Sunday, November 13, 2011

Future of Coffee Retail Chains in India

"After Starbucks with Tata, Dunkin Donuts is also entering Indian market. Will India be a success story for these coffee retail chains or is Indian market not big enough for all these players?"


Lokesh Harnal, MDI Gurgaon

With over 170,000 coffee farms in India, cultivating nearly 900,000 acres of coffee trees, India is the 5th largest producer of coffee in the world, out of which 75% is exported. The current market for coffee in India is $ 160 million, making it the second most popular beverage, growing at an astronomical rate of 40% year-on-year. A favorable demography, growing economy, and increasing disposable income, the whopping 68% growth rate of Café Coffee Day and 36% growth rate of Barista, reinforce the success story India could and should witness in the industry of Organized Coffee chains.

The present Government policy permits a 51% investment in single-brand products, allowing for a congenial platform for leveraging of the synergies by both the International players with experience of retailing and the domestic players providing the premium arabica coffee beans (TATA Coffee) and roasting facilities. In addition to this, the collaboration to promote responsible agronomy practices, including training for local farmers, technicians and agronomists to improve their coffee-growing and milling skills, is a welcome practice.

The present production and domestic consumption make for a considerable difference in the demand and supply equation, favoring a potential capitalization by new entrants.
Moreover, the concept of coffee chains in India has been positioned around selling a much loved, cordial and welcoming ambience for youngsters to interact, hangout, spend soothing time amidst while providing coffee and scrumptious snacks.


Srikkant, IIMS

The coffee retail industry seems to have attracted a lot of interest over the last few years. The FDI inflow in to the ‘Tea and Coffee industry’ has increased from just 186mn in Jan 2010 to 460mn in Dec 2010 and the increase has been very steady. However, there are a lot of pitfalls with such a burgeoning investment spree on the industry.

According to Coffee day 54% of Indians still prefer tea, 17% prefer plain milk while only 13% of Indians prefer Coffee for a drink. Also, coffee is predominantly a south Indian drink where ‘filter coffee’ is the most preferred which none of the coffee retail chains provide. This choice of the coffee retail chains has further restricted the market potential.

Secondly, the target market of these retail chains is largely the ‘affluent youth’ in the upmarket. These retail chains have long ago moved from ‘product selling’ to ‘experience selling’. The value chain of the coffee industry is like this: Arabica grade coffee is valued at Rs. 142 per kg at production, exports yield a rate of Rs. 165 and Retail selling is at a rate of Rs. 260+. However, in a CCD, the average price of coffee which used 12-16gram of coffee at a cost of Rs.4 is Rs. 42. This kind of pricing means that all new entrants will only be competing in the upmarket leading only to increased competition.

Thirdly, fixed costs are extremely high and in most stores, just the rent eats up to 20% of the sales. A lot of these stores require extensive styling and lot of initial investment goes into the outlet design. This nature of the industry favours ‘price wars’ which is bound to affect the industry’s margins and pricing. It is clear that this stereotypic model of growth is not good enough to take in this kind of rapid investments and it is time the ‘Coffee retail’ industry looked at a different model of growth.

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