You are here: Home » Companies » Features
Business Standard

Coffee chains wake up to new reality

Coffee chains in India are struggling to turn the corner

Viveat Susan Pinto  |  Mumbai 

In August this year, Turin-based coffee company Lavazza, the owner of Barista Coffee in India, sold the Indian coffee chain to Carnation Hospitality, changing the ownership of the company for the fifth time in two decades.

Lavazza's exit seven years after it bought Barista cafes and its coffee vending business from serial entrepreneur C Sivasankaran for Rs 480 crore, highlights the key challenge before coffee chains in India: profitability. It is not just the smaller chains but even bigger ones are struggling to turn the corner, prompting players to recast operations, hunt for new partners or exit the business.

It is believed that UK-based Costa Coffee is looking for a new local partner following differences with Ravi Jaipuria's Devyani International, its current local partner, over expansion of the chain in India. Both Costa and Devyani declined to comment on their plans. Dubai-based Landmark Group, the master franchisee of Australian brand Gloria Jean's Coffee in India, is also reportedly talking to strategic investors to sell the business.

Among the new entrants, US-based coffee chain Starbucks, which has a joint venture with Tata Global Beverages in India, is also contemplating scaling back the size of its coffee shops to cut costs. The downsizing comes even as Starbucks attempts to keep its expansion plans intact.

Experts say India is a tough market to crack for coffee retailers. The first problem is that unlike burgers or pizzas, coffee does not generate huge sales. So while fast-food joints see high footfalls and sales volumes, cafes are seen as meeting spots where people come to socialise rather than consume what is on offer on the menu.

"This is the big difference between a cafe and a fine dining or a casual dining restaurant. People quite often are keen on meeting up with friends and acquaintances and may not necessarily have something substantial at a cafe. The ticket size, therefore, is smaller in comparison to a quick-service restaurant or a fine dining place," says Anand Ramanathan, associate director of consultancy firm KPMG.

The second problem is the emphasis on location. Retailers say managing rentals is becoming a huge problem because of the shortage of properties at good locations. As a result, retailers often have to shell out a disproportionate amount on rentals. For every Rs 100 worth of sales at a cafe, Rs 35 is the consolidated cost of the product including food & beverage, while the balance Rs 65, which is the gross margins for a cafe, has to cover operational expenditure such as rent (15-18 per cent), staff (10 per cent), utilities (6 per cent) and store-level promotions (4-5 per cent). After deducting the costs, the net margin on a cup of coffee is only about Rs 10.

Arvind Singhal, chairman, Technopak, a consultancy, says: "Rentals are a big challenge in the retail industry and with the emphasis on premium properties, cafes find themselves saddled with high rental costs."

Barista, for instance, had to close 30 outlets that were making losses. At present, Barista has 190 outlets across lounges, cafes and kiosks at corporate offices. Carnation Hospitality, its new owner, could not be immediately reached on its future plans for Barista. But when acquiring the cafe chain two months ago, executives at Carnation had indicated that their endeavour would be to create a profitable business. That means, the focus will be on ensuring that costs and revenues are in sync with each other.

While growth is important for the companies, they are also increasingly realising that not all markets are worth being present in. While the potential that Mumbai and Delhi presents to retailer is the highest in comparison to other cities, the competition here is also fierce. "Total retail spending by consumers in India is $525 billion (or Rs 31.5 lakh crore). Of this, Mumbai and Delhi alone accounts for $44 billion (or Rs 2.64 lakh crore), which is close to 8.4 per cent of India's total consumer spending and equal to the next four cities put together. These four cities are Kolkata, Bangalore, Hyderabad and Ahmedabad," says Singhal.

Still, barring Starbucks, no other player has undertaken an expansion drive in the two metros. The last few years have also been challenging from a consumer spending point of view. "Discretionary spending has been under pressure, which has impacted food service as well as cafe players," says Abneesh Roy, associate director, research, institutional equities, Edelweiss.

New players such as Australia's Di Bella Coffee, which relaunched operations in India recently after snapping ties with its local Indian partner, have had to lower price points of its coffee by about 15-20 per cent to make it affordable to customers. Phillip Di Bella, founder, Di Bella Coffee, says, "We are not in the race to set up a huge number of stores. Our game plan is to ensure our outlets are profitable, based on the location and ambience we provide."

The current quarter is expected to be the last before an urban recovery sets in, say analysts tracking the sector. But whether cafes will be able to turn a corner is anybody's guess.

Subscribe to Business Standard Premium

Exclusive Stories, Curated Newsletters, 26 years of Archives, E-paper, and more!

Insightful news, sharp views, newsletters, e-paper, and more! Unlock incisive commentary only on Business Standard.

Download the Business Standard App for latest Business News and Market News .

First Published: Thu, October 23 2014. 22:28 IST