Coffee Billionaire
A key ingredient in the drink popular among the young is soda imported from France, which alone costs Rs 12 each glass. Siddhartha makes a mental note of it. Later, that Saturday, at Chikamagalur, an estate town on the Western Ghats 260 km northwest of Bangalore, he quizzes Pradeep Kenjige, the head of a team of 15 food technologists who develop new beverages for CCD, as Cafe Coffee Day is also known. Siddhartha is told that the development team has successfully cloned the French soda for taste and effervescence, and can make it locally at one-third the imported cost.
SIDDHARTHA, THE PERSONA
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An acceptance that is critical to Siddhartha's ambition that CCD will rank among the top three cafe chains in the world before 2018. Market leader Starbucks runs 16,635 cafes, Dunkin Donuts 8,800, Tim Horton's 3,527 and Costa 1,511 globally, according to data from brand consultancy Harish Bijoor Consults Inc., and if Siddhartha can break into that league, he will be the first entrepreneur from outside the US and Europe to do so. And, a very prosperous man.
Siddhartha's story, never told before in deep detail, is best narrated with his first CCD outlet on Bangalore's Brigade Road, the city's main street for teenagers, tourists, and city residents out for a beer or high street shopping.
Opening for business in August 1996, the two-level cafe was schizophrenic: it served traditional south Indian filter coffee on the ground floor, and cappuccino and espresso on the mezzanine floor. Espresso was both a foreign word and taste for most customers and many frowned at the dark brew.
Coffee+Web=Addiction2
But, Siddhartha had a killer app upstairs: high speed Internet access (served through a 64-kbps leased line) on computers with large 17-inch screens. In 1996, this turned out to be a big draw on the cappuccino level because the alternative was slow dial-up access. Early in 1998, he decided to close down the filter coffee operation-partly, because the ubiquitous brew was served at Rs 5 a cup at a local restaurant down the street and very few customers paid Rs 15 at CCD for a filter coffee serving.
BEAN COUNTING
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In essence, Siddhartha was betting on repeat-buying of well-brewed coffee and Internet access-a unique customer experience then. "My people were sure that I was making a big mistake," Siddhartha recalls. "But I was clear: the whole thing would cost me Rs 1.5 crore. I asked them, 'Will Rs 1.5 crore finish my company? It wouldn't. Let's go ahead with the plan, then.'" Eventually, the lure of coffee, or more specifically, shooting the breeze over a cuppa, won over customers. Today, about one million customers visit CCD cafes, takeaway kiosks and vending machines a day.
Siddhartha, the only son of a Chikamagalur coffee planter, is the first to admit that his "plan" never aimed at the success story it is today. "If you had asked me in 1996, I would have perhaps told you the city of Bangalore can take a maximum of three cafes and the entire country about 50," he says. Apart from its 918 cafes (not including four in Vienna and two in Karachi), CCD has some 14,000 vending machines and 1,000 kiosks dispensing coffee across India. At its current rate of adding four new cafes a week, CCD-a deal to buy a 14-outlet chain in Eastern Europe may close soon-will have a 1,000 cafes before end-September.
Information on revenues or profits for the unlisted businesses in Siddhartha's fold is scant. CCD is a division of Amalgamated Bean Coffee Trading Company Ltd, which topped an estimated Rs 850 crore revenues in fiscal 2010. CCD cafes contribute 60 per cent of those revenues and return operating margins of 23 per cent.
