First It Was Coke & Pepsi, Now Its Coffee.......Are Indian Customers So Gullible....Shouldn`t we proud of our Garam Chai Ki Piali!!
Can we force them to change their Cup Ingredients as they have customized their Menu Pallates when it comes to Indian offerings!! |
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Starbucks, the world's
largest coffee retailer and Café Coffee Day, India's No. 1 chain,
square off even as rival chains struggle to keep up
It is 5 pm on a weekday
evening and the line at Starbucks in Indiabulls Finance Centre, a swish
business complex in south Mumbai, is teeming with executives looking for
their caffeine fix. With ties loosened and jackets casually slung over
their arms, these men and women from the financial services, consumer
goods and media firms housed in the towers of the complex are an ideal
target audience for a range of beverages and snacks sold by Starbucks,
the world's largest coffee retailer; in 20 months of its inception in
India -via a 50-50 joint venture with Tata Global Beverages -Starbucks
has set up 46 such stores nationwide and has plans for dozens more. Cut
to Ulundurpet, far removed from the urbane chatter at Indiabulls. This
town of some 400,000 people in southern Tamil Nadu is best known for
being halfway between Chennai and Tiruchirappalli, an industrial and
temple town some 320 km to the south. If Starbucks has embarked on its
fastest-ever expansion globally in India, the homegrown leader Café
Coffee Day (CCD) isn't easily intimidated. India's largest coffee
retailer has launched some 150 stores in the past 12 months and plans a
similar number in the next year. What's more, it isn't sticking to one
format. In a bid to firm up its position, CCD has launched formats for
malls, highways, an upscale offering called Lounge and a single-origin
coffee destination called Square. The world's largest chain and India's
No. 1 retailer are squaring up for control of the country's coffee
retailing market.
VG Siddhartha, the reticent founder of CCD, is all
beans when he speaks to ET Magazine. “Our dream is to be among the top
three retail coffee brands in the world,“ he says. Already, CCD is
present in some 200 towns across the country (it is often the first and
only coffee retailer in many locations) and is aggressively expanding
its footprint. “We hope to grow our retail business at about 20% in
2014-15 [and] we hope to do a revenue of `1,200 crore from retail sales
and another `350 crore from the wholesale and export business this
year.“ Siddhartha is firmly stepping on the gas with CCD. “We want to
have around 2,500 Café and Express outlets in three years...we will set
them up wherever there are opportunities, including at educational
institutions, hospitals, expressways and high streets.“ Bean There, Done
That Siddhartha, who pioneered the bean-to-cup concept in the coffee
industry -his Amalgamated Bean Coffee owns the plantations where coffee
is grown and processed and later served at CCD outlets -is now set to
take his next big step. According to reports, CCD has initiated plans
for an initial public offering, which may value the chain at $1 billion
and provide PE investors such as KKR an exit. CCD and its investors
declined comment on the possibility of such an IPO. A war chest from
such an IPO will help Siddhartha finance what is quickly evolving into a
two-horse race for India's coffee café mart. India's No. 1 chain, which
has spent the past two decades building up its business -and has been
predominately unchallenged -will face up to its strongest challenge yet.
The $15-billion Starbucks is preparing to raid its citadel, digging its
heels in for a long, bruising brawl. Coffee, Anyone? India is
predominately a nation of tea drinkers, with most chains struggling to
keep business afloat. Siddhartha opened the first CCD in 1996 on
Bangalore's Brigade Road, initially to serve pricey cups of coffee and
let customers experience internet, then a novelty. While he opened the
first store based on visiting a similar store in Singapore, the internet
novelty wore off and CCD gradually became a beverage and food retailer.
Over the past two decades, CCD and other chains have been trying to
persuade more people to visit their outlets and drink coffee. For all
the coffee drinking claims, India remains a relative lightweight.
Scandinavians throw back, by far, the most amounts of coffee and, across
the world, several other countries such as the US and China swill
vastly more coffee than India (see A Tea Country Still). Since
inception, CCD (and several other chains) have scaled up the coffee
drinking experience from crowded non-airconditioned cafes to far more
luxurious outlets, offering clean cutlery, a refined ambience and,
increasingly, a growing assortment of food. Indians have willingly
signed up, with industry estimates pegging this segment's growth at
about 20% annually. The advent of CCD and later a plethora of chains
targeting this free-spending consumer catalyz e d c o f f e e sales.
“Domestic consumption of coffee, which was almost stagnant in the 1980s
and 1990s, picked up an impressive pace in the past 7-8 years,“ says
Jawaid Akhtar, chairman, Coffee Board. “We estimate the domestic
consumption at about 115,000 metric tonnes a year now which is growing
at about 5% a year...driven largely by consumption through branded
coffee chains.“ CCD and Starbucks are both wrestling for a share of this
fast-growing market -and elbowing out the strugglers in their slugfest.
