Case Study: Coffee Cafe Business in India

Starbucks started in Seattle in 1970 as a gourmet coffee retailer, selling fresh ground coffee beans to local coffee lovers. Starbucks CEO, Howard Schultz spotted an unfulfilled market need for cafes serving gourmet coffee directly to consumers. This proved to be a sound market penetration strategy and led to a large loyal consumer base.

Read: Case Study of Starbucks: An Amazing Business Success Story

Entrepreneurs in India discovered the romance of coffee at Starbucks and a few coffee chains, such as Barista, Cafe Coffee Day, and Qwiky’s have sprung up in metro cities. People of all age groups are extending enthusiastic welcome to this new entrant and drinking coffee like never before. Coffee lovers have always been lyrical about the virtues of this beverage — coffee inspires poetry and inflames prose; it is capable of firing passion, and stir people to romance, and drown a lover in dreams. The word coffee originates from Turkish kahvelt, which is wine prepared from fermented juice of ripe coffee cherries. Traditionally, coffee cafes in countries like Italy, France, Vienna, or London were the points where philosophers, writers, painters, and musicians spend hours savoring their coffee and let their creative juices flow.

In India — cafes or addas in Calcutta (now Kolkata) acquired the status of their legendry counterparts of 19th century Europe, where artists of various descriptions and anarchists, with dry hair and a kind of seriousness peculiar to them jostled together with their khadis and jhollas. Being seen sitting in a cafe with a cup of coffee for hours together discussing their favourite and hot topics was a kind of distinction for being progressive.

Times changed, and today’s cafes reflect the befitting ambiance of contemporary times, yet each cafe reflects a distinct character. Barista is brightly lit with orange colored tabletops, Italian furniture, and music resounding in the air. Qwiky’s has transparent glass walls through which consumers contemplate the buzz of the world, so that they are part of it and yet away from it. There is a message board on which a consumer can scribble a line to loved one. In addition, there is a Buddhist bell to sound one’s satisfaction by ringing it. Prices suit every pocket, ranging between Rs. 10 and Rs. 150, and the brew is lip smacking variety of imported toppings.

For some, coffee sitting is incidental to hawking a lifestyle. The emphasis is on merchandising, such as T-shirts, greeting cards, and wristwatches. Each of the cafes plans a portal and a guest loyalty programme. With this high demand boom in coffee retailing, the image of coffee is changing from old-fashioned to young and modern. Harish Kapoor, vice president marketing at Tata Coffee says, “These are part of a coffee movement. There will be a third place for families to be in besides home and office.” Shivaram, a college student says, as he zooms in on his motorcycle into Cafe Coffee Day, “My parents actually love this. Rather than being in pubs, this is more acceptable as an alternative. So I get a coffee allowance and hang around with friends.”

For Amalgamated Bean Coffee Trading Co. (ABC) owned by Siddharth Hegde of Karnataka, Cafe Coffee Day represents forward integration. Three generations of the family have been in plantation business. The family owns 2,500 acres plantations and 50 depots that buy beans from 10,000 traders. ABC is one of the largest coffee export houses. This provided the company an opportunity to build its own brand of coffee. The firm decided on a genetic name to enhance recall value — Coffee Day. Retail section head, Narendra says, “We decided to enter the filter coffee segment, where freshness and choice of blend are critical. It is here you get real feel of coffee.”

Regional marketer’s, such as Narasu, Padma, and Vivekanand of Mysore dominate the market. At their points of sale where coffee beans are roasted, exude an aroma of fresh coffee, but the firms give little or no thought to customer convenience.

So, Coffee Points stepped in and set up shop in residential localities in small 120 sq. ft spaces where customers find a place to leave their shopping bags, and actually step in the shop and choose the blend. 50gm samples and leaflets were distributed in the neighborhood. In the past four years, over 400,000 households have been targeted. Coffee Points’ pricing during introduction period was slightly below regional players’ prices, and the customer response was phenomenal. The head of cafe division, P. Murali says, “Today we dictate the price.”

Riding the crest of 1996 Internet wave, the first cafe was opened as cybercafe on Brigade Road in Bangalore with a leased line and terminals. Narendra says, “We exploited the compatibility between coffee and the cyberworld. Now, however, the two terminals are incidental. It is coffee that dominates.” Today, there are 14 cafes in the south; 300 are being planned in three years’ time all over the country, and also international airports. Prices of coffee and light snacks are reasonable. Murali says, If we increase the price of a cup of coffee by one rupee, with a sale of 100,000 cups per day, I will improve my margins by Rs. 3.5 crore a day.” Promotions vary from jazz festivals to distributing coffee recipes. Recently the cafe’s have started to organize art exhibitions at the cafe’s to promote local talent.

Unlike Hegde of Coffee Day, who were coffee people, for the owners of Qwiky’s and Barista, coffee retailing was niche in the market waiting to be exploited. Shashi Chimala, CEO of the Chimaiyo Chain, master franchise for US-based Qwiky’s says, “When I returned from the US, I missed cafe’s. It is a place where you can connect with the community. In India, cafe’s did exist in five-star hotels, where accessibility was limited to a few.” Chimala, an IT person, had no experience selling coffee. Inspired by Howard Schultz’s book on the romance of selling coffee and realising that the domestic market holds potential, Chimala moved into coffee retailing. He says he does not want to push a particular type of coffee bean. He says, “We are enhancing an experience.”