THE COFFEE DAY EMPIRE | ||||||||||||
COFFEE DAY RESORTS (75%) | TANGLIN DEVELOPMENTS (100%**) Valuation: Rs 1,300 crore Scale: 120-acre Global Village Technology Park, B'lore and 23-acre TechBay, M'lore Plans: To expand to 6 million sq.ft by 2015, build residential units | GLOBAL TECHNOLOGY VENTURES (100%**) Valuation: Rs 700 crore Venture fund that owns Way2Wealth fully and has minority stakes in a clutch of firms | AGRI BUSINESS, DARK FOREST FURNITURE CO. (100%) Valuation: Rs 1,000 crore Group owns 10,000 acres of coffee plantations Timber sourced from the plantations is used to make and supply 2,500 pieces of furniture to Cafe Coffee Day outlets Plans: To set up furniture retail stores | |||||||||
AMALGAMATED BEAN COFFEE TRADING CO. Valuation: Rs 2,500 crore Revenues: Rs 850 crore (FY 2010) Retail and coffee trading operations | COFFEE DAY HOTELS & RESORTS Valuation: Rs 250 crore Expanding number of resorts to 10 (from three) with investments of Rs 400 crore. Locations: Karnataka, Kerala, Tamil Nadu, Andamans & Nicobar | WAY2WEALTH In the business of financial trading and investment services Outlets: 200-plus in 50 cities Plans: To grow to 400 branches in 30 months | OTHERS*** Includes GTV's venture capital investments in companies such as MindTree, Ittiam Systems and Global Edge Software | |||||||||
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| * The remaining 25 per cent is owned by PE funds such as KKR, New Silk Route, Standard Chartered PE, among others; ** Siddhartha's 100 per cent ownership in Tanglin Developments and Global Technology Ventures will come down upon dilution after the latest round of PE funding; *** Stakes vary in different companies. Source: Industry, Ratings Reports | ||||||||||||
Besides the cafes, other divisions of Siddhartha-chaired Amalgamated Bean Coffee include coffee powder retailing, packaged coffee sales, coffee machines (yes, CCD makes its own coffee vending machines!), take away counters and coffee exports. In fiscal 2009, according to a debt ratings report by ratings agency ICRA, Amalgamated Bean Coffee reported a profit after tax of Rs 4.72 crore on sales of Rs 554.7 crore.
Siddhartha's next gear shift is to take his cafe numbers to 2,000 in India and 200 abroad in the next four years. "We are the largest coffee retailing chain in Asia and our vision is to be in the top three in the world coffee retail market in the next seven to eight years," he says, in one of the four interviews he gave BT.
Siddhartha has no dearth of funders, some backing a bunch of new businesses-in commercial real estate and infrastructure, retail financial services and hospitality-that he's cranking up fast. He raised Rs 1,027 crore from Kohlberg, Kravis, Roberts & Company; New Silk Route, and Standard Chartered Private Equity in a round that closed early April. He also counts Sequoia Capital, Deutsche Group, Darby Investment and International Finance Corporation, who together have invested $100 million, among backers from the past.
The latest round of funding values Amalgamated Bean Coffee at some Rs 2,500 crore, a fledgling resorts business at some Rs 250 crore, an investing arm at Rs 700 crore, and the real estate and infrastructure set up at Rs 1,300 crore. An agri-business valued at Rs 1,000 crore and spread over 10,000 acres of coffee plantations (that yield the highest output of the premium Arabica beans in India and even Asia) together with a furniture business (branded Dark Forest Furniture) complete Siddhartha's empire.
This values the businessman (he and his family own three-fourths of Amalgamated Bean Coffee and Coffee Day Hotels & Resorts) at over Rs 5,000 crore-ranking him higher than G.V. Krishna Reddy, Chairman of GVK Group in terms of wealth.
Other Irons in the Fire
Siddhartha says he will spend Rs 2,000 crore over the next three years into the expansion of CCD cafes, Way2Wealth Broking, hospitality, and infrastructure businesses (see The Coffee Day Empire). "We raise money when we don't need it. This combined with internal accruals and our ability to raise equal amount of debt... we can make huge investments," he says. He aims also to scale up resorts at Coffee Day Hotels to ten, from the current three, spending Rs 400 crore.
Details of funding of its investment arm, Global Technology Ventures, under which a bevy of Siddhartha's venture investments as also Way2Wealth are grouped, and Tanglin Developments, the infrastructure and realty business, have not been disclosed. All that the Coffee Day Group Chairman will say is that in seven-eight years he is aiming at businesses of $1 billion (Rs 4,500 crore at current rates) revenues each in retail coffee, infrastructure and in a new business, details of which he is keeping close to his chest.
