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19 December, 2014 10:05 IST
Expect impressive growth from specialist coffee chains in India: Rabobank
Source: IRIS | 19 Nov, 2012, 02.01PM
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Coffee culture in India is flourishing thanks to the efforts of a few specialist coffee chains and the instant coffee players, says a new report from Rabobank.

Coffee drinking has spread across the country and consumption has doubled. Specialist coffee shop chains, which have established themselves as a 'hangout' for urban youth, are projected to reach 4,000 in numbers by 2015 (CAGR of 21%). This growth is a result of favourable demographics, rising income levels, rise of mid-sized cities and high population density. High real estate costs, manpower attrition and difficulties in managing the supply chain will continue to be the key challenges.

Although specialist coffee chains' contribution to India's total coffee consumption by volume may not be significant, these coffee shops have added more visibility to the coffee culture. The first specialist coffee shop by Cafe Coffee Day opened up in 1996 and the company has since grown to a market leading position with 1,350 coffee shops spread across India. At present, there are around 2,100 specialist coffee shops in India, and given that there are multiple international coffee shop chains trying to expand their base in this important