A Storm In A Coffee Cup.

     Storms. They don’t usually occur in teacups. And yet, the expression continues to do the rounds of the English language. While ‘a storm in a teacup’ may refer to a situation which has witnessed its fair share of excess attention and outcry, certain business sectors in India share that very same feature. But storms, on their part, don’t just appear out of the blue. They take weeks, months and sometimes even years to build up and then, they unleash their pent - up fury. Storms, especially post – 2008, have hit virtually every business segment in the country and their intensity is only going to increase in future. Nowadays however, most storms seem to be gunning for new spots. India’s café market just so happens to be the latest target.

     Being a customer – centric, food and beverage (F&B) business, India’s organized fast food market, mainly composed of quick service restaurants (QSRs), still continues to grow a double – digit rate. The same growth though has tapered in the recent past, on the back of slowing consumer spending and falling same – store sales growth. The sector is mainly driven by rising incomes, rapid expansion, economic recovery, foreign investments and above all, an Indian consumer who is willing to diversify and experiment, when it comes to food. While the unorganized market has been around for decades, the organized segment has only seen its rapid expansion in the past two decades or so. India’s café market, a major subset of the F&B sector, only took off around fifteen years ago. Ever since then, it has been a glorious period of growth and profitability for the players in the market, all the way up to the present. One company, however, stands out from the crowd in terms of size, scale, reach, offering and profitability. And as far as that company is concerned, it has truly been a decade – and – a – half of domination.

     In 1998, the Amalgamated Bean Coffee Trading Company entered the QSR market with its format, Café Coffee Day (CCD) and gained the first - mover advantage. For the Indian customer, it was a novel concept, a place where one could hang out, grab a bite and gulp down a beverage at the same time. CCD took full advantage of a competitor – free market and pegged its offerings at the higher end of the price ladder. And its patrons lapped them up. CCD took the market by storm and set out on a rapid plan of expansion, to take its cafés into locations where it was virtually unchallenged and where a ready customer base already existed. After staking out the metros, CCD moved to tier – 2 cities and gained an unrivalled lead. But CCD wouldn’t remain the lone ranger in the market for long.

     After watching CCD’s rapid success and sensing a market that was nascent, many QSRs entered the café segment, in a bid to capture the market and wean customers away from CCD. Over the years, Barista, Costa Coffee, Gloria Jean’s Coffees and several home-grown chains entered the market and threw down the gauntlet. CCD, however, was already the large koi in a small pond. While its rivals started taking their baby steps, CCD continued its expansion drive, which had already materialized into over a thousand outlets. But being the largest just wasn’t good enough. CCD wanted to be the absolute best that the Indian market had ever seen.

     With a growing presence, CCD began to diversify its range of offerings to the Indian consumer. In 2011 – 12, CCD went in for a revamping of its brand and unveiled its all – new face. The Coffee Day brand was stretched to birth new extensions such as Coffee Day Lounge and Coffee Day Square, which were essentially premium, upscale formats. Coffee Day Xpress vending machines soon became ubiquitous, serving the dual purpose of being the customer’s beverage of first choice and promoting brand recall. CCD also set up more outlets along highways and in hospitals and universities. While the market’s perception was that CCD was strengthening its stranglehold on the market, the company did have another reason for its rejuvenation. For, a global major had announced its intention to enter the Indian market. With financial and marketing muscle, coupled with a brand recall that its competitors would kill for, it certainly wasn’t a competitor that CCD could afford to take lightly. It was a global behemoth that had entered, disrupted and captured market after market around the globe. Now, it was all set to do the same in India. And as far as CCD was concerned, it was indeed the perfect storm.

     In 2012, Starbucks, the Seattle – based café giant with an over 20000 – strong global outlet footprint, stepped into India, amidst much fanfare. After a botched attempt to enter the Indian market in 2007, in an alliance with the Future Group, Starbucks entered into a 50 – 50 joint venture with Tata Global Beverages Limited (TGBL) and a coffee beans – sourcing agreement with Tata Coffee, for its second coming. With a maiden store in Mumbai, Starbucks soon set out on an expansion spree and hit the 50 – store figure in less than two years. While Starbucks mostly zeroed in on premium, upscale locations to set up its stores, CCD did move fast in several towns to snap up those very realty spots, in a bid to leave Starbucks high and dry. Starbucks, as expected, played the premium pricing game but focused on a wider offering of food and snacks, than it normally would have in other countries (CCD in recent times has followed suit and expanded its own range of food offerings). The JV owns and operates the Starbucks outlets but Starbucks’ proclivity for upscale locations has driven up its realty costs and pushed store breakevens back by a couple of years at least. In fact, the drag created by the initial establishment costs and the losses posted by the JV is already showing on TGBL’s bottomline, as TGBL continues to post one bad quarter after another. Despite the blows on its bottomline, the TGBL – Starbucks JV shows no signs of slowing down and continues to expand, with smaller outlets in tier – 2 cities on the anvil.

