The Resurgence Of New-age Coffee Chains During the pandemic, many new-age coffee chains saw a lull in terms of growth. But, today they are back on track with increased demand led by the rise in hybrid work culture
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Even though coffee has been a crucial part of everyday consumption in many Indian states, the concept of coffee shops or cafes started in the early 2000s. For the first time, coffee chains, which included the likes of Barista, Costa Coffee and Cafe Coffee Day (CCD), started letting consumers/guests sit for hours and chat while sipping a cup of coffee.
Costa Coffee started operating in India in 2005 via New Delhi-based franchise partner Devyani International Limited and Barista launched its first store in 2000. The first CCD outlet was set up in 1996 in Bangalore and opened more than 1,000 cafés across the country by 2011. These players have been the pioneers of coffee culture in India.
In 2012, American coffee giant Starbucks also launched its first store in Mumbai, in collaboration with the Tata Group. The coffee chain's entry paved the way for the launch of many more coffee chains and brands. Recently, Mukesh Ambani-led Reliance Brands also announced that it has partnered with London-based firm EL&N Cafes to cater to the demand for such cafes and restaurants in India. Reliance Retail had also partnered with the UK sandwich and coffee chain Pret A-Manger and opened its first outlet in the country in April this year.
INDIA'S POPULAR COFFEE CHAINS
HOMEGROWN ESTABLISHED PLAYERS
STARTUPS AND COFFEE BRANDS
Starbucks, Costa Coffee, EL&N Cafes
Cafe Coffee Day, Barista, Indian Coffee House
Third Wave Coffee, The Flying Squirrel, Hatti Kaapi, Indian Bean, SLAY Coffee and Sleepy Owl
The entry of startups
Many startups have also entered the space to capitalize on the rising demand. And, it wouldn't be incorrect to say that these startups seem to have an edge over MNCs and legacy players in terms of a better understanding of the Indian market. While they offer a great ambience, similar to international chains and legacy players (and sometimes even better) they also seem to be catering better to Indian taste buds while managing to keep prices in check. They also have cashed in on the rising work-from-home or hybrid work culture by offering a GenZ and millennial-friendly environment.
Due to these reasons, even though during the pandemic, these coffee chains saw a lull in terms of growth, they are today back with a bang. And, funding raised by them is a testimonial to their rising demand.
Many investors are today ready to bet on these new-age chains. For instance, specialty coffee brand Blue Tokai Coffee Roasters raised $30 million in its latest funding round and Third Wave Coffee raised $35 million in Series C round. We also have many others like The Flying Squirrel, Indian Bean, SLAY Coffee and Sleepy Owl who are offering organic freshly roasted coffee powders through their D2C websites and marketplaces and giving tough competition to legacy players. Some of these players are also slowly opening their cafes.
What's brewing the growth
"Post-pandemic, we have seen work behaviors evolve from working on-premise to hybrid work. As this trend plays out, we see a lot of people preferring to work out of non-co-working environments and hence, coffee chains have become an obvious choice. Increasingly, we are seeing this trend play out not just in metros but also beyond tier-1 cities in India where unprecedented footfall is being witnessed by some of these chains," said Nitya Agarwal, vice president, 3one4 Capital.
The resurgence of coffee chains post-pandemic is also driven by pent-up demand for in-store experiences in general. "Coffee chains adapt by diversifying menus and expanding food offerings. For instance, many pan-India coffee chains offer comprehensive food menus alongside coffee, developing diner business model," said Ajinkya Sawrikar, investment professional at BlackSoil.
He also added that the expansion of the coffee industry is also led by capital infusion. Coffee chains are raising significant funding from investors which have enabled them to expand their foothold, he said.
"We believe that the coffee-first QSR industry is one of the fastest-growing consumer categories in the country. We have grown 5x through the last year and strategically expanded our footprint across the nation. Going forward, we will continue to double down on technology and product innovation to deliver a superior cafe experience across the country," said Sushant Goel, co-founder, and CEO, Third Wave Coffee in a press statement during the latest funding announcement.
