Bean there, done that

Bean there, done that

Before the newfangled expression ‘Bangalored’ became a rage with the tech savvy world over, a small coffee shop-cum-cyber café by the name of Café Coffee Day (CCD) was created in the garden city. This was an avenue of indulgence for sleep-deprived techies, whose lifestyle was largely responsible for the advent of this Indian adaptation of an American cliché- the coffeehouse. Interestingly, the founder, V.G.Siddhartha’s idea was to cash in on the Internet boom through the cyber café and not actually stimulate caffeine consumption.

Beginning the espress operation

Siddhartha did not take a penchant for coffee right away, even though he belonged to a family of coffee planters. In 1983, Siddhartha began his career as a research analyst at JM Financial having completed a degree in economics from Mangalore University. While researching stocks, he discovered that Indian farmers used to get an equivalent of 5 cents (Rs 2.50) for 1 kg of coffee, while their overseas counterparts got about $1.27(Rs. 60). With the intent of putting to use the experience he gained as a researcher, Siddhartha joined the family business of exporting coffee beans. He soon realised that the space he was operating on as an exporter offered low margins that fluctuated depending on the  pricing of coffee beans in the world coffee market. A café, in contrast, would operate at the highest end of the value chain. Its margins could be 35 per cent to 40 per cent higher than those of coffee bean exports. Buoyed by the idea, Siddhartha began CCD in 1996.

Introducing India to coffee culture was no mean task, especially when a vast majority comprised tea drinkers. Coffee drinking in India was limited to South Indian traditionalists, the intellectuals and the five-star coffee shop visitors.  CCD’s success is testament to its triumph over the Indian mindset and the reasons for its popularity remain multifold. “We took a 360 degree view of the customer’s perspective and aspirations to formulate a wholesome cafe experience at an affordable price tag. A perfect blend of factors such as pricing, quality of coffee, ambience, location and trained staff can be attributed for the phenomenal success and mass appeal of Cafe Coffee Day,” says Naresh Malhotra, former chief executive officer of CCD who is now Operating Partner at Sequoia Capital, a venture capital firm.

CCD currently owns 806 cafes in 107 cities. Its growth does not stop there. The CCD brand presence can be felt across the entire coffee consumption chain in India. Coffee Day Fresh n Ground (which owns 400 Coffee bean and powder retail outlets), Coffee Day Xpress (which owns 895 Coffee Day Kiosks), Coffee Day Take away (which owns 12,000 Vending Machines), Coffee Day Exports and Coffee Day Perfect (FMCG Packaged Coffee) division are some examples of the creator’s enterprise.

“Sequoia was impressed by the retail footprint that CCD left in the Cafe segment. Today, it is the single largest retail Indian brand and we are always on the lookout for investing in companies that are market leaders in their chosen field of business. Cafe Coffee Day fit our requirements to the ‘T’(rather coffee),” says Naresh Malhotra, the former CEO of CCD, and now Operating Partner at Sequoia Capital India.

Over the years, CCD has constantly won praise for its efforts. The most recent addition to its accolades was Best Exclusive Brand Retailer & Best Food Services Retailer award instituted in the year 2008.

Staying fresh

As they say, grabbing the numero uno spot is easier than ensuring a stay at the top. In the wake of competition, CCD had to find ways to keep the brand young and increase both the value and volume of the business. It was important for the management to rethink its food and beverage choice formats and ensure aggressive marketing of the same. CCD successfully experimented with newer formats, such as lounge cafés serving plated meals in addition to the sandwiches, pastries and croissants offered in the cafés. The idea was to retain customers who typically go elsewhere during mealtimes. Unlike the cafés, which cater primarily to the 15 to 30 age group, CCD targets consumers who are more than 30 years of age. In fact, at the Mumbai and Bangalore airports, the lounge cafés serve liquor to cater to those locations’ specific audiences.

CCD has always prioritised consumer experience. The company keeps pace with current trends such as unveiling new offerings on Friendship Day, Valentine’s Day or other days of celebration. As part of its marketing strategy, CCD chose to partner with Airtel, Google and Yahoo for additional mileage.

Keeping competition at bay

The numbers are stacked in overwhelming favour of CCD. According to Technopak Advisors, a global retail consultancy firm, the organized coffee retail business in India is over Rs. 8 billion (Rs. 800 Crores) and the potential for coffee retail outlets are nearly 3,000. Fewer than 1,000 cafés make up India’s organized space, and the largest player after CCD, Barista, has about 200 cafés. Java Green (around 75 cafés) and Mocha (around 25 cafés) are further behind. CCD intends to extend its popularity as a lifestyle brand to smaller towns and cities within India in the immediate future.

With the rumoured threat of big players such as Starbucks entering the fray, analysts feel CCD has consolidated its market leader status and is positioned to take further advantage of the ongoing macroeconomic, demographic and lifestyle changes within India. They also feel that the expertise of a brand such as Starbucks will only strengthen CCD’s case for growth by creating more awareness on coffee and café culture in India. Adding to the advantage is the price difference that is likely to occur between Starbucks and CCD.

In the international markets, CCD is looking to further its hold by opening 12 outlets overseas, mainly in the Eastern Europe by the end of 2009. The edge that CCD has over its rivals in India and overseas markets is its ability to cut costs significantly. In Europe, while CCD’s rivals have to spend 12 euros for 1 kg of coffee, CCD sources it from its plantations for two Euros.

Finding the right investors

Such has been the success of its venture that investors are lining up to back CCD’s initiatives.  Two years ago, Sequoia invested around Rs. 100 crores in Amalgamated Bean Coffee Trading Company, the holding company of CCD.  An additional sum of Rs. 120 crores has come from the Darby Asia Mezzanine Fund, a unit of Franklin Templeton Investments. “Sequoia was impressed by the retail footprint that CCD left in Indian Cafe segment. Today, it is the single largest retail Indian brand and we are always on the lookout for investing in companies that are market leaders in their chosen field of business. Cafe Coffee Day fit our requirements to the ‘T’, (rather coffee)” says Malhotra.  Looking back in time, CCD seems to have gotten its tagline right, a lot can happen over a cup of coffee. Indeed!