up 216 outlets and 105 kiosks by FY17. The way I
see it, India can have thousands of stores on the highways at
our price point. On the Kanyakumari-Madurai highway, we have two
stores; between Goa and Mangaluru, we have three. That is a very
small number. We have sold 1.3 billion cups of coffee and tea
this year. Over the past five years, we have grown 30% in that
business. This is only the beginning of our growth story,
However, after getting aggressive with the Lounge and Square
formats to take on Starbucks, Siddhartha had to scale back his
plans as he found the move unviable. According to sources, around
2011, Siddhartha wanted to have 25% of CCDs total outlets
under the Lounge and Square formats. But by 2013, realising that
the capex involved for both the formats was twice that of a regular
CCD outlet, Siddhartha decided to change tack.
As a result, the Lounge format is restricted to 42 stores currently
and the Square format to just seven stores. Though Siddhartha
is a prudent competitor, what is helping him is that other café
players are happy playing second fiddle to CCD. It is a
typical expansion curve. First, you aim for scale and brand recognition
and then focus on quality of profits as the model stabilises.
Our expansion is now value-based and profitability-centred. It
also has to do with market conditions and spending sentiment as
a whole, says Virag Joshi, president and CEO, Devyani International,
which runs the Costa Coffee chain.
CCD, however, will have to counter competition that is slowly
building up from QSR players such as Dunkin Donuts and McDonalds
McCafe. Dunkin Donuts has opened 50 stores since its entry
in 2012. In case of McDonalds, which introduced the McCafe
brand three years ago, the economics work out even better, as
the new brand is run from within the existing McDonalds
outlet, thus saving on rentals.
Amit Jatia, vice-chairman, Westlife Development, the master franchisee
of McDonalds in west and south India, says, What works
for us is that we already have about 210 restaurants at prime
locations in the west and south markets, with about 50-odd McCafes
within them. What this format does is bring incremental revenue
for us without any extra real estate costs. We already have accessibility,
so what we are doing is introducing our customers to coffee and
subsequently ramping the business up. McDonalds plans
to take up the McCafe count to 70 by the end of FY16 and nearly
double that number in another two years.
Jatia acknowledges that the coffee business in India is nascent
but growing. What hes betting on, however, is the potential
that the category promises. The real café chain story
will unfold over the next two to three years. The market could
get polarised. McCafe is not just about coffee but doubles up
as a beverages platform for us as well, and we have to ramp it
up quickly, he adds.
Just like McDonalds, Jubilant Foodworks, which introduced
the Dunkin Donuts brand in India, sees the brand serving
the dual purpose of a QSR and a café chain. Dev Amritesh,
president and CEO, Dunkin Donuts, says, We are in
a sweet spot between a QSR and a café. This kind of positioning
is very nascent and the opportunity to create an interesting experience
is immense. Donuts differentiate us from the rest the product
has a strong novelty and pull factor. It complements the category,
which is important to the overall business.
While no one can beat CCD in terms of its scale, with Starbucks,
Dunkin Donuts and McCafe entering the picture, industry
benchmarks have moved up significantly when it comes to customer
experience. In other words, even as it has one eye on profits,
Coffee Day Enterprises will have to ensure a greater consumer
It has scale but still needs to work on experience management,
wherein similar customer experience is delivered across the chain.
It remains to be seen how CCD will fare wherever it has multiple
coffee and QSR chain brands around it, feels Nangia.
Concurring with the view is Devangshu Dutta, chief executive,
Third Eyesight, a retail consultancy. A significant threat
to older café chains lies within their own business. The
biggest challenge in this sector is making sure that brand desirability,
ubiquity and product-service consistency are balanced. Indian
chains run the risk of becoming less desirable as compared with
international brands, or may deteriorate in their product-service
consistency with rapid growth.
And while Starbucks with its limited presence may not be a challenge
for now, what it has done to the detriment of CCD is that it has
spoilt the consumer, especially the youth segment.
Starbucks has made our customers more demanding. They want
the experience of Starbucks at CCD prices. Today, 60% of CCDs
business is generated by repeat customers and 40% by new customers.
The big challenge is getting the share of the 40% without losing
the existing 60%, says an ex-CCD employee. The challenge
for Siddhartha in creating a greater consumer experience is multi-pronged,
as it involves staff, the right menu mix and investing in a better
ambience. Point to staff-related issues and Siddhartha says, We
have 13,500 people working for the brand. Yes, we have attrition,
although employees at above-the-store level have stayed with us.
