Atharv Jaiswal has had morning trading ever since he started working from home since the pandemic. He goes to Starbucks near his home in Kolkata, attends his morning office call amid the noisy melee and finishes his first tasks of the day with a sandwich and a double-shot espresso. After all, he had been doing that at his job in Singapore too. Going to Starbucks had become a routine.
That changed last year. A new local coffee chain came up close by, which offers a wider variety of food and coffee that is just as good. "I used to spend around Rs 800 or so in the morning before. At the new store, the experience is just as good; the coffee is nice and my daily billing has now come down to around Rs 500. Also, Singapore Starbucks would have food and coffee combos for $12 or so, which isn't available here," Jaiswal says.
The hybrid working model continues to hold on to its pandemic roots in India. The US chain that popularised the concept of 'working from a coffee shop' in India must have set a large vista for growth. That's not to be.
In the US, Starbucks' consecutive two-quarter sales drop has led to a dramatic shift in leadership, replacing Chief Executive Officer Laxman Narsimhan recently. The Indian market, however, is still growing, unlike the China market, but its growth rates have tapered off their peak.
"The coffee sector is very dependent on the macroeconomic situation of a country. In the US, the slowdown is an effect of inflation. But in India, the problems are not so generic, but systemic," says Harish Bijoor, marketing expert and founder of consulting firm Harish Bijoor Consults.
Seizing The Cup
Tata Starbucks' revenues grew by 12% in FY24 after losing two years to lockdowns. But, in Q1, its revenue growth was 4%. It's a far cry from its pre-pandemic growth rate—a healthy 27% in FY20. What has changed since the pandemic and now? If not anything, the demand for Starbucks-like service has only gone up.
A lot more chains have thrown their hats into the coffee ring. When Tata Starbucks came to India 12 years ago, there were barely two good 'large' coffee chains—Café Coffee Day and Barista. CCD, which is going through an insolvency process, has been cutting the number of its outlets from its peak of over 1,700 stores to around 400 now. But a new wave of new-age chains funded by venture capital is expanding rapidly—like Third Wave Coffee, speciality chains with artisanal offerings like Blue Tokai, and more.
"The market faces a threat from intense competition among coffee chain brands. Saturation in urban markets and the entry of new players heighten the competition, potentially impacting market share and profitability," says a report by Custom Market Insights.
Costa Coffee, which now has 192 outlets, plans to add around 50 stores per annum. According to Devangshu Dutta, founder and chief executive of Third Eyesight, the cafe business in India has been evolving for decades.
"Starbucks wasn't the first to enter the market or create a specifically unique environment, at least as far as the Indian market is concerned, nor is it the only competitor. The fact that companies such as Blue Tokai, Third Wave and many others have been expanding is a testament to not only market momentum but also to the success of their own products and formats," he adds.
Brownie Points For Fast Cafes
It's not just direct competition that's hitting chains like Starbucks. There is a lot of lateral competition seeping in too, which is just as dangerous, if not more. Indian fast-food chains or QSRs, are jumping into the business, upping their coffee offerings along with cafe experiences.
"Competition in India will remain intense and there will be multiple segments that will evolve within the cafe market, allowing for further evolution and cross-fertilisation from newer brands," adds Dutta.
One of them is yet another American giant, McDonalds, run by Westlife Foodworld in India, which has supercharged its McCafe offerings. As of June 2024, 92% of its outlets have cafes, which is 371 stores. Like Starbucks, it also has a few drive-throughs. Burger King, too, has 351 cafes built inside its 456 restaurants in total, and the rest of the conversions are in progress.
These fast cafes are not merely banking on coffee with burgers, either. They're deepening the cafe experience. "Westlife Foodworld is ambitiously expanding its McCafe offerings, including cookies and brownies, across its entire network. The company aims for these additions to contribute 15–18% of its revenue by 2027," says a research report by BP Wealth.
Carving A Niche
Unlike Starbucks and other coffee-only chains, fast-cafes also have different economics. Their cafe offerings sit on top of their normal offerings at the same location, with few investments. For them, it's a way to bring in more walk-ins and provide value offerings as well. In terms of numbers, they now compete with Starbucks' 438 stores across 65 cities.
Starbucks, however, is still in the red, as it posted a loss of Rs 81.8 crore in FY24. That, however, is not concerning experts, as the company is chasing growth aggressively. It plans to grow to over twice its size and hit the 1,000-outlet mark by 2028.
"Growth is good. You can't judge it by profitability alone, as they are expanding. They have to reach a critical mass so it's a good thing. They’re upgrading their customers, and more stores would mean more opportunities for the customers to come in and try the product," says Ambi Parameswaran, branding guru and author.
There are many local coffee shops, and the cafe market in India is fairly assorted. With high-end professionals as clientele at premium locations, Starbucks, however, carved a niche for itself. "Starbucks is a luxury coffee experience. Then there is premium coffee that's provided by Third Wave Coffee and Blue Tokai. CCD and Barista are the third rung," explains Bijoor.
There is also enough space for growth in the coffee chain market, which is expected to grow at an 8.1% compounded annual growth rate from 2024 to 2033. The size of the market is projected to hit a valuation of $160.6 million in 2024.
The Indian coffee market in general is expected to grow at 9.8%, whereas the roasted coffee market, which Starbucks is known for, is expected to grow at 5.8% for the next nine years, as per Custom Market Insights.
There is a runway for growth, but Starbucks is in a precarious position of having to grow faster than others like itself, edge out newer players, and fight off a bevy of competitors across price points.
Fast, Wide And Deep
Starbucks has also innovated and expanded its menu over the years. It had brought in chef Sanjeev Kapoor-inspired Indian menus like turmeric brioche in 2021. It's bringing in more Indian blends like monsooned malabar and more. It also added more GenZ-friendly refreshers, which are green coffee extracts made from unroasted arabica coffee beans with fruit flavours like strawberry, acai, mango and passionfruit.
It has a rewards programme to encourage regulars and also introduced a 'picco-sized coffee' at a smaller price point in India. Traditionally, Starbucks comes with tall, short and grande options.
According to a few experts, it has to do much more to capture a complicated market like India, especially on the food front. Its operational costs have been going up due to adding more employees and more stores, but it needs to deepen its offerings.
Even pure-play cafes offer a lot more than just coffee. "Cafes are wrongly called so. A major portion of their revenues — around 62% comes from food. Starbucks must deepen its offerings, as opposed to just widening its presence," adds Bijoor.
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