Cafe growth story in India has just started, says CCD Chairman G Siddhartha

The coffee cafe segment in India has been through volatile times in the past few years. While Barista changed hands at frequent intervals, another international brand Gloria Jeans decided to shut shop fearing intense competition from new players like Starbucks. On the flip side, a few other international brands such as Costa Coffee and The Coffee Bean & Tea Leaf have focused on consolidating their presence in the market after announcing aggressive expansion plans. However, one brand that has had a firm footing in the market is the home-grown chain Cafe Coffee Day. It is not only credited with creating a market for coffee cafe business, but also expanded it manifold, thereby creating room for brands like McCafe by McDonald's and Di Bella Coffee to take a serious look at this business in India. V G Siddhartha, chairman of the IPO-bound Coffee Day Enterprises Ltd, in conversation with Ashish K Tiwari, speaks about the coffee cafe retailing industry in India, current market scenario and the brand's journey.

Q. Could you give us a sense of the coffee cafe market in the country?
A. Coffee as a beverage was prominent primarily in south India. Our per capita consumption of coffee is still about 110 gram a year as against about eight kilogram in developed countries. The good thing however is that the last few years have seen a flurry of activities and aggressive expansion by established brands and entry of new players in the market. This coupled with increased consumer purchasing power, high café exposure and acceptability of the segment by the time-pressed consumer has significantly increased the scope of business for coffee cafes in the country.

Q. How is the market likely to progress in the coming years?
A. According to a consulting firm Technopak, the organised café market is estimated to be around Rs 6,700 crore in 2014 and is projected to grow to Rs 15,100 crore by 2020 at a compounded annual growth rate (CAGR) of 15%. The chain cafe market is approximately 27% of the total organised cafe market at Rs 1,800 crore in 2014 and is estimated to be 36% of the total organised market by 2020. The chain cafe market is estimated to grow at a CAGR of 20%.

Q. How difficult was it for you to build the brand and where do you see this brand headed in the coming three to five years?
A. It takes a very long time to build your own brand. It is very easy to stick a foreign brand and operate as per their systems and processes, but in case of a home-grown brand one has build everything from scratch. We have done a lot of things right and a few things wrong, but I can confidently say that we have achieved perfection to the tune of 70% and we will achieve the balance (in terms of service standards, look and feel of the stores, product mix etc.) in the next three to four years. Look at any of the big American brands. They have been in the market of over 50 years but a majority of them have seen a sea change in their respective businesses only in the last 10 years or so. We are just a 19-year old start-up in the country and have a long way to go.

Q. Tell us about market positioning of Cafe Coffee Day vis-a-vis competitors?
A. The brand was first launched in 1996 with an outlet in Bangalore and the journey has been very exciting with milestone achievements in last almost two decades. In the total 2,000-odd coffee cafe footprint in India, Cafe Coffee Day is the largest player with 1,538 cafes (as of June 30, 2015) across 219 Indian cities. We also operate 16 international Cafe Coffee Day outlets across Austria, Czech Republic and Malaysia. In India, the brand is four times larger than the cumulative footprint of the next four competitors, which clearly establishes Cafe Coffee Day as the market leader.

Q. What is your current footprint and how do you plan to expand the store count in the coming years?
A. On the retailing front we have three formats viz. Cafe Coffee Day (1,489 outlets), Cafe Coffee Day The Lounge (42 outlets) and Cafe Coffee Day The Square (seven outlets) operating across high streets, malls, petrol stations and highways. We have established cafes in high traffic areas such as transportation hubs, airports, hospitals, corporate offices, educational institutions and tourist attractions. This approach enables us build huge visibility while also catering to a wider customer base. We also operate coffee kiosks (Coffee Day Xpress), coffee product outlets under the Fresh & Ground (F&G) banner and have a huge coffee vending business. Our retail expansion plan entails opening 135 outlets every year over the next three years. In fact, a considerable portion of the money raised from the public offer will go towards business expansion. While the Cafe Coffee Day format will play a key role in the expansion plan, we will also selectively open The Lounge and The Square formats. We also see a lot of potential for our coffee cafes on the highways and a sizeable number of new openings will happen there. We were recently talking to a multiplex chain that is looking to put up 500 theatres. We are talking to such business entities for setting up one of our cafe formats inside their facilities on a profit sharing basis. I think India will have 5,000 coffee cafes in the next five years and we will ensure Cafe Coffee Day will continue to maintain a market leadership position even then.

