It’s fight over coffee for lovers of tea!

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Starbucks’ imminent entry has already begun making other retailers wary...

When Karan Johar crosses his legs demurely, seated across beautiful people on the sets of his show, he not only endears Koffee with Karan to millions of enraptured fans, but also serves as a clear reminder to this tea-loving nation’s newfound love for coffee beans. Reason enough to egg on coffee bars and pubs mushrooming across urban India, which have become popular hangout zones for the young and young at heart.

Emerging as the golden goose in the gastronomic Indian economy, organized coffee retail is frothing over with potential. India already boasts an exorbitant café market of Rs.8 billion (according to Technopak Advisors) and the urban demand is growing at a breakneck 35% per annum. And while early movers in the segment like Barista, Café Coffee Day (CCD) and Nescafé coffee shops were till now among the few fighting it out for a piece of action, the imminent entry of the world’s largest premium speciality coffee pub – Starbucks – by the end of 2007, is set to usher in a shake up in the current arithmetic of coffee chains in the country.

Here’s what the current dynamics of the coffee pub culture in India looks like. CCD and Barista were the first to popularise the concept of café bars in India, with their unique blend of aromatic beans and attractive ambience. Flourishing on the Indian palate, the two chains have proliferated over the past few years with 426 Café Coffee Day (CCD) and 170 outlets for Baristatoday. Furious expansions have ensured that the two biggies have remained the main contenders in coffee retail for years, constantly vying to outdo the other. Of course, the big two are flanked by numerous others of their ilk, including Costa Coffee, Coffee World, Mocha, et al, but even between all of them, it’s tough to mop up the entire urban demand, which has a combined scope for a whopping 3,000 retail outlets vis-à-vis the 700 odd coffeeoutlets in the country now.

Against this backdrop, it comes as no surprise that the $3 billion Starbucks, the world’s largest coffee chain, is greedily eyeing an Indian odyssey. And despite a few continuing hiccups in government formalities that would officially mark its entry, this US-based coffee chain has already announced the rollout of its first store in October this year. Starbucks hopes to test Indian waters with five stores at strategic malls in Mumbai and Delhi to begin with; followed with the possibility of adding over 100 stores every year for the next five years.

There’s another reason why Starbucks wants to enter the Indian market soon. According to a 2006 ENAM Securities survey, Indian consumers are spending nearly 51% of private final consumption expenditure on eating out. This is truly mouth-watering for almost every global giant in the food and beverage’s space. Italy-based Lavazza already acquired Barista for $120 million in March this year, while Australia’s Gloria Jeans is also not far behind. Be that as it may, Starbucks wants to move in for the kill quickly, before other global forays make any major headway with the coffee-drinking consumers.

Predictability, with such a big global star shinning in the Indian sky, the duopoly market of the first movers Barista and CCD is under threat. And to worsen the situation for the country’s biggest coffee chain – CCD, its director Naresh Malhotra (credited for metamorphosing a Bengaluru-based brand into a national brand) bid adieu to CCD in the last week of June 2007. Already, former Coffee World CEO, Anoop Saquiera has joined Starbucks in India, and the market buzz is that Naresh Malhotra is also headed in the similar direction.

So will the exit of Malhotra, combined with Starbucks knocking at the door, bog CCD down? Clearly not, if present management is to be believed. Simran Sablok, GM-Marketing, CCD says, “We are aware of Indian taste buds and our pricing is always economical, so even if any other player comes in, it won’t disturb us,” adding that CCD’s trendy brand image will also help the chain sustain its popularity.

Moreover, as experiences of other global food and beverage global biggies in India shows, a key mantra for success in the Indian milieu lies in indianising the menu with prices that are easy on the pocket. But strangely, sources in Starbucks India confirm that the global major is not paying heed to any of the two, at least for now. Instead, the company is relentlessly focussing all efforts to hire manpower from rivals.

Affirms Partho Dattagupta, CEO of Barista Coffee Company, “flagship products should always be Indian and you have to price them keeping in mind the Indian consumers.” But pricing may ultimately not be too big a problem for Starbucks in India. Despite modest pricing claims, most coffee chains, actually sell a litre of coffee at costs that are higher than a litre of oil. Rather Starbucks’ entry will positively raise the competitive barriers in the segment and take it far beyond the present duopoly.

So will Barista and CCD have to stop bickering against one another and think of fighting the shark (Starbucks) together? Maybe. To counter Starbucks’ imminent entry, CCD has begun looking at greener pastures beyond the homely milieu, with a plan to invest Rs.100 crore for setting up parlours in Pakistan, Poland and several other countries. “We are going to have a strong global presence, at the same time, strengthen our Indian presence. It’s not that we are competing against anyone, but it’s a part of our strategy to reach every corner of the country,” explains Simran. With 426 stores spread in 40 cities, CCD minted an incredible turnover of Rs.4,500 million for this fiscal. It plans to add at least 50 more stores and also restructure its accessories venture. And rest assured, these additions will happen much before Indians start having coffee with ‘stars’.

Not to be left out, Barista has also armoured itself with a plan of opening as many as 100 more stores by 2007. But to compete with Starbucks, these players will have to think of more ammunition than just splattering India’s geography with more coffee outlets. They need to create a strong logistics chain and a sturdy raw material base. This is where Barista or global coffee chains like Costa Coffee and Coffee World have missed out. On the contrary, CCD, being a part of Amalgamated Bean Coffee Trading Co., has abundant raw material at its disposal at lower costs. Realising its importance, Coffee World, after being in India for more than 3 years, has suddenly woken up to create its own sourcing hub in India now. Others will no doubt, follow soon.

In as much, Starbucks has unwittingly ensured that coffee retail in India will soon get another face lift, leaving behind some very coffee-happy consumers in its wake. After all, branded chains are already waking up and smelling the coffee...

Edit Bureau: Angshuman Paul

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Source : IIPM Editorial, 2008

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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