Changing the brew

Café Coffee Day is rethinking its model as international brands make a beeline for india. Will the new mix stick?

Geeta Nair bubbles with enthusiasm as she prepares to brew siphon coffee at our table at the newly-opened Café Coffee Day Lounge in Mumbai. The 20-something coffee brew-master brings over a vacuumised glass coffee maker, where the upper chamber has the ground coffee beans and the lower has water. The coffee maker is balanced on a small burner on the table and taken off the flame as soon as the water starts boiling.

As the water vapour escapes into the upper chamber, it mixes with the coffee grounds and freshly brewed coffee trickles down to the lower chamber. Nair deftly pours out the distinctly aromatic coffee into a mug and serves it to us with a plate of dates. “Dates go really well with siphon coffee,” she smiles.

The coffee cost us ₹146, several times the price of a simple cappuccino at a regular CCD outlet. The coffee beans are the same Arabica that parent company Amalgamated Bean Coffee Trading Co grows in its estates at Chikmagalur and supplies to its cafés across India. The difference lies in the brewing technique, which attained cult status in the US a couple of years ago. Besides, at the Lounge, we’re also paying for the ambience and a more extensive, international menu of salads, pastas and sandwiches, as well as a variety of mixed drinks. 

At CCD’s headquarters in Bengaluru, chief operating officer Venu Madhav A sips a cup of regular joe as he explains the strategy behind opening the more upmarket Lounge and Square even as the company focuses on expanding its regular CCD cafés across India. “It is time we offer our consumers the next level experience,” he says. “Unless we expand our offerings, it will be difficult to grow the market.”

Left unsaid is the fact that the café market in India is suddenly heating up. The big daddy of coffee bars, Starbucks, will open its first outlet in India by August, about two months behind another American biggie, Dunkin’ Donuts. Estimates say the Indian café market has enough room — and more — for everybody, but at least initially, CCD is likely to feel the pinch of increased competition. Which is why it started its pre-emptive moves a couple of years ago, brewing a three-pronged strategy. The question is, will it work?

What, me worry?

Currently, the Indian café market is worth about ₹800 crore and it’s growing at 15-20%, thanks to a youth population with increasing disposable incomes. As things stand, the ₹1,000-crore CCD is enjoying all the perks of being the first mover and market leader by a huge stretch. Of the 2,000-odd cafés currently in India, 1,200 belong to CCD (including the premium Lounge and Square). In addition, it operates about 900 or so kiosks that cater to the takeaway clientele. CCD started in 1996 and three years later had opened just around 25 stores.

It’s only in the past few years that the pace of expansion has really picked up steam: in 2011 alone, the company opened 250 cafés — that’s more 20 a month —  and it plans to cross 2,000 stores by 2014. “Our aim is to open at least one store a day,” declares K Ramakrishna, director of marketing. 

Close to 60% of CCD’s revenue comes from the retail business (which includes Café, Fresh & Ground, CCD Express), with the remaining accounted for by exports and other businesses. Incidentally, the company has also entered the hospitality business recently to further leverage its coffee plantations (See: Coffee Day’s here).

 Over the next two years, the company will invest over ₹200 crore in expanding its business — from internal sources as well as private equity infusion into the parent company. There’s no room in the business model for franchises, so CCD will bear all expenses of opening new outlets. That’s about ₹30-40 lakh for a regular café and ₹70 lakh for a Lounge. 

Ramakrishna and Madhav are quick to dismiss any charges of being worried by impending competition. The market will only grow, they say. “We are already ahead of the market and understand consumer psyche well. For us, it’s business as usual,” adds Madhav. Still, there’s no denying the entry of two global giants will shake things up considerably.

The Seattle-headquartered Starbucks has over 17,000 stores across the world and in India, it’s tied up with another heavyweight, Tata Coffee (a subsidiary of Tata Global Beverages). Tata will not only roast coffee beans to supply to Starbucks, it will also open 50 stores in the first year of the joint venture. Meanwhile, Dunkin’ Donuts has entered India through a franchise agreement with Jubilant FoodWorks, which distributes Domino’s Pizza, with a plan to roll out over 100 stores in the next five years. 