Overall, the key factors leading to the demand include work-from-home or hybrid work culture, increasing purchasing power and its growing preference among GenZ and millennials as a hang-out zone.
The taste of D2C
The coffee chains also capitalize on the uptick seen in the demand for direct-to-consumer (D2C) brands. Moreover, since coffee chains offer products with longer shelf life, it becomes easy for them to have better margins in D2C. However, the average revenue of D2C brands in India selling long-shelf-life products like coffee powder, cookies, etc., varies.
"The D2C market in India has been experiencing significant growth. But, the revenue figures vary based on the size and scale of the brand, product quality, marketing strategies, and consumer demand," said Sawrikar, while sharing below the average revenue these brands have today.
- Small startups: Smaller D2C startups generally have an annual revenue ranging from INR 10 Lakhs to INR 1 Crore. These companies are often in the early stages of growth and may focus on a niche market or specific product category.
- Medium-sized brands: With an established customer base, broader product base and marketing reach, medium-sized D2C brands can have annual revenues ranging from INR 1 Crore to INR 10 Crores.
- Established players: Driven by a robust online presence, loyal customer following, and diversified product portfolio, established D2C brands can generate revenues exceeding INR 10 Crores.
- Industry leaders: With nationwide reach, India's most successful D2C brands can generate revenues in the range of INR 100 Crores and above.
Is there room for all?
With many new players entering the segment, is there a place for everyone? Will it be difficult for smaller players to compete with global entrants, legacy homegrown cafes and FMCG giants entering the segment?
Smaller cafes can thrive by differentiating themselves with unique menu items, ambience, and personalized experiences, say experts. "They can target areas where global chains are absent and cater to local markets. Leveraging digital marketing and word-of-mouth recommendations can help build brand recognition and attract customers. By combining these strategies with a niche focus, favorable locations, affordability, and a personal touch, smaller cafes can position themselves for success in the growing out-of-home consumption segment," said Sawrikar.
Food and Beverage (F&B) experts and investors watching the space believe that the Indian coffee is so huge that there is ample room for all players. According to TechSci Research, the India Coffee Cafe Market was estimated at around $340.12 million in 2023 and is growing at a CAGR of 13.21% during the forecast period.
In 2012, John Culver, president of Starbucks in Asia was quoted as saying by newspapers that the company is going to move as fast as it possibly can to take advantage of the opportunity that exists in India. And, today, it has over 360 stores across the country, according to news reports. Coca-Cola-owned Costa Coffee also recently said that it considers India among its top ten "priority" markets and expects to see significant growth in the size of the consumer base for specialty coffee in India. Will these moves be a threat to startups? "The expansion of this market will be a function of unlocking under-penetrated geographies as well as unlocking models that can work at more affordable price points," said Agarwal.
Further, with increasing purchasing power and Western influence, Coffee has become a premium beverage. "In the post-pandemic era, people have developed an inclination towards co-working spaces or working from a cafe. Coffee joints having such add-on services have a higher customer retention. Hence, there is a lot of scope for differentiating brands," said Milan Sharma, founder and MD, 35North Ventures.
Challenges for startups
Historically, making economics work in this segment has been really hard. There are very few chains that have been able to crack this at scale, said Sharma. Another challenge in this segment has been to unlock predictable retention engines. "As compared to the West, most of these smaller chains see very less loyalty from users as coffee is not part of a staple diet for an average Indian. Hence, incentivizing repeat, as well as habitual behavior, is critical to the success of these smaller chains," he added.
Smaller cafe chains face significant hurdles, including intense competition from giants, resource limitations, high rental costs and the challenge of maintaining quality and consistency. Also, in the Indian cafe industry, pricing is crucial due to price sensitivity. "However, it must be balanced to attract a diverse customer base. Quality, consistency, a welcoming environment, and exceptional customer service are crucial for success. Diversified menus catering to different tastes and dietary preferences are vital. Continuous innovation and the introduction of new products and experiences are necessary to meet evolving customer desires and maintain competitiveness," concluded Sawrikar.