Shutting down loss-making stores has helped leading coffee chains like Barista, Costa Coffee, Tata Starbucks and Cafe Coffee Day improve profitability, and in the case of a few, turn the corner. Boutonniere Hospitality, which operates coffee chain Barista, reported a profit of Rs 0.63 crore in FY17 aided by a tax credit in the year (loss of Rs 36 lakh before tax credit), compared to a loss of `3.45 crore in FY16. The revenue of the company grew 491% to Rs 71.60 crore in the fiscal. The company presently operates 45 stores, after having closed down more that twice that number, most of them company-owned.
The company now plans to add 500 franchisee stores over the next five years, the company said in its annual report.
A senior official from Barista, who did not wish to be identified, said the company has only 10 stores in Mumbai and a total of 45 across the country that are operational. “We are focusing on adding new stores, having opened two in Pune last month, through franchisees, while the company-owned stores are being shut,” the official said. Emphasising the company’s new strategy of expansion through the franchisee route.
Saloni Nangia, president, Technopak, said, “Shutting down loss-making stores has helped coffee chains improve performance. Internationally, big retailers keep expanding and shutting loss-making stores at the same time. In a way its better to shut stores that don’t work than continuing to incur losses.”
Rival Tata Starbucks, a unit of Starbucks in India which formed a partnership with the Tata Group, too managed to narrow its losses in FY17 to Rs 32 crore from Rs 41 crore the year ago. The company clocked net sales of `272 crore, a growth of 14% in FY17, according to filings with the registrar of companies. The company at present has 106 stores operational in the country, after some pruning of underperforming ones, especially in Delhi, since 2016.
Meanwhile, country’s largest coffee chain Cafe Coffee Day (CCD), owned by Coffee Day Global, had shut between 25 to 30 stores in FY18, even as it added nearly 100 more stores, senior CCD executives said. At the end of Q3FY18, its pan-India network comprised of 1,704 outlets. Shuttering down loss-making stores has helped CCD improve its same-store sales growth (SSSG) over the last one year, Venu Madhav, CEO, Cafe Coffee Day, had observed in a recent earnings conference call.
Coffee Day Global recorded a 7.1% year-on-year SSSG in Q3FY18, better than the 5.2% SSSG in FY17. “Improving our menu and shutting down small-size cafés has helped us improve our SSSG. We will continue to shut the smaller stores of around 500 to 600 sq ft, as we are focusing on opening bigger stores of around 1,200 to 1,400 sq ft,” said Madhav. Net profits at Coffee Day Global grew 56% y-o-y to `10.1 crore in Q3FY18, gross revenue was up 22% from a year ago to Rs 496.2 crore.
Analysts point out that the company had been focusing on shutting loss-making stores in the past few years, which has helped it improve its profitability. Abneesh Roy, research analyst at Edelweiss Securities, says, “In the past two years, the management closed smaller size stores of around 500 to 650 sq ft, as these stores were cluttered and left customers wanting for more. The management is confident of increasing average sales per day per store to `20,000 in the next 3 to 4 years from the current `15,000.”
Competitor Devyani International, the master franchisee of Costa Coffee India, reported a net loss of `46.8 crore in FY17 compared to a net loss of `92.6 crore in FY16 with revenues rising 5.3% to Rs 814.5 crore. As Devyani International manages and operates quick service restaurants for Pizza Hut, KFC, Costa and Vaango, it isn’t fair to attribute the improved profitability only to rationalisation of Costa Coffee’s network, it is likely to have contributed to the trend. At present, the company has 46 Costa Coffee stores operational in the country, after shutting almost half its stores over the last one year. In an RoC filing, Costa Coffee said the company continued its focus on product innovation, cost optimisation, technology upgradation, consumer connect and loyalty programmes. All these efforts have resulted in narrowing losses of the company.
Experts said in the last three years there has been some consolidation in the café segment, but with the emergence of new domestic players and expansion of international brands the segment is set to see growth in the coming years. Tecnopak’s Nangia says, “Many new domestic and international brands are now opening outlets, largely in the metros and mini-metros. Established players like Café Coffee Day are continuing to expand in the Tier I to Tier III cities.” So, the growth story continues, but from here on it is likely to be a more profitable one.