The first Starbucks outlet, according to sources, will open at the Taj Mahal Hotel in Mumbai in August, which seems a clear indication of Starbucks’ positioning strategy in India — premium, if not super-premium. Dunkin’ Donuts, in contrast, is the all day coffee and food outlet and it will have the benefit of Jubilant’s experience in India (Domino’s created the pizza delivery market in India). Given the positioning and perception of these two brands around the world, which are also likely to influence how Indian consumers see them, CCD’s going to be flanked by strong rivals on both ends, the premium and regular. Perhaps it’s just as well that the company has plans in place for both these segments.

Horses for courses

CCD forayed into the premium segment about two years ago, around the time Starbucks first started exploring India as a potential market. Apart from opening Lounges in select cities (33 outlets across three cities), it also launched another format called the Square, which serves only single-origin coffee (coffee from one estate, not blended) such as Ethiopian Sidamo, Peruvian Cinchoma and Arakku Valley and Mysore Nuggets from India. There are only two outlets at present — in Bengaluru at CCD’s headquarters and at Delhi’s T3 terminal.

That’s too slow, feels Harish Bijoor, CEO, Harish Bijoor Consults and a former vice-president of Tata Coffee. “CCD should have expanded more aggressively earlier on. Today, real estate costs are the biggest hurdle for most players — CCD would have been at an advantage had it grown faster in the past.”

Meanwhile, it’s also investing in the look and feel of the regular CCD outlets to make them more appealing to its youthful customers. The brightly coloured furniture and fixtures, and caricatures and graffiti on the walls are a stark contrast to the formal ambience of a Lounge or Square. “While the earlier cafés have a heritage look, all our newer ones are more artsy, which appeals to a younger audience,” explains Madhav. 

The company is also taking care to be where its youthful consumers will be (the typical coffee café customer is 18-22 years old). “We have started segmenting opportunities and are trying to reach consumers where they are,” says Madhav. Not only is it looking at setting up stores on the high street and malls in both metros and tier 2 and tier 3 towns, CCD is also aggressively setting up Coffee Day Express kiosks (small, 100-120 sq ft outlets focusing on takeaways) in corporate parks, educational institutions and hospitals and smaller airports.

There are already over 900 Express outlets with plans to add another 200 this year. “This segment gives returns from Day One and the investment is almost 50% lower than in a café,” points out Puttaraj AG, president of Coffee Day Express. 

It’s a good idea for CCD to have several formats, believes Bijoor, as long as they are run as separate business units. “The moment you look at a bouquet of offerings being managed by one SBU, only one will get attention and the others will be neglected.” But it’s not easy running a takeaway business, especially for a company that runs a regular café service as well.

Players like Barista (which has 165 cafés) wound up their takeaway business because of the low margins. Now, Starbucks has a strong takeaway business internationally — about 8,000 takeaway outlets at last count, of a total 17,000 — but it’s doubtful whether it will introduce that format in India. Dunkin’ Donuts, though, is another matter altogether — after all, its partner in India is a takeaway specialist.

Food for thought

More than Starbucks, the real threat to CCD’s supremacy comes from Dunkin’ Donuts, believe retail analysts. “They are the ones who are going to ramp up fast by opening stand-up cafés,” points out Harminder Sahni, MD of retail consultancy Wazir & Co. And if CCD alienates its existing customers by launching premium offerings in the same city, as Sahni fears, they may switch loyalties. “By getting into premium formats, CCD is exposing itself to unwanted competition. Its focus should only be at the value end, which it is good at,” he adds. 

There’s another front where Dunkin’ Donuts may put up stiff competition: food. Across the world, the company is known as much for its eats — doughnuts, of course, but also other baked goods like bagels and muffins as well as sandwiches. In India, coffee consumption is more occasion-based rather than a habit as it is in most parts of Europe and America, so the focus on food is very important. Make that Indian food.

Other international coffee chains that came to the country, like Costa Coffee, have realised the Indian palette is different. Initially, the British coffeehouse, which has 75 stores across India, offered only European accompaniments like croissants, pastries and wraps. But it quickly expanded its food portfolio to additions like chicken tikka rolls and curry-based vegetarian sandwiches. Dunkin’ Donuts, too, has already announced that its Indian outlets will also serve foods that will appeal to local customers and tastes.

For its part, CCD has also been working on its menu. Rather than expand it across all outlets, the company is making changes based on the location. For instance, the CCD stores at Tirupati and at Katra, en route to Vaishno Devi, serve only vegetarian dishes made without onion and garlic. Similarly, CCDs on highways offer parathas and dosas that are made to order in kitchens adjoining the store.