     A lot has changed in the coffee café segment, ever since Starbucks entered the country. Barista was sold by its Italian parent, Lavazza, to Carnation Hospitality. Lavazza, which acquired Barista almost a decade ago on the back of an ambitious plan to capture the Indian market, threw in the towel when it saw that Barista was nowhere even close to gaining traction. Costa Coffee’s JV with the Devyani Group is mired in uncertainty, with an increasing possibility of the British giant pulling the plug anytime soon. Gloria Jean’s Coffees snapped ties with the Landmark Group in late 2014. Tepid sales growth, lacklustre expansion plans, scaling back of investments and increasing rentals aren’t helping the MNCs’ cause either. For now, Starbucks and CCD seem like the two top dogs in the market and the action in the coffee café space is all set to spill over into the stock markets.

     With the markets now in an upbeat mood, more and more companies are lining up to go public and CCD is one of them. While CCD’s IPO has been a subject of parlance for many years now, a multi – year depressed equity market meant that the company kept shelving its plans of listing its shares until the time was just about right. And apparently, that time is now. Coffee Day Holdings, which has a stalwart list of investors onboard such as Kohlberg Kravis Roberts (KKR), New Silk Route (NSR), Standard Chartered, Radhakishan Damani and Rakesh Jhunjhunwala, is the parent company of CCD and is all set to command a valuation of around a billion dollars, anywhere between Rs. 5800 and Rs. 6400 crores. While the holding company may choose to only list its café arm, its other business interests include Serai Resorts, Sical Logistics, Way2Wealth, Tanglin Realty, Daffco, significant stakes in Lakshmi Nivas Bank and Mindtree and acres and acres of coffee, teak, rosewood and spice plantations. Of course, there’s always a possibility of the other companies being merged into the listed entity or the group companies themselves going public at a later stage, which could see some significant value unlocking. Coffee Day Holdings’ café arm reportedly clocks an EBITDA of around Rs. 250 crores on a topline of Rs. 1500 crores, which is growing at a double – digit rate. The promoter, VG Siddhartha, holds close to 70% of the company and CCD is all set to file its Red Herring Prospectus soon. While it may be a foregone conclusion that CCD’s IPO will be oversubscribed, its scrip should see a significant pop – up on its first day of trade, given the ebullient market and the recent trend of the market awarding steep valuations to QSR stocks.

     But if CCD happens to be in the limelight, can TGBL afford to stand aside and watch the fun? Well, not if it’s American partner has something to say about it. With Starbucks on expansion mode in India, the TGBL – Starbucks JV’s losses continue to widen and breakeven is years away. Starbucks, however, has pockets that are deep enough to weather the storm and incubate its Indian operations. Once Starbucks India is on its own feet, Starbucks is almost sure to acquire a significant stake in TGBL or better yet, the Tata – Starbucks JV, which is currently housed under TGBL, will be listed as a standalone company. Considering the sky – high valuations that listed MNCs command on the Indian bourses, Starbucks, either via a stake in TGBL or as a standalone listed entity, is bound to be a significant wealth creator. And what you just read about Starbucks’ eventual appearance on the Indian stock markets scene is neither a prediction nor a prophecy. It’s more of a spoiler really. 

     Starbucks is evidently and undoubtedly the biggest threat that CCD has gone up against. With a slugfest between the Indian giant and the American colossus steaming and with the other MNCs fleeing the scene, India’s café market is all set to become a two – way battle. While CCD is already entrenched in the market, Starbucks is gunning to become India’s cup of tea and grab the numero uno spot. And with both companies set to enter the Indian stock markets in one capacity or another, the Starbucks – CCD saga is all set to take an interesting turn. India’s café wars are indeed brewing.