(Published in the Financial Express, 10 May 2016)

In about 20 years, Café Coffee Day (CCD) has grown from one ‘cyber café’ in Bengaluru to the leading chain of cafés in the country by far.

In its early years, it was a conservative, almost sleepy, business. The launch of Barista in the late 1990s and its rapid growth was the wake-up call for CCD — and wake up it did!

CCD then expanded aggressively. It focussed on the young and more affluent customers. Affordability was a keystone in its strategy and it largely remains the most competitively priced among the national chains.

Its outlets ranged widely in size — and while this caused inconsistency in the brand’s image — it left competitors far behind in terms of market coverage. However, the market hasn’t stayed the same over the years and CCD now has tough competition.

CCD competes today with not only domestic cafés such as Barista or imports such as Costa and Starbucks, but also quick-service restaurants (QSRs) such as McDonald’s and Dunkin’ Donuts. In the last couple of years, in large cities, even the positioning of being a ‘hang-out place’ is threatened by a competitor as unlikely as the alcoholic beverage-focussed chain Beer Café.

CCD is certainly way ahead of other cafés in outlet numbers and visibility in over 200 cities. It has an advantage over QSRs with the focus on beverage and meetings, rather than meals. Food in CCD is mostly pre-prepared rather than in-store (unlike McD’s and Dunkin’) resulting in lower capex and training costs, as well as greater control since it’s not depending on store staff to prepare everything. However, rapid expansion stretches product and service delivery and high attrition of front-end staff is a major operational stress point. Upmarket initiatives Lounge and Square, which could improve its average billing, are still a small part of its business.

Delivery (begun in December 2015) and app-orders seem logical to capture busy consumers, and to sweat the assets invested in outlets. However, for now, I’m questioning the incremental value both for the consumer and the company’s ROI once all costs (including management time and effort) are accounted for. The delivery partner is another variable (and risk) in the customer’s experience of the brand. Increasing the density through kiosks and improving the quality of beverage dispensed could possibly do more for the brand across the board.

The biggest advantage for CCD is that India is a nascent market for cafés. The café culture has not even scratched the surface in the smaller markets and in travel-related locations. The challenge for CCD is to act as an aggressive leader in newer locations, while becoming more sophisticated in its positioning in large cities. It certainly needs to allocate capex on both fronts but larger cities need more frequent refreshment of the menu and retraining of staff.

An anonymous Turkish poet wrote: “Not the coffee, nor the coffeehouse is the longing of the soul. A friend is what the soul longs for, coffee is just the excuse.” There are still many millions of friends in India for whom the coffee-house remains unexplored territory, whom CCD could bring together.

Aggregator models and hyperlocal delivery, in theory, have some significant advantages over existing business models.

Unlike an inventory-based model, aggregation is asset-light, allowing rapid building of critical mass. A start-up can tap into existing infrastructure, as a bridge between existing retailers and the consumer. By tapping into fleeting consumption opportunities, the aggregator can actually drive new demand to the retailer in the short term.

A hyperlocal delivery business can concentrate on understanding the nuances of a customer group in a small geographic area and spend its management and financial resources to develop a viable presence more intensively.

However, both business models are typically constrained for margins, especially in categories such as food and grocery. As volume builds up, it’s feasible for the aggregator to transition at least part if not the entire business to an inventory-based model for improved fulfilment and better margins. By doing so the aggregator would, therefore, transition itself to being the retailer.

Customer acquisition has become very expensive over the last couple of years, with marketplaces and online retailers having driven up advertising costs – on top of that, customer stickiness is very low, which means that the platform has to spend similar amounts of money to re-acquire a large chunk of customers for each transaction.

The aggregator model also needs intensive recruitment of supply-side relationships. A key metric for an aggregator’s success is the number of local merchants it can mobilise quickly. After the initial intensive recruitment the merchants need to be equipped to use the platform optimally and also need to be able to handle the demand generated.

Most importantly, the acquisitions on both sides – merchants and customers – need to move in step as they are mutually-reinforcing. If done well, this can provide a higher stickiness with the consumer, which is a significant success outcome.

For all the attention paid to the entry and expansion of multinational retailers and nationwide ecommerce growth, retail remains predominantly a local activity. The differences among customers based on where they live or are located currently and the immediacy of their needs continue to drive diversity of shopping habits and the unpredictability of demand. Services and information based products may be delivered remotely, but with physical products local retailers do still have a better chance of servicing the consumer.

What has been missing on the part of local vendors is the ability to use web technologies to provide access to their customers at a time and in a way that is convenient for the customers. Also, importantly, their visibility and the ability to attract customer footfall has been negatively affected by ecommerce in the last 2 years. With penetration of mobile internet across a variety of income segments, conditions are today far more conducive for highly localised and aggregation-oriented services. So a hyperlocal platform that focusses on creating better visibility for small businesses, and connecting them with customers who have a need for their products and services, is an opportunity that is begging to be addressed.