Risky Business CCD's Siddhartha will be the first to admit that running
a café chain can be a bruising business. For starters, real estate
costs have hobbled and humbled many of CCD's rivals, who've struggled to
make costly stores in central districts viable. According to industry
estimates, rentals can account for 15-25% of the cost of running a café
chain. Then, there's the investment in making a store appealing to
customers with its interiors, finding people to run them and building a
food and beverage menu that's hip enough to keep 18-24-year-olds -the
target market for coffee chains -coming back for more. CCD has tried to
find a way around this problem by enter ing into a revenue-sharing deal,
paying 10-20% of a unit's proceeds as a fee. “Store location is a prime
factor to con sider for these chains,“ says Re teesh Shukla, associ ate
director, food and agriculture, with Technopak, a busi ness
consultancy. “Re tail space is becoming very expensive, but you need to
balance the ever-in creasing costs of this prime real estate by being in
[relatively less expensive] areas frequented by the youth.“ CCD has
been successful in India because of its beanto-cup business strategy,
which gives it control over bean production and processing and greater
efficiency from its back-end set up. While Starbucks does have similar
strengths thanks to its Tata tie-up, industry watchers say its relative
lack of size in India means it's at a disadvantage in squeezing out
similar economies of scale. Opening a new store isn't just about finding
a good location and dressing it up for a brand-conscious audience. In
stead coffee chains need to figure out a tricky supply chain -how to get
food and beverage to these outlets quickly, while keeping quality high.
The others, who don't have this backward linkage, have predictably
struggled. While the opportunity may be tempting, food and beverage
outlets are dealing with a soft market, where consumers are cutting down
on how often they eat out and reducing how much they order when they
do. For cafes such as CCD or Starbucks, this is a blessing in disguise
-consumers are reducing their spend on full-scale restaurant meals and
instead scaling it down to a coffee and a snack. Starbucks' Advent Since
he started his coffee chain, Siddhartha is facing up to perhaps his
biggest challenge. Starbucks, which opened its first store in 1971 in
Seattle's Pike Market, today operates 20,519 stores globally. In the US,
the chain has become a byword for a quick, upscale cuppa (not just
coffee, but increasingly tea too, with Teavana Oprah Chai launched with
talk show host Oprah Winfrey), with Alist celebs and executives all
having their personal favourites. Starbucks has attracted thousands of
loyal customers to its My Starbucks loyalty programme and has even
worked with tech start-up Square to pilot cashless transactions at its
stores. While Starbucks has till recently focused on its home market, it
has changed tack in the past few years. For ex ample, it announced am
bitious plans to scale up its presence in China it will open 700-odd
stores this year -even as it looked to man age tough economic headwinds.
In October 2012, the firm announced a JV with the Tata Group to launch
some 50 stores in India. While Starbucks thought of initially going it
alone in India (foreign direct investments in single brand retailing are
ko sher) it decided to lean on Tata Global Beverages' ex perience in
the coffee in dustry supply chain to give it additional leverage here.
Expanding faster in China and then India is financially prudent for
Starbucks. Starbucks' operating margin for the second quarter of finan
cial year 2014 (ended March) was 32.8% for the China Asia-Pacific
segment, 21.6% for the Americas and 5.7% for Europe, the Middle East and
Africa. While CCD had to build its brand from scratch in India,
Starbucks hopes to leverage a globally familiar label with its target
audience. 
When its first store opened in each city, winding queues were
formed well before opening time. Familiar with its offerings in tall,
grande and venti sizes, thanks to consumers who'd travelled overseas,
either in real life or virtually, Starbucks' India business got off to a
rousing start. Chinese Inspiration Starbucks has shown some gumption
going after opportunities overseas. For example, it has made a splash in
the Chinese market, says Elizabeth Friend, an analyst with Euromonitor,
a research and analysis firm. “Starbucks has done very well in a number
of emerging markets...much of this has had to do with the brand's very
strong global reputation, which helped it to gain more immediate
traction than other lesser-known chains,“ she says. “They've also done a
really great job tailoring their brand -through store design, menu
innovation and even learning how local stores are operated -to best suit
each individual market.“ In China, this has included leaning toward
larger store footprints that offer space to relax with coffee in the
afternoon. The addition of beverages such as the red-bean frapuccino and
a broader tea-based menu have helped Starbucks make strong inroads into
the Chinese market, says Friend. Starbucks' rise in China may provide
many lessons for its India business. In a large country Starbucks has
had to localize its menu to keep customers coming in -something it has
done quickly in India too, with dishes such as chicken tikka panini.