It’s not only the front end of the store and the menus that are getting a facelift: the company is also taking a relook at its processes and making improvements. “There’s a lack of uniformity in our products at present,” points out Pradeep Kenjige, head of R&D, as he offers us a frappé at CCD’s coffee research lab in Chikmagalur. It’s a perfect blend of coffee, milk and ice-cream, several notches higher than the similar drink we had at a CCD highway outlet the previous night on our drive from Bengaluru to Chikmagalur. Kenjige points to a pouch of dairy base his lab has formulated, which he used to make the frappé. “This will be sent to all our stores. All the barista has to do is blend the mix and serve it to the customer. The consumer will no longer be at the mercy of the barista,” he adds.

Similar bases have been prepared for other drinks on the CCD menu and in the works are new recipes for fruit-based drinks, iced tea variants and so on. All of which should be introduced across outlets over the next few months. To further ensure uniformity of taste — one of the biggest pluses of a Starbucks or any other big international chain is the promise of a uniform experience across all stores all over the world — CCD has also increased the number of hours it trains its baristas and started central sourcing of its ingredients.

Earlier, local sourcing for each city meant the taste of the foods and drinks varied; there were also issues with inventory management, which Madhav hopes the central sourcing will address. There’s an increase in transportation costs, no doubt, but it’s able to offset these by negotiating better input costs. 

From bean to home

There’s one area where CCD can score over other coffeehouse giants — rather than wait for customers to come to its cafés, it can reach them in their homes, thanks to its coffee powder business. Apart from the recent launch of a premium imported coffee machine that uses single-use coffee capsules made by CCD locally — and is more affordably priced than its only competitor, a similar machine marketed by Lavazza — the company also sells coffee grounds from its plantations.

Amalgamated Bean is among India’s top two coffee producers and exporters (the other is Tata Coffee), with 10,500 acres of coffee plantations in Chikmagalur. It produces 7,000 tonnes of coffee every year and sources another 35,000 tonnes from other plantations. About 25,000 tonnes is exported and 3,000 tonnes used in CCD cafés. Madhav says that going forward, CCD’s internal usage is likely to go up by at least 25% year-on-year. 

That still leaves about 14,000 tonnes to be sold to domestic consumers. It doesn’t sound like much but remember, India is essentially a tea-drinking country. Despite an annual output of 300,000 tonnes, domestic consumption of coffee, according to the Indian Coffee Board, is a meagre 100,000 tonnes. The biggest market for the brew is South India, where four states together account for about 60% of the national consumption.

CCD’s strength lies in ground coffee — used for brewing ‘filter’ coffee — which accounts for about 40% of the branded powdered coffee market; the rest is accounted for by instant coffee, where Nestlé’s Nescafé leads the pack (See: It’s hot). The leader in packaged ground coffee is Bru Green Label, which has a 40% market share, but CCD claims its Coffee Day Perfect (its mass retail ground coffee brand) is No.2.

The brand is also sold through CCD’s Fresh & Ground stores; the company operates 422 stores in the four southern states and is now looking at expanding the network to other states like Maharashtra this year. Recently, it has started a pilot in Bengaluru to promote the concept of freshly-ground coffee through the FMCG route. It gives retailers smaller packs of Coffee Day Perfect with the promise of replacing unsold stock with fresh coffee after seven days. “It’s worked really well and we plan to extend it to other markets as well,” says Fresh & Ground’s president CJ Jayanth.

Now, CCD is attempting to take on Bru, especially in rural markets. In January, it launched a brand Trishakti, priced at ₹20 for 100 g, similar to Bru Green Label’s price. Currently launched only in Karnataka, Jayanth claims Trishakti is already selling 10 tonnes a month; Bru sells close to 100 tonnes. “The FMCG strategy is still in its infancy,” says COO Madhav, adding that the rural distribution strategy will be an area of focus, going forward. 

In the next few years, CCD is aiming for revenues of ₹3,000 crore and to become the No.3 coffee company in the world, after Starbucks and Dunkin’ Donuts. During the same time, those two giants are going to begin their India operations. “CCD doesn’t need to worry as it has an established coffee market. It is going to remain a top player for a long time,” says Bijoor.

It’s not as if there are no challenges ahead, even if they are the usual ones: high real estate costs, finding trained manpower and rising input costs. But, by all accounts, the café market is perky enough for several players. Now all CCD needs to do is ensure that its brew remains to customers’ taste.