Coffee last sunday..

When did you last meet someone over coffee at 'Third Wave' and not Starbucks? or ordered chai (tea) from Chaayos instead of Coffee? or thought of meeting someone at CCD the last time?

Coffee (F&B industry) is on the rise in India, as Indians moves from chai to coffee or have always been accustomed to coffee first.

The overall market for coffee cafes in India was ₹5000 crores in 2023, with Starbucks capturing ₹1000 crores in revenue. A 71% increase for Starbucks itself, so quite evident it is growing fast. And with recent venture fundings for Subko and Third Wave Coffee growing there presence and global chains like Tim Hortons and Pret a Manger entering India, competition is fierce to grab the brewing market.

Before we begin…

So what is this going to be about? Since this is my first "musing" letter, let me explain what to expect. It usually is not just reflections. There are three parts to it - the conversation; the thoughts; and then assessing from a investment perspective (not always in this order).

The Coffee Philosophy - India

DALL-E: Encapsulate the essence of Indian coffee culture, blending traditional elements with the modern coffee chain concept.

Indians are becoming affluent, something that has been talked about in multiple reports (you can give it a read here). And aspirational Indians are now pouring in money and changing lifestyle rapidly, and so is changing their "wants".

• People want 'their' coffee

  • Your coffee cannot be something off menu now as it used to be when you place your first Starbucks order and added whipped cream just because the barista gave you a choice (most of us have been there). People want their coffee to be the way they want it, as more people become conscious about their coffee choices and want it perfect - and obviously this means more attention to coffee taste, with other things following on.

  • This essentially means actual coffee taste > coffee brand/chain. As most chains are becoming standardised in status/symbol (doesn't matter if you post a Starbucks or Third Wave or Subko snap), now the obvious question is which chain has better coffee.

  • Something which is resulting because of growing coffee adoption is not just more people spending at coffee cafes, but also making one's own coffee at home - people would be okay with investing in coffee equipments at home.

    Although this comes with a catch, as brewing cafe style coffee at home is:

    • Not easy

    • Requires heavy investment on equipments

    • Time taking - laid back attitude

    • This also means coffee chains now launching their own readymade coffee products - literally each one of them - why go to Blue Tokai every week when you can get same bottled and delivered in 10 minutes (quick commerce days)

      Note: Ready-to-go coffee is thriving here (Check iD innovation here)

• People like close environments

  • Coffee shops are still best co-working space + meeting spots - for most next-gen folks. What could be better than to go work from a cafe, when you are bored working from home.

  • With more gig workers, people are looking to make coffee shops a part of their life - morning coffee run or evening cafe hangout/chill time

    • Although coffee pricing in India is still expensive i.e. ₹250-₹350 for a drink

• Personalised/ Curated experience

  • Although chains are trying to standardise Barista experience, an interaction needs to be more friendlier than 'Namaste' or 'Welcome to Starbucks'

  • A good Barista should be able to offer more connect, along with good coffee. A friendly face who interacts for more than 2 minutes on first visit will make recurring customers for the outlet, than a standardised experience.

  • Chains like Starbucks/ Third Wave (not including Barista/ CCD as they seem dead now) look over-commercialised, with no personal experience and cross-selling getting more important at the billing counter itself.

• Loyalty Programs

  • Loyalty programmes is one of the great retention module for any F&B chain, and Starbucks is one behemoth in this - must watch Why Starbucks Operates Like a Bank | WSJ

  • Personalisation > Loyalty Program Although a personalised experience beats standardised loyalty program any day, it is as important to have program which can be replicated across stores (people who travel/ change places or don't visit same coffee outlet often)

Adding some side notes in case you are mistakenly drawing parallels with western coffee culture:

• Although pricing is now okay for most Tier 1 consumers (Indian California consumers), it is still expensive. Even if we were to assume a ₹100 rupee bottle of water in India (where usually an average Indian will ask for tap water instead).

  

  Comparison of coffee pricing in India & US

• Cost of making a cup of coffee is just INR 15-20 for a cafe at scale, whereas the minimum investment to start a cafe with good interiors and a food menu is approximately 50 lakh onwards + a good amount of fixed costs (electricity + human resource + wastage). Check this detailed breakdown that I discovered after completing this post by @caffeineace - here

I cannot miss to mention the growth of D2C coffee brands over last few years, where Nescafe, Bru and Tata Coffee still exist as incumbents and dominate markets. It can be a whole different report decoding each of these brands, but one innovative brand here has to looked upon here for now - check iD and their filter kaapi innovation here.

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Where do you want to go this week for coffee?