Starbucks had cornered over two-thirds of the coffee café market in
China until 2010, estimates Euromonitor, even if aggressive domestic
rivals have more recently cut its market share to 60%. Friend of
Euromonitor says Starbucks has been able to replicate some of this
success in India, too. “Some of India's new outlet launches have been
among Starbucks' most successful in its history,“ she claims. “Starbucks
has been steadily gaining on local leader Café Coffee Day, though the
chain will continue to pose a significant threat.“ Slow Brew Starting
with its first store in Elphinstone Building in south Mumbai -the Tata's
iconic Bombay House headquarters is just a stone's throw away
-Starbucks has built its business steadily in India. In fact, the chain
is behind its initial target of 50 stores -it has 46 operational
currently -but has expanded to the National Capital Region, Bangalore
and Pune as it seeks to take on CCD. According to analysts, Starbucks
has firmed up its presence as a premium coffee retailer, with some malls
even using it as a carrot to attract free-spending consumers to its
premises. “Having a Starbucks outlet is a guarantee to attract upscale
customers to a mall and this in turn helps convince international labels
to rent space there,“ says Anand Sundaram, CEO of PPZ, a mall
management firm which operates malls nationwide; RCity in Mumbai's
Ghatkopar suburb, for instance, houses a Starbucks store. A 34-year-old
Tata Administrative Services graduate is piloting Starbucks' business in
India. Avani Davda went from being an executive assistant to Tata Group
veteran Krishna Kumar to helming the joint venture with Starbucks for
India. Having tasted her first Starbucks Coffee in Seattle in 2011 (she
counts Sumatra and India Estate Blends as her favourites), Davda thinks
the chain has plenty of scope for growth. “India is one of the most
exciting markets in the world...we believe we have a unique opportunity
to deliver an unparalleled coffeehouse experience to Indian consumers,“
she says. “We firmly believe in our ability to build and grow the
Starbucks brand in India and are confident in the opportunities that the
Indian market offers for it to become one of the top five markets for
Starbucks globally.“ Heady Growth India provides a fertile market
opportunity for CCD and Starbucks. According to company executives and
analysts, there is plenty of opportunity for growth.
Euromonitor says
the Indian coffee café market will grow from `1,683 crore in 2012 to
`2,276 core in 2017. “Growth of cafes in India is driven by many
factors, including favourable demographics, rising income levels,
graduation from mid-sized towns [to large metros] and the advent of
global chains,“ says Sunitha Barlota, a research analyst at Euromonitor
International. “Cafes in India are considered a perfect place to
socialize among college goers and working professionals.“ Others such as
Asitava Sen, head of the food, agriculture research and advisory team
at Rabobank Group in India, believe there is plenty of headroom for
growth in this space, with cafes just starting out on a sharp growth
curve. Sen estimates that there are around 2,000 coffee cafes across
India and there is room for 5,000 or more nationwide. “The Indian market
is very different from the West ... here a visit to a café is more a
social occasion and less a quick visit...the opportunity for café owners
is to try and get a greater share of wallet from these consumers,“ he
adds. Starbucks has discovered over the past few months how different it
is doing business in India. According to Manmeet Vohra, the Indian
operation's marketing and category chief, they discovered that peak
hours in India were 2 pm to 6 pm (compared to 5 am to 11 am in the US,
for example) and takeout orders accounted for barely a fifth of their
business in India (compared to 80% in the US). What's more, as customers
spend time in the cafes, they needed to design them differently. So the
cookie cutter design gave way to customized spaces in each city -for
example its store in Pune uses copper elements, in a nod to the heritage
of the city. “After office and home, we want to be the firm favourite
as a third place to hang out,“ Vohra adds. According to brand consultant
Harish Bijoor, consumers have made their preferences clear -Starbucks
is the more upscale hangout, while CCD is a budget option. “Both these
brands have strongly defined identities and consumers identify with
them,“ says Bijoor, who worked for eight years at Tata Coffee (a
subsidiary of Tata Global) between 1993 and 2001. By his estimates there
are currently 2,350 cafes, while the potential is for as many as 6,440
such outlets. Success Potion According to analysts such as Euromonitor's
Barlota, there are three or four key ingredients that determine the
success of a coffee café. Other than location -CCD's success to date is
determined by being located close to colleges, business complexes, high
streets and malls -pricing can be a make or break factor. This is
particularly crucial at the lower end of the market where
budget-conscious buyers are wary of shifting from cheap restaurants
(sometimes called Darshinis) to a CCD or Starbucks. Those that do make
the shift and pay the premium can be demanding on quality of service and
product. As consumers make their choices known, there seem to be strong
indications that India's coffee café market is going to consolidate.