BEAN ME UP, SID How the value chain plays out at CCD.
Source: Harish Bijoor Consults Inc., except *, which is a CCD estimate |
Other deals too shone: a $300,000 cheque to Kshema Technologies in 1997 turned into $37 million when the tech firm was acquired in 2004. A Rs 15 crore investment made in 1999 in software services firm MindTree is worth at least Rs 180 crore today.
Calling Siddhartha India's most unheralded entrepreneur, Nandan Nilekani, Chairman of the Unique Identification Authority of India and cofounder, Infosys, says he admires the way his fellow Bangalorean is "solid, meticulous and methodical; always looking ahead; and can juggle 100 balls in the air". The 49-year-old coffee baron could have stayed with his plantation roots like other planters, Nilekani says, but he saw the value chain in the coffee business and moved relentlessly to capture the opportunity. "Siddhartha broke away from the pack," he says.
CCD has the biggest cafes operation in India (its nearest competitor Barista Coffee Company, owned by Lavazza of Italy, clocks in at some 210 outlets in India) and enjoys tremendous integration benefits (see Bean Me Up, Sid ).
Harish Bijoor, the head of the eponymous brand strategy firm, who earlier in his career worked eight years with Tata Coffee, says CCD's big strength is its ability to control quality from coffee bush to cup. "Siddhartha has a margin advantage of 14-20 per cent on costs at the operating level," Bijoor estimates. In addition, he has cost advantages such as savings on royalties-some 3 to 7 per cent of sales (tending towards the upper end in later years of a contract) for international food and cafe brands franchised in India-since he owns the brand.
It Also Sells Coffee
Still, the killer in the coffee retail business, like dozens of other retailers have learnt in India, is real estate costs. CCD, which runs every outlet itself to keep a tight control on quality and customer experience, pays rent of up to 20 per cent of sales in some of its cafes. At its most expensive cafes in Mumbai's Bandra and Connaught Place in New Delhi, rents eat up Rs 3.5-5 lakh a month. Such high fixed costs and a slow uptake of cafes in India make for a recipe for long years of losses, argue some industry insiders-especially, if your average prices are lower than those of the competition.
Siddhartha counters that he has long- term leases of 9-15 years, which reduces the average rent of the outlets. CCD Director Alok Gupta, the man responsible for all operations in the CCD cafes business, meanwhile, is working on lease contracts, especially at the new outlets, with rents set as a percentage of revenues. "Our outlets in 22 Shopper's Stop locations are all on revenue-share basis. We pay a rental of between 12 and15 per cent of our business," he says, adding at 85 per cent, "our stores are performing on expected revenue lines".
Then, there's always the food versus beverages trade-off. Essentially, snacks and eats may make for low margin business globally for large cafe chains but draw in crowds much more than coffee does. Raghav Gupta, President, Technopak Advisors, says food is increasingly becoming a growing component of the cafe business across chains (see his column, An Indian McDonald's Anyone?).
Costa, which has 54 outlets in India, for instance, is laying emphasis on sales of sandwiches, quick eats, and even pulao and biryanis and counts up to 40 per cent of its turnover from food. The chain's outlets in the National Capital Region and New Delhi are served by a large commissary or central kitchen in Gurgaon, and it is clear that model will work in other cities too. "We do not enter a new city unless we see that there is an option of setting up at least 20-25 outlets as that would justify the cost of setting up a central commissary. When we launch in Bangalore we will start with at least six outlets at once," says Ravi Kant Jaipuria, Chairman, RJ Corp., which is the franchisee for the Whitbread Group of the UK, owner of the Costa brand.