Starbucks has 5,000 outlets in the US and is a multi-billion dollar company. It opened in Chennai in 1999, aiming to sell 100,000 cups in the year but actually sold 3.65 lakh cups. Chimala says that Starbucks targeted 13 — 30 years-old but soon realized age was no bar for a cup of coffee. The outlets regular clientele included US consul general Bernard Alter, Ford’s managing director Phil Spender, housewives, and children. Besides coffee pubs, Qwiky’s Islands are a store-within-a-store concept, which can be placed in shopping malls, book shops, or multiplexes.

Qwiky’s chain has a tie-up with Dubai-based Landmark to open coffee kiosks in all its Life Style stores. H. Ramanathan, Life Style’s MD says, “It is a win win situation. Both of us share the core value giving our customer the best retail experience.” To strengthen the brand, Qwiky’s has a brand partnership with MTV where VJs are regular visitors. Chimala has also acquired Confidence Trading, a company belonging to Marugappa group, to distribute equipment and food necessary for the gourmet coffee business.

As coffee retailers roll out expansion plans, the market is getting segmented, Ravi S. Deol, president and CEO of Barista says, “We are enhancing as a fine cafe, not just a coffee pub like Qwiky’s or Cafe Coffee Day. Out target customers include professionals, working couples, and families who detest the loud ambience of coffee pubs.” Its softer ambience and higher price distinguish it from others. Barista takes its name from the Italian term for a coffee brew master. According to Deol, his brew master are trained under genuine baristas; the Cimpelli machine differs from the automatic dispensers in other cafes and the coffee bean is treated in a way that gives coffee a richer, sweeter taste. Deol believes that three crucial elements — the bean, the dispensing of the brew, and the actual brewing — makes Barista tick. He says people spend 45 minutes on an average in his cafe and 70 per cent are repeat customers. Many have been weaned away from the cold glitter of the five-star hotels. Reiterating the bond between books and music lovers, Barista has small bars in music retail chains, Plant M and Crossword. To fuel the boom, Barista plans to sell out a training school for Indian brew masters, coffee-tasting clubs, and coffee appreciation sessions.

Bijoor of Tata Coffee is glad that evangelists have boosted the coffee market that has been so far unexplored. He says this shot in the arm and other branding efforts are the need of the hour if Indian coffee is to survive. Bijoor attended the seventh Asian International Coffee Conference in Thailand and has just returned. He says, “Coffee has never seen such bleak days.” Coffee prices have shot down to an all time low. He points out that supply is 114 million bags, of 60kg each, this year, where demand is 97 million bags. He says that if stocks carried forward it will be tragic for coffee prices.

Traditionally, once in ten years there used to be a correction of stock by bad weather in Brazil or Columbia. But this correction is not expected. Besides the demand-supply problem, another reason for the volatile is speculative funds, which have moved into commodities such as coffee when meals and stocks fare badly. In fact, Bijoor says coffee is the second largest traded commodity after petrol. The cumulative effect of these external conditions like trading sentiment, weather, and health of economy presents a bleak picture for coffee growers. “We need to build an Indian brand with a coffee ambassador to improve the image of Indian coffee,” says Bijoor Consumers in developed countries stress the need for quality, consistency, and new offering. Bijoor says that instead of crying hoarse about low prices and low realizations, coffee producers need to work on their image and lobby with the International Coffee Organisation to fund a generic promotion in the country, for after all India is nascent market with the world’s second largest population. He says that Tata Coffee applies innovative ways to build its brands. For example, it built the world’s largest coffee mug to toast 50 years of Independence. The mug was 20 feet high, with a five-foot handle made of food-grade fiberglass. It not only entered the Guinness Book of World Records, but also featured on national and international television. Tata Coffee is now installing coffee machines in shopping malls, petrol stations, and railway stations to enhance visibility. Bijoor does not rule out setting up its own cafes in the future.

The speculation of Starbucks’ impending launch in Indian market has warmed up the cafe market. Coffee Day is expected to invest Rs. 100 crore over the next three years. Qwiky’s has plans to set up 55 coffee pubs and 90 islands. For this it might tap the capital market. Barista is contemplating opening 100 cafe’s at a cost of Rs. 65 crore. Lakshmi Venkatachala, chairperson of Coffee Board, says, “In India, there is tremendous potential to improve domestic coffee consumption considering rising per capita income in the urban middle-class.” For log, Vindhya divide was thought to mark the boundaries between coffee-land and tea-land. Not anymore. The coffee bean is converting people all over India with cafes whisking up many different aromatic coffee combinations.

Questions For Discussion:

  1. Study the promotional approaches in this case to promote coffee brands by different cafe’s in India. If you were to develop a promotional approach for the anticipated new player Starbuck, what would it be?
  2. In your view what kind of promotional approaches should be adopted to increase category consumption in India?
  3. What theme would you suggest to promote coffee as a category?

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