Coffee Chains

Looking into some of the most prominent coffee chains in India…

Starbucks

Backing : Tata Consumer Products Revenue : ₹1000 crore+ Number of stores: 333 and counting

Starbucks Reserve [18° 55' 59", 72° 50' 2'']; Image Source: Starbucks India

One of the most prominent ones when we talk about coffee chains, 'Venti' one too! With Tata group backing, it's growing fast with ₹1000 crore revenue in 2023 (read here) despite a premium pricing band.

Starbucks has 333 stores in India, with 71 added just last year. With a ₹1,000 crore sales in 2022-23, it is a big competition to any entrant, with Tier 2 city presence and an awesome loyalty program.

Blue Tokai

Backing : A91 Partners, White Whale Ventures, Deepika Padukone + 2 other VCs Funding : $37 Mn Revenue: ₹127 crore ($15.3 Mn) Number of stores: 60

Roasters first; Image Source: Blue Tokai on X

Started in 2012-13 as a roastery in Gurgaon, it has great bitter coffee (and a very wide menu of roasts for coffee nerds). Although this wide choice just on roasts and sourcing has not worked great with masses.

With a funding of $30 million in Jan 2023, it is planning to add 200 stores, with 60 already present. And not just cafes, it has a great range of D2C products also.

Third Wave Coffee

Backing : Creaegis, Westbridge Capital Funding : $66 Mn Revenue: ₹150 crores+ (₹31.75 crores in FY22) Number of stores: 105

Third Wave Coffee

While every Bangalorean must have heard of famous Third Wave deals, I was introduced to the brand in GK, Delhi in my college last year. I like to call it the 'Indian Starbucks'.

• Gained great popularity - now trying to expand menu/ get into breakfast segment - Reminds of Dunkin' Donuts approach

• Coffee is not best, although perfect alternative to starbucks, 10% cheaper or prices are equivalent

With a funding of $35 million in late September 2023, it is going after $850 million coffee retail business by 2025 (projected by Third Wave).

Subko

Backing : Blume, GVK, others Funding : $3.6 Mn Number of stores: 14

Subko : an experience; Image Source: Subko India

The newest entrant and most 'aesthetic' of all, Subko has raised $3.6 million so far. It is trying to create an experience - around coffee in a distinguished manner - and that stands out!

• Great coffee chain based out of Mumbai - owner passionate about coffee and desserts (chocolate and croissants especially)

• Now expanded to Hyderabad (2 outlets) and Bengaluru (2 outlets)

• Focused on Quality (wastes food worth INR 45k everyday, this is for Byculla store) and ensure everything is fresh each morning.

Cafe Coffee Day

Backing : Blume, GVK, others Market Cap : ₹1250 crores Revenue : ₹924 crore Number of stores: 469

The one chain that introduced coffee cafes to India is now struggling to survive. With CCD being on verge of giving away it's retail business, it still stands strong in coffee dispensing machine business. And it would have been unjust to not look into the brand which made Indians flock to cafes and made it look cool then.

Araku

Backing : Araku Valley Number of stores: 2

Araku is featured on Architectural Digest, what else can be said; Image Source: Araku Coffee

Something extraordinary for this chain, it is the second most attractive store front on 12th Main Road, Indiranagar (first being CRED's office). Their cafes are just to make people aware of their coffee beans and Araku Valley. Their website and story of Araku Valley is a recommended visit as their stores - here.

While I have covered only few chains here, there are a dozen, competing for this growing pie in F&B space. Incumbents like Costa Coffee, Barista and others(all of which have somewhere lost and need revamp) or D2C brands like Sleepy Owl, Rage Coffee and cloud kitchen based like Slay Coffee.

To end this, here's a fact. The largest coffee chain in India is not Starbucks or CCD, but it is Indian Coffee House with 500 outlets, started in 1957 and run by a series of worker co-operative societies - read more here.

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Story time!

Here's the story. On a Sunday noon in Worli [19° 0' 5", 72° 48' 54"], a friend of mine invites me to meet in a cafe (which he saw near his home). I reach there on time and he is late, don't know how much. But I end up talking to their Head Barista, who has worked on coffee since his teens (he was 21 and a great conversationalist). And guess what, it is the cafe's first day and everything is on house and I spend 1.5 hours talking with the Barista, oh his name is Vayu, and he explained me everything coffee from his POV. Me being a coffee nerd (something I would add to my profile) get to know about his experience at Third Wave, Subko and now this new place.

Obviously mention to @standbycoffee, which is by @toastinc (got to know this later while writing) and Vayu!

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This is it my first written musing. Would love to hear about your coffee philosophy and anything else - LinkedIn or Twitter. Feel free to drop in your feedback or any interesting reads.

I am planning to write a detailed thesis on this sector, do let me know your views on whether I should attempt that, or any inputs that you might have for me at hello@hardikmore.com.

Also, grateful to Anirudha Basak, Akshat Rohatgi, and Rahul Deshpande for reading early drafts.