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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