It is likely that each locality will end up having two strong players: a market leader and a follower. For a hyperlocal to fit into either role, it is critical to rapidly create viability in each location it targets, and – in order to build overall scale and continued attractiveness for investors – quickly move on to replicate the model in another location, and then another. They can become potential acquisition targets for larger ecommerce companies, which could acquire to not only take out potential competition but also to imbibe the learnings and capabilities needed to deal with demand microcosms.

High stake bets are being placed on this table – and some being lost with business closures – but the game is far from being played out yet.

The Patanjali Group has created an Indian FMCG giant in a very short span of time on the back of a three-pronged strategy:

1. The enormous brand awareness that can be attributed to the very high visibility of Baba Ramdev, across a variety of media and issues,
2. Wide and deep market penetration through a large network of outlets and distributors across the country, and
3. Pricing itself below the benchmark competitor in each product area in which it is competing.

Over time, the group has also invested in improving its manufacturing and packaging infrastructure to bring itself on par with well-established competitors.

The group has clearly focussed itself on the mass market, and Patanjali Group’s products become a “go-to” for customers who are more price-sensitive than brand-loyal. This definitely creates pressure on established brands in each of the product segments where the group is now present.

In the growing market for ready-to-cook packaged food, a new entrant would struggle to create visibility and initial demand. However, with the momentum of the Patanjali brand behind it, the group’s new product — instant noodles — has a fighting chance.

I must say, though, that the immediate opportunity would have been bigger had Maggi also not just relaunched in the market. The other aspect to keep in mind is that while a lot of food and nutraceutical products resonate easily with the Patanjali brand, instant noodles seem completely counter-intuitive under this brand’s umbrella. How much consumers will support this new launch remains to be seen.

This 2-4 minute noodles story is still cooking. Keep watching the pot!

India has a rich culture and ecosystem of social enterprises, non-profits and many other social purpose organisations that serve the needs of many segments of society within a vast landscape. However, for a foreign investor looking for impact investing or other philanthropic opportunities in India, it can often prove to be a challenging journey. Devangshu Dutta (Third Eyesight/PVC Partners) and the Audrey Selian (Artha Platform) together provided a landscape overview of India, highlighted key challenges and pitfalls to look out for, and shared an insider view for international investors in this first part of AVPN’s India series.

(The Hindu Businessline – cat.a.lyst got marketing experts from diverse industries to analyse consumer behaviour during the last one month and pick out valuable nuggets on how this could impact marketing and brands in the years to come. This piece was a contribution to this Deepavali special supplement.)

Two trends that stand out in my mind, having examined over two-and-a-half decades in the Indian consumer market, are the stretching or flattening out of the demand curve, or the emergence of multiple demand peaks during the year, and discount-led buying.

Secular demand

Once, sales of some products in 3-6 weeks of the year could exceed the demand for the rest of the year. However, as the number of higher income consumers has grown since the 1990s, consumers have started buying more round the year. While wardrobes may have been refreshed once a year around a significant festival earlier, now the consumer buys new clothing any time he or she feels the specific need for an upcoming social or professional occasion. Eating out or ordering in has a far greater share of meals than ever before. Gadgets are being launched and lapped up throughout the year. Alongside, expanding retail businesses are creating demand at off-peak times, whether it is by inventing new shopping occasions such as Republic Day and Independence Day sales, or by creating promotions linked to entertainment events such as movie launches.

While demand is being created more “secularly” through the year, over the last few years intensified competition has also led to discounting emerging as a primary competitive strategy. The Indian consumer is understood by marketers to be a “value seeker”, and the lazy ones translate this into a strategy to deliver the “lowest price”. This has been stretched to the extent that, for some brands, merchandise sold under discount one way or the other can account for as much as 70-80 per cent of their annual sales.

Hyper-opportunity

This Diwali has brought the fusion of these two trends. Traditional retailers on one side, venture-steroid funded e-tailers on the other, brands looking at maximising the sales opportunity in an otherwise slow market, and in the centre stands created the new consumer who is driven by hyper-opportunism rather than by need or by festive spirit. A consumer who is learning that there is always a better deal available, whether you need to negotiate or simply wait awhile.

This Diwali, this hyper-opportunistic customer did not just walk into the neighbourhood durables store to haggle and buy the flat-screen TV, but compared costs with the online marketplaces that were splashing zillions worth of advertising everywhere. And then bought the TV from the “lowest bidder”. Or didn’t – and is still waiting for a better offer. The hyper-opportunistic customer was not shy in negotiating discounts with the retailer when buying fashion – so what if the store had “fixed” prices displayed!

This Diwali’s hyper-opportunism may well have scarred the Indian consumer market now for the near future. A discount-driven race to the bottom in which there is no winner, eventually not even the consumer. It is driven only by one factor – who has the most money to sacrifice on discounts. It is destroys choice – true choice – that should be based on product and service attributes that offer a variety of customers an even larger variety of benefits. It remains to be seen whether there will be marketers who can take the less trodden, less opportunistic path. I hope there will be marketers who will dare to look beyond discounts, and help to create a truly vibrant marketplace that is not defined by opportunistic deals alone.