Working Up Some Steam

Purvita Chatterjee , The Hindu Businessline

Mumbai, May 30, 2013

Global they might be, but the café chains have woken up to the potential of coffee in smaller towns and cities. The metro markets are saturated, the rents are high, and they are having to shut down some stores. They are even becoming more open to franchising their brand in these new places.

After setting up shop in Mumbai and Delhi, Starbucks is now enquiring about rent in Bangalore. Barista Lavazza, one of the first international coffee retailers, hopes to add 15-20 cafes every year. “All our outlets have largely been company-owned, but now, for the first time, we have decided to go into Tier 2 cities with the help of franchises and these would include the State Capitals,” says Nilanjan Bhattacharya, COO, India and SAARC, Barista Lavazza. Barista is now present in even smaller cities such as Surat through franchises.

With 160 outlets, mainly in the Delhi NCR region, Barista has been closing some of the unprofitable ones in in the metros in areas which command high rentals. For instance, it recently shut two outlets in South Mumbai and moved to the city’s far-flung suburbs.

Others such as the UK-based Costa Coffee are gearing up to enter smaller towns such as Ludhiana and Jalandhar in Punjab while Australia’s Di Bella Coffee recently launched a 5,000 sq. ft. outlet, its largest, in Hyderabad.

“High rentals are a challenge but that is not going to stop us from opening 40-50 stores in year and entering more cities in Punjab,’’ says Santosh Unni, Managing Director, Costa Coffee. Now at 107 outlets, Costa Coffee intends crossing 150 outlets this year and emerging as the second largest player after Café Coffee Day (CCD).

Di Bella Coffee has another store in Hyderabad, spanning 3,000 sq. ft. “High rentals and saturation in cities like Mumbai have made us enter Tier 2 &3 cities which are still not exposed to international coffee chains. There have been great sales out of Hyderabad as the city still does not have an international coffee chain and at 5,000 sq. ft, we are the largest coffee retail outlet in the country,’’ says Sachin Sabharwal, Managing Director.

Considering the last quarter has been challenging for QSR (quick service restaurants), coffee chains do not believe in slowing down. “Discretionary spends have been down in the last quarter but the boom in retail is still happening in the Tier 2 and 3 cities which will offset it,’’ adds Sabharwal. Di Bella Coffee has ten outlets in Mumbai, and Hyderabad is the next city it has chosen to enter.

CityMax Hospitality, the master franchisee for Gloria Jeans Coffee, plans to open at least ;15-20 stores a year. While it has already entered Mumbai and Delhi and smaller cities such as Pune and Ahmedabad, more Tier 2 cities are on the anvil. As Vishal Sawhney, President, City Max Hospitality says, “Coffee retail is still a huge market and there is demand. After Tier 1 cities, we need to expand more into Tier 2 &3 cities.’’

Last week Pan India Food Solutions, the master franchise for The Coffee Bean & Tea Leaf entered Punjab with two stores in Chandigarh. “We intend opening one store every 3-4 weeks as there is demand for local area coffee formats even in smaller cities like Chandigarh,’’ adds K. S. Narayanan, Chief Executive Officer, Pan India Food Solutions.

It’s not just about rents and demand in the non-metro markets, though. Regional preferences and pricing have to be kept in mind. The coffee-drinking population in such places is obviously not going to match that of the metros.

To begin with pricing may prove to be the biggest impediment to the coffee chains being accepted. “Coffee culture is driven by the youth in these smaller markets and to cater to them pricing has to be more value-based,’’ observes Ankur Bisen, Vice-President (Consumer Products & Retail Practice), Technopak. Regional preferences may also play a role and chains might have to tweak their offerings. "The well-travelled Chandigarh consumer may be aware of these international coffee brands but consumers in Jaipur may prefer more traditional offerings from these chains," adds Bisen.

Lower rents may not lead to higher footfalls. These chains have to be careful in choosing the right location, just like they do in the metros. “The absolute rentals may be low but the percentage of revenues from a particular outlet may not be enough to match that of a metro market,’’ says Bisen.

In fact, rents may not necessarily be low in a non-metro market. “Some of the non-metro markets like Coimbatore and Madurai may also have high rents. Besides, there may also be a higher cost associated with managing the fewer number of outlets compared to the metros,’’ observes Joseph Cherian, CEO, GFA Global (Global Franchise Architects, the owner of the Coffee World outlets).

The Switzerland-based GFA Global, the owner of Coffee World, has nine outlets today at places such as Chennai and Kolkata and has yet to enter a non-metro market. “While we would definitely like to enter a Tier 2 city as there are highly aspiring consumers, it would depend on what stage of operations the brand is in, and Coffee World has yet to decide whether as brand it is ready to do so,’’ adds Cherian.

Most retail chains wait to reach a certain critical level before expanding to smaller towns and the same is applicable to coffee chains.

“International coffee chains realise that most of the spending happens in the metros and wait to reach a critical mass before they feel they can efficiently service the smaller towns,’’ observes Devangshu Dutta, Managing Director, Third Eyesight.

While building scale in the metros before expanding to smaller towns may be the ideal strategy, not everybody seems to be following it and would rather tweak their models depending on their business conditions.

For instance, there are players such as Costa Coffee which have exited smaller markets such as Pune.

But no longer is shutting down and moving out a stigma for retailers. “While in the past coffee chains were expanding indiscriminately, they are now evaluating this dynamic business more closely and there is no stigma attached to closing down an outlet anymore, be it a metro or a non-metro market,’’ adds Dutta.

Coffee chains such as Gloria Jeans have learnt much from entering cities such as Pune and Ahmedabad as well as from metro markets. Today Gloria Jeans continues to expand with even a recently launched new outlet at Colaba Causeway in South Mumbai despite the steep real estate costs. Di Bella, despite choosing Hyderabad for its largest store, is tapping a lounge format in South Mumbai. “We negotiated a good deal with a landlord in South Mumbai and will be opening our first lounge format which will also serve coffee liqueurs,’’ said Sabharwal.

New coffee chains such as Starbucks are only spurring growth for the existing chains, edging them to expand to new markets. As Dutta of Third Eyesight says, “The entry of chains like Starbucks has added to excitement in this category and has re-ignited the growth prospects of the existing coffee chains who are expanding cautiously at the same time." With Starbucks looking at smaller markets like Pune, Chandigarh and Hyderabad quickly for its next phase of growth in India, these cities will emerge as the new hubs for international coffee retailers.