Elsewhere, at Barista, the second largest coffee chain in the country after CCD, the experiments with food are even more radical. According to Sanjay Coutinho, Chief Operating Officer, it is serving idlis at an outlet on the Bangalore-Mysore highway, filter coffee (the same brew that Siddhartha yanked off his first menu) at all outlets in Bangalore, and, even, paratha and biryani at another outlet on the highway to Murthal, Haryana, from Delhi.
"This has been extremely successful for us and we find that almost 36 per cent of our revenues come from food and the balance is from beverages and coffee," says Coutinho. Other similar moves involve setting up an ice factory in 2009 and, besides supplying its own outlets, sealing deals with Shatabdi and Rajdhani trains.
At CCD cafes too, the focus is increasingly turning to food, says the chain's Gupta, which already brings in some 35 per cent of sales. About 60 per cent of revenues comes from beverages- split 85:15 between coffee versus tea and other drinks-and the remaining five per cent from coffee powder, cookies, coffee maker, and merchandise such as coffee mugs. Food is the next big opportunity for CCD, says Jacob Kurian, Bangalore-based Partner at New Silk Route. "Food has lower margins but it increases the ticket size per transaction," he says. "No one thinks of CCD as a place to go for a quick lunch. (With a new menu being readied) people coming in for a bite could order a coffee too." Kurian should know-his boss and CEO, Parag Saxena, backed Starbucks when it had just 19 outlets.
Image Redux
CCD could see some of its pressures easing with two big pushes it is making. One, recognising changing customer preferences, it is energising and stratifying its brand. The branding overhaul-new logo, new cup and crockery designs, new wall paint and, even, coffee machines that produce better brewed coffee-is starting in Bangalore and will soon spread to other cities. With a new brand "we wanted to create an identity of a young, new and modern India," says Gupta. The new brandtiers are: Coffee Day Square, which focusses on single origin coffee and a near-fine dining experience; Cafe Coffee Day Lounge, which focusses on alternative brewing and mixology together with Western food; and, the old format CCD cafes that continue their value offering.
The branding change cost CCD some Rs 30 crore-CCD engaged Landor Associates, a San Francisco brand consultancy that is part of the WPP Group-and has started off at Bangalore with a new Coffee Day Square and another in Delhi slated in May. CCD already has 20 Cafe Coffee Day Lounge outlets in Delhi, Mumbai, Bangalore and Kolkata. Differential pricing, already in place between take-away counters and sit- down cafes, will likely widen even further. At the Coffee Day Square near Siddhartha's office at Bangalore, for instance, a cappuccino comes at Rs 114 a mug, more than twice as much what it costs at CCD's outlet at Brigade Road (the cafe he started the chain with). The three-tier format will help CCD evolve to a 45 per cent share of its business coming from food.
Next, CCD has embarked on a new food supply chain with precooked and frozen food supplied to cafes, where "last-mile finishing" will make for fresher servings to customers. "It will achieve standardisation across our cafes and enhance the mouth-feel. All our cafes will have this sophisticated, imported equipment in about two years," Gupta, the CCD Director, says. The transition to so-called hot foods will be expensive: the equipment to manage the new food supply chain will cost Rs 6 lakh to Rs 8 lakh per cafe.
What CCD, Siddhartha and Gupta have going for them is a nationwide spread-scale that can be grown and leveraged further into big operational strengths and profits. The growth potential for coffee is clear. Tea and milk are still beverages of choice among Indians, who consume just 82 grams of coffee per capita a year compared to about 10 kg in, say, Austria, the mecca for coffee aficionados . Bijoor, the consultant, reckons India would need some 5,500 cafes to satiate consumer demand for coffee. As of end-March, the country has just 1,421-just one-fourth of the latent need. "If CCD can add another 1,000 cafes over the next three years, it is going to be invincible and see partnership opportunities in overseas markets coming its way," Bijoor predicts.
That would set up the face-off of the next decade: CCD's Siddhartha versus the likes of Starbucks, Whitbread and Tim Horton's. For the boy from Chikamagalur, that will be another high.
- Additional reporting by Shamni Pande