According to analysts, while CCD may be the mass market leader,
Starbucks has occupied a strong position in the premium space, with
plans to slowly but surely expand its presence. This means others in the
market, including Costa Coffee, Baritsa and Gloria Jean's, will
struggle to attract and retain loyal custo mers. As the market gets
polarized, CCD and Starbucks are expected to soon dominate the coffee
café sweepstakes. Some of these signs of strife are already visible. For
example, Barista, the second organized retail chain in India after CCD,
is on the market for a third time. While Ravi Deol, the chain's first
CEO, was tipped as a leading takeover candidate, his interest has faded
in the past few weeks. Deol couldn't be reached for comment. Italian
owner Lavazza also declined comment. Then, Costa Coffee, brought into
India by Devyani International, is the subject of much wrangling between
partners. Devyani, which runs the India business for the likes of KFC
and Pizza Hut, has struggled for years with the Costa Coffee business.
Virag Joshi, the CEO of Devyani, wasn't available on the phone and
didn't respond to an email seeking comment. Costa Coffee, however,
doesn't seem to have given up on India. “Costa is the world's second
largest coffee shop brand and is growing rapidly in its domestic UK
market and globally adding over 300 stores a year,“ says Kate Manning, a
spokesperson for the chain. “We are very much committed to growing our
presence in India.“ While Costa has some 120 stores in India, she
declined to enumerate the firm's future plans. Costa's India head,
Santhosh Unni, has recently quit. Third, Gloria Jean's is also dealing
with its own dose of bitter beans, with its joint venture with The
Landmark Group on the rocks. Both sides didn't respond to emails seeking
comments, but real estate analysts said the chain was scaling back its
presence in costly high-street locations to salvage the business.
However, CCD's Siddhartha isn't getting distracted by the woes of the
competition. “All foreign coffee brands are looking at the top 5% of the
Indian market -i.e. high in come group consumers,“ he says. “But we are
focusing on the dynamic youth population. Roughly 70% of Indians today
are below 35, and our goal is to reach out to them.“ Focus Matters
Experts argue that as a scale player, CCD has been able to escape much
of the tumult in the sector because it has focused on its core
proposition of affordable coffee, with comfortable surroundings, and
steered clear of trying to tinker too much with a winning formula. This
is not to say that it has stood still in an evolving market. CCD, for
example, gets around 35% of its business from food -an area it only
focused on in the past 12-18 months. “What stands out about Siddhartha
and CCD is their ability to make strategic changes in response to
customer demand and competition -expanding the food offerings or
rationalizing store count to sustain growth and profitability are great
examples,“ says Sanjay Nayar, MD and CEO of KKR India. “There is a great
opportunity for CCD to leverage its large network to drive growth in a
new direction,“ he adds. In March 2010, KKR invested $210 million in
Coffee Day Resorts, the holding firm which includes the coffee retailing
business. Venu Madhav, who has been with CCD since day one and got
promoted as chief executive over a month ago, says the coffee retailer
is streets ahead of the competition in understanding the Indian
consumers' needs. “Cafes are social hubs, where coffee and conversation
play a key role in the success of an outlet,“ he says. “India is a
value-conscious market and we see ourselves in the affordable luxury
category of coffee retail.“ Madhav is keen to expand the reasons
consumers stroll into a CCD -not just for a relaxed cuppa but for
breakfast, lunch and dinner, too. It's no surprise that CCDs on many
highways are popular rest stops and the chain is focused on expanding
its presence in the space. Brand Battles CCD is acutely aware that it
takes little for consumers to switch loyalties -however good the coffee
may be. To try to keep pace, CCD's interiors are periodically updated to
prevent its ambience from looking dated and jaded. “The look of our
stores changes completely every couple of years,“ avers Madhav. While
CCD continues on its rapid expansion path, Starbucks isn't rushing to
keep pace. According to industry sources, Starbucks could add a dozen or
more outlets in the next year in India and is looking to expand its
presence in the cities it is present in and consider going to
second-tier metros, too. “Each market comes with its own set of
opportunities and challenges and our guiding principle across all
markets continues to remain the same: to inspire and nurture the human
spirit -one person, one cup and one neighbourhood at a time,“ says
Davda. And in the process she'd be hoping Starbucks coffee becomes most
Indians' cup of tea. 2015* 2,046.58 2016* 2,166.95 2017* 2,276.34
Source: Euromonitor *Projections
Ref: AN ET ARTICLE By Rahul Sachitanand & KR Balasubramanyam
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