A version of this article was originally published by Knowledge at Wharton
V.G. Siddhartha, chairman of the Bangalore-based Amalgamated Bean Coffee Trading Co. (ABC) and the man behind India's largest cafe chain, Cafe Coffee Day (CCD), has set his team a stiff target: By next March he wants to expand the chain to 950 cafes.
From where it stands today, with 595 cafes across 100 cities in India, three in Vienna and two in Karachi, this means opening more than one cafe a day -- and not just in India. Siddhartha has strong global ambitions: He wants 50 of these cafes to be located outside India.
The Coffee Day story is not just in its numbers, though. Coffee Day has been a pioneer. When Siddhartha opened the first Cafe Coffee Day outlet in Bangalore, India's silicon capital, in 1996, it was positioned more as an Internet cafe. This was the very early days of the Internet in India, and customers trooped in to Coffee Day to experience the Internet. Coffee was just an extra.
Siddhartha, though, had other plans. The Internet was the bait. Coming from a family of coffee plantation owners and as chairman of ABC, which owns more than 10,000 acres of coffee plantations in the southern Indian state of Karnataka, Siddhartha's aim was to sell coffee. The space he was operating in, as an exporter of green coffee beans, offered low margins and these fluctuated depending on the vicissitudes of pricing in the world coffee market. A cafe, in contrast, operates at the highest end of the value chain. Its margins can be 35 percent to 40 percent higher than those of bean exports.
"At that time, coffee drinking in India was limited to South Indian traditionalists, the intellectuals and the five-star coffee shop visitors," Siddhartha says. "I saw that in the neighboring international markets of Southeast Asia there was a popular culture of consumers visiting a cafe for experiential purpose in addition to consuming a glass of beer. These cafes were also promoting cyber-culture and offering Internet access. These trends inspired us. We realized that there was a potential for building a coffee brand for the India market, and we launched the first cyber cafe model based on the international lessons, but replaced beer with coffee. This is when Coffee Day was born."
Competitors estimate ABC's revenues last year to be around Rs 600 crore ($140 million), of which half, they say, came from a cafe business that they believe turned profitable a few years ago. The rest of ABC's revenues come from its other business groups, all of which operate under the Coffee Day brand. These include Coffee Day Exports, Coffee Day Xpress (fast food and beverage outlets that are much smaller than the cafes and are franchised), Coffee Day Take Away (coffee vending machines), Coffee Day Fresh 'n Ground (ground coffee retail outlets) and Coffee Day FMCG (packaged filter coffee powder). Operating across this spectrum has allowed Siddhartha to expand his brand presence rapidly.
Siddhartha is experimenting now with new formats, such as lounge cafes serving plated meals in addition to the sandwiches, pastries and croissants offered in the cafes.
Siddhartha is believed to have raised some $100 million for his expansion plans during the past few months. While much of this apparently is through debt, around $25 million has come from the Darby Asia Mezzanine Fund, a unit of Franklin Templeton Investments.
In its early years, Coffee Day had neither clear positioning nor significant presence. In fact, it lost ground to Barista Coffee, which was founded in 2000 by Amit Judge of the investment company Turner Morrison. Barista positioned itself as an upmarket, premium coffee cafe and targeted executives who saw it as a less expensive alternative to coffee shops in five-star hotels. In 2002, Barista had some 85 cafes around the country, while Coffee Day had just 35.
But after a faltering start, Siddhartha pulled things together. What turned the tables in Coffee Day's favor was its subsequent strong positioning as a "third place" away from the home and college or workplace for the young and the young at heart. Siddhartha made people ages 15 to 30 Coffee Day's prime target. Having zeroed in on the target, elements such as pricing, ambience, food, music and promotions fell into place.
Coffee Day also was sharper than Barista in finding the right locations, a critical success factor in the cafe business.
Taking Coffee Day to the next level of growth, of course, has its challenges. Competition, for one, is likely to play a larger role. Barista, too, has now decided to target the young adult.
Another significant competitor in the coming years could well be the global coffee giant Starbucks. In June 2007, Starbucks put its India plans on hold because of foreign direct investment regulatory issues. But India is too big a market for Starbucks to ignore.
Other recent global players in India include Britain's Costa Coffee, Australia's Gloria Jeans and Italy's illycaffe. Meanwhile, domestic chains such as Java Green, from the Reliance Anil Dhirubhai Ambani Group, are looking to expand.
Siddhartha is not unduly worried. "The cafe space in India is opening up and newer players are entering the market and offering more options for consumers," he says. "This is healthy, as competition will ensure that each player delivers his best to be the consumer's first choice. As long as one is committed to delivering world-class quality, there is no need to change the rules of the game just because of new entrants."
Outside of ABC, Siddhartha has launched a small business that supplies furniture for his cafes and a residential hospitality college that trains young people who can be absorbed into the business.
Apart from his interests in coffee, Siddhartha is founder and managing partner at Global Technology Ventures and founding chairman of Way2Wealth, an investment consultancy. He is also on the board of MindTree, Ittiam Systems and Liqwid Krystal. In addition, he has other plans: He wants to leverage ABC's picturesque coffee plantations into a new business opportunity.
"We have identified the burgeoning luxury tourism market as a suitable growth opportunity," he says. "With this we will be catering to an older target audience." As for getting a CEO for Coffee Day, Siddhartha admits that he will "have someone to fill this position" but this will not happen immediately.