At the top level, we have 700 people with an attrition of not
more than 5-6%. But the issue is with the front end, which
deals with customers. We interview 100 and shortlist 30,
but at the end just 15 join us, and they, too, do not last for
more than a year, says an insider.
Siddhartha does not refute the observation. For someone
earning Rs. 10,000 per month in Mumbai and having to travel two hours
to work, the quality of work is always a tricky issue. However,
training can make things better. Initially, the staff was
trained for just six days, but over the past year-and-a-half,
the company has adopted a policy of retraining recruits a month
later, for another 10 days.
We have a school in Bengaluru where 500 people are trained
each year. If we increase our training programme from six days
to three months, the quality will improve tremendously,
When it comes to creating a good ambience, Siddhartha says that
in Mumbai alone, CCD has opened 20 stores of over 1,000 sq ft
each. These stores have a better ambience and are as good
as any international cafés.
Realising that existing cafés, too, would need sprucing
up, the chain is looking to spend Rs. 60 crore on refurbishment
of existing outlets, besides improving vending machines. The other
critical challenge that the chain needs to work on is the inconsistency
in the quality of its beverages and its limited food menu. In
the cafe´ market, beverages primarily dominate the stock
keeping unit and sales mix, given the nature of the coffee retail
For CCD, beverages contribute 61% and the rest comes from food.
Starbucks, on the other hand, has an average beverage sales contribution
of 53% and the rest is food. In an earlier interaction with Outlook
Business, Avani Davda, CEO, Tata Starbucks, had mentioned, Food
will definitely be a key part of our business here and it is something
we will focus on. In fact, Taj Sats has helped the chain
develop a menu that keeps in mind local preferences. So, theres
a cardamom-flavoured mawa croissant that Davda says has done
quite well, besides tandoori paneer roll, murgh kathi wrap
and chatpata paratha wrap, among others.
In the case of CCD, till two years back, food was sourced from
210 vendors and today, that number is down to just four. Siddhartha
is clear about the revenue mix that he is comfortable with. Food
is complementary and we will do things like serving a cookie with
a cappuccino. We want to keep that 60% intact. Food will never
exceed 40% of our revenue. Coming to inconsistency in terms
of coffee taste, Siddhartha points that CCD sources handcrafted
coffee, which makes the taste inconsistent. A lot of companies
have the technology for mechanised brewing. We, too, can manufacture
our own machines and that can be done when we think we need to.
If CCD has to increase its same-store sales growth and profitability,
it will have to look at ways to offer consumers more menu options,
especially at a time when expansion will eat into profits on account
of depreciation. Fundamentally, CCD will have to work on
improving its billing value, says Nangia.
Given that the company reports profitability for the entire coffee
segment, its not clear if the café business is profitable
on a standalone basis. Typically, 30% of CCD outlets bleed,
40% barely break even and the remaining 30% drive the business,
says a company source. In fact, profit from coffee and related
businesses for FY14 was Rs. 25 crore, a decline of 19% from the
same period a year ago, although it bounced back to Rs. 30 crore
in the nine months of FY15.
coffee and allied businesses account for over 50% of revenue and
are profitable, on a consolidated basis, the entity has been loss-making
for the past three financial years all through FY14 and
in the subsequent nine months of FY15, with a consolidated debt
of over Rs. 2,800 crore. Of this, the debt in the coffee retail
business accounts for only Rs. 300 crore, of which the promoter
plans to repay Rs. 125 crore.
The company, which counts KKR and Rakesh Jhunjhunwala among its
investors, aims to utilise Rs. 633 crore about 55% of the
issue proceeds towards partial repayment of loans availed
by the company and its subsidiaries and invest the balance towards
expansion of its coffee business. Jatia believes that the IPO
will help CCD keep its momentum going. CCD has been a front-runner
for coffee in India. Once it has additional funds, it will be
able to reinvent itself, he feels.
Clearly, Siddhartha realises that the café market might
just be hitting escape velocity and he does not want to let go
of the opportunity. I would be kidding myself if I say I
have got it 100% right. We realise we have made mistakes and will
rectify that, although you must also look at great American brands
and how they were placed when they were 20 years old, smiles
Siddhartha, as he eyes customers who have just made themselves
comfortable at The Lounge.
(Published in Outlook