Coffee chains in India, having entered the market more than a decade ago, are finding it hard to survive, with many even forced to shut down certain outlets due to high real estate costs in metros and tier-I cities. To compound things, there is very slow growth rate in the sector.
In the organised sector, cafe models incur the highest revenue-to-rent ratio, as rentals form a major part of operating expenses of coffee chains.
Also, coffee chains are highly sensitive to food inflation, due to which they have to increase their prices from time to time, causing them to lose customers who then look out for other value options.
But reinvention is the name of the game. Coffee chains are now looking beyond traditional locations and opting for places like high streets and malls where footfalls are higher, according to a report by Technopak Advisors on the coffee chain sector.
Bidisha Nagaraj, group president (marketing), Cafe Coffee Day, said, “On the real estate front, we have overcome this issue through implementing longer lease contracts, thus enabling us to channelise our time in finding innovative ways to keep our customers happy and business rolling. Longer duration also allows us to understand the surrounding area as it evolves and find appropriate ways to sustain ourselves and facilitate same store growth.”
“By far, the most aggressive player has been Cafe Coffee Day and they have had the first-mover advantage. They have expanded and also kept their prices lower than competition, which has helped them. They didn’t get into malls and usually stuck to high streets and didn’t venture into super premium locations, which worked for them,” said Samit Sinha, founder of Alchemist Brand Consulting.
Losses of the company have narrowed to R2.71 crore in 2013-14 compared with R4.66 crore in 2012-13, while Devyani International, the partner with which Costa Coffee entered the country, reported a loss of R60.5 crore in 2014 fiscal, compared with R49.4 crore in the previous fiscal.
However, consolidation is not expected in the sector, as players expect that there is space for a lot of players to still enter the market.
“Moreover, the large population base, increased disposable incomes and opportunities to expand in tier-II and III markets are factors propelling investment in this industry. With our demographics, there is plenty of room for all players,” said Nagaraj of Cafe Coffee Day.
Main players in the sector are Cafe Coffee Day, Barista, Costa Coffee and Starbucks. Last year, Australian coffee chain Gloria Jeans exited the Indian market, which was attributed to the entry of Starbucks, as well as slow growth rate in the sector.
The biggest Indian player so far is Cafe Coffee Day, with a retail footprint of 1,568 outlets across the country. A far-off second is Barista, with 169 stores. Sources indicate that Barista shut down 60 stores last year.
Technopak’s report on the industry estimates that the Indian coffee chain market stood at R1,820 crore in 2014 and is expected to reach R5,430 crore by 2020.
The total number of units currently stands at 3,500 and is expected to touch 6,200 by 2020. The coffee chain business is expected to grow at a CAGR of 20% in value.
THE CUP IS HALF FULL:
* The chain café market stands at R1,820 crore, growing at 20% in value and constitutes around 27% of the overall café market (R6,750 cr)
* In terms of number of units, the market is formed by about 3,500 units, expected to reach around 6,200 in the next five years
* Café Coffee Day is the market leader in terms of retail footprint, with 1,568 stores
* Brands such as Starbucks, Dunkin Donuts, Costa Coffee and Coffee Bean & Tea Leaf are other players
* Starbucks started its Indian operations in 2012 and crossed the mark of 60 stores in 2014
* QSR chains are also entering the segment. McDonalds has opened approximately 30 McCafes and plans to set up around 50-75 McCafés by 2015-end