Q. What is the cost per store and how long does it take for a store to break even?
A. Setting up a store costs around Rs 37 lakh on an average across the three formats. The break-even at earnings before interest, depreciation and taxes (Ebitda) is anywhere between 12 and 15 months and changes from location to location.

Q. You have also closed a lot of stores in the recent past. Will this momentum continue in the near future?
A. We closely monitor under-performing cafes and initiate appropriate actions to relocate or close such outlets. During the nine month period ended December 31, 2014, we undertook a strategic review of our cafes and decided to close 175 outlets due to their smaller size, lower level of performance and high rental on renewal of the lease. With respect to Coffee Day Xpress kiosks, we closed 400 kiosks (during the nine month period ended December 31, 2014) because we decided to rationalise the number by closing a number of unprofitable or lower sales per day kiosks and reducing the number of franchised kiosks. For the kiosks business, we have also decided to change from a predominately franchise model to primarily an own and operate model. We believe this will provide us with more control over the quality of the products and service at these Coffee Day Xpress kiosks in the future and improve their financial performance. While the rationalisation exercise has been completed for both businesses, any additional closures going forward will be in the ordinary course of business.

Q. Could you give some insights into your coffee business, growth registered and market share?
A. During the financial year 2015, we made cash profit of Rs 198 crore on a revenue of Rs 1,432 crore. Our retail business has grown between 16% and 17% over the last five years and we will be able to sustain this growth over the coming years as well. Our debt in coffee business is around Rs 300 crore and we will bring it down to Rs 175 crore. On the capital expenditure front, we have earmarked Rs 300 crore for over the next 18-24 months. Our market share (as of December 2014) is approximately 46%, in terms of number of coffee cafe outlets. We see this (market share) figure increase significantly over the coming years.

Q. Was it a conscious decision to own and operate all the coffee cafe stores? What are the other operational areas key to your business?
A. Yes. In fact, our strategy of company owned and operated outlets (excluding 35 Cafe Coffee Day outlets located at airports across India) with retail space taken on a long-term lease has been key in reaching a market leadership position. A very interesting part of our business is that we have presence across the entire coffee value chain. This enables us to exercise effective control over various segments in the business. This in turn helps us ensure quality and consistency in the entire process from procurement, processing and roasting to consumption across multiple points. Having said that, there are plans to expand international presence through franchising and partnerships. In fact, we have appointed a master franchisee to expand our footprint across Malaysia.

Q. The brand has of late witnessed changes in terms of its offerings. You seem to slowly move towards becoming a quick service restaurant (QSR) serving burgers, etc?
A. One thing we have started realising in this business is that beverages contribute almost 59% of our sales and food which was earlier 32% has now increased to 36%. Having said that, I'd like to stress that ours is a primarily a coffee beverage company and there is very good profitability of over 75% in coffee business. While the food composition may increase by another two or three percentage, we will always be a beverage company selling coffee and related items. QSR is a very different business model and I don't even want to look at that possibility. My view about coffee cafe segment is that the growth story in India has just started and the next five years are going to be very crucial for players in the market.

Q. What is your take on McCafe from the McDonald's stable that is gradually expanding footprint and could likely eat into your coffee retailing market share going forward?
A. One thing we are certain that people come to your store for a conversation. While they (McCafe) will do well, you need to understand that it's not just the product but the environment that you create next to the product that plays a crucial role.