Coffee Wars in India: Cafe Coffee Day 2013

To:                 V.G. Siddhartha

From:                Elizabeth Varner

Subject:         Coffee Wars in India: Café Coffee Day 2013

Date:                 10/28/2018

Executive Summary

Over the last year Café Coffee Day has been head-to-head with strong competition entering into the Indian market, Starbucks. As the no. 2 ranked coffee shop in the “Food & Beverage” segment, Café Coffee Day knows it has the ability to withstand an upcoming rival. Throughout the years of its existence, CCD has successfully outperformed local competitors, as well as international competitors, such as Gloria Jean’s, Costa, Coffee Bean, and Lavazza. Because the company has strategically positioned itself to cater to a specific target market, and has uniquely branded themselves, they are not easily shaken. However, management is aware of the potential threat that Starbucks poses, and is prepared to respond appropriately. The tools used to analyze the strategies Café Coffee Day can use to stay ranked no. 2 in the food and beverage market segment include GDPEST and Porter’s Five Forces.

Introduction

        Before the inception of Cafe Coffee Day, the founder and chairman V.G. Siddhartha, owned hundreds of acres of coffee plantations. He grew his plantation business, known as Amalgamated Bean Coffee Trading Company, from 350 acres to 3,000. Upon seeing the tremendous success of his plantation business, he knew that if he was able to grow his trading company that quickly, eventually he would be overthrown by international traders. This ultimately sparked the idea to establish his own stores where he would be able to distribute and sell his coffee. In 1994, Siddhartha opened approximately 20 stores which operated with the brand “Coffee Day Fresh and Ground”, where they sold high-quality coffee beans and freshly ground coffee to brew at home. With yet another business success in the coffee industry, in 1995 Siddhartha moved up the value chain once again in opening up his own Cafe known as, Cafe Coffee Day. It was first opened in Bangalore as an internet hub to the people of India, but by the year 2000, accessibility to the internet had spread, and the company changed its mission to become the dominant coffee cafe in India.

        The Company now spans to over 200 Indian towns, with a network of 1,454 cafes, 91 Xpress kiosks, 428 Fresh and Ground retail outlets, and 21,594 vending machines. The location of the majority of the company stores are along busy high-streets and within malls and corporate campuses, and 18 international outlets in Vienna, Prague, and Pakistan. With ambitions of being the no. 2 or no. 3 retail coffee brand in the world, they’re well on their way to reaching that goal, being named the no. 2 in the “Food and Beverage” segment in India’s Economic Times. The target market that Cafe Coffee Day sells to primarily includes but is not limited to, India’s youth, ages 15 to 30 years of age, in the middle to upper-classes. Their goal is to be “a place between home and work, to hang out with friends.” Other target markets include customers in the 28-36 age group who are looking for a more upscale environment, and are trendy affluent customers exploring alternative coffee brews, and up-scale coffee connoisseurs. To encompass the diverse market segments within the industry, CCD has expanded their cafes to include lounges, which are 40-50 percent larger than cafes, and offer a wider menu than the typical cafe foods. Additionally, they have also opened Squares, which are twice the size of a lounge, and offer gourmet foods and coffees from exotic locations. As of March 2013, cafe coffee day has 39 lounges, and three squares.

        Over the life of the company, Cafe Coffee Day has successfully been able to strategically position themselves in the coffee industry within the Indian market. Starting the coffee revolution in 1996, which prompted competition to enter the market, inviting brands such as Barista Coffee Company (eventually overtaken by Lavazza), Costa Coffee, Coffee Bean & Tea Leaf, and Gloria Jean’s. Other franchise entrants also made an appearance such as Dunkin’ Donuts. But despite all the new competition, Cafe Coffee Day was still able to capture 60 percent of the market. However, in October of 2012, US-based Starbucks Coffee Company made its debut through a joint venture with Tata Group, India’s largest business conglomerate, which has allowed a smooth transition into to India’s market. While Cafe Coffee Day isn’t new to beating out global brands, they are aware of the potential threat that Starbucks poses, and is prepared to respond appropriately.

Strategic Issue

        Starting as the market leader and successfully establishing the cafe culture in India, Cafe Coffee Day has been able to remain the top of the coffee industry in India. They have expanded their company both nationally and internationally, targeting toward the younger demographic. CCD has located its outlets primarily around urban areas such as high streets, malls, educational institutions, and business process outsourcing firms, to better enable the capture of their target market. Additionally, because they primarily advertise toward the younger age group, there is a big price gap between CCD and its competitors. Due to their vertically integrated business model, Cafe Coffee Day is able to operate at significantly lower costs than its competitors. They have 11,000 acres of plantation, they own and operation two curing mills, as well as India’s largest roasting and blending facility. From this, they have built a reputation with the community as experts of coffee and are able to select the highest and best quality coffee to sell. They manufacture all of their own coffee vending machines and cafe furniture, as well as procure equipment such as A/C’s, ovens, and pastry coolers nationally. Because of their internal sourcing, they are able to save 25 percent of capital costs. Their goal is to consistently source at prices at least 20 percent lower than their competitors. Establishing residential hospitality colleges where over a six-month period, village youth could be trained in cafe operations, they were able to significantly lower the attrition rate, priding themselves on having a fully backward integrated model, ensuring perfection from bean to cup. However, despite their many successes and overall advantages within the industry, during recent years CCD has faced some growing challenges regarding the retail industry, maintaining customer service, and spreading out foot traffic throughout the day.

        In October 2012, the long-waited launch of the world's most popular coffee brand, Starbucks, finally hit India’s market. The launch was a booming success, with wait times extending past a half-hour, massive media coverage, long customer queues, and profits estimated to be around $2,000 to $4,000 per day; which was one to two times more than CCDs profits. Starbucks entered into a joint venture with Tata, who was also a large coffee producer, giving Starbucks a competitive advantage to offer a local coffee brand at a higher price. Their price strategy was aggressive, selling about 33 percent higher than local coffee shops, but their brand is prestigious, so through curiosity of the community and a strong urge to be a part of this new addition, customers were willing to pay higher prices. Being a brand that prides themselves on high service standards, Starbucks bought that with them to their Indian locations, offering twice the pay level of CCD. Because of this, about 15 to 17 percent of CCD staff were stolen, enticed by higher salaries. The market attracted by Starbucks was a broad cross-section of customers, with a large portion being individuals over the age of 25. Which by comparison, CCDs target market was more geared toward individuals under 25. Knowing that the majority of foreign brands tend to focus predominantly on the top 5 to 7 percent, CCD did not feel much pressure knowing they were targeting 40 percent of the market. Because of this, without encompassing the younger generation, CCD knows if they do not come, then growth will be hindered for Starbucks. And while Starbucks is priced high for a slightly price sensitive market, the biggest unknown question is if Starbucks will cause a shift in consumer patterns or not. With this newly introduced competition, knowing that Starbucks has the ability to overcome CCDs three greatest challenges, Siddhartha and Madhav know that at the very least, a slight course correction is needed. With that, the question remains, what action can CCD take to withstand its newest competitor, Starbucks, and continue striving toward its ambition to become the no. 2 or no. 3 coffee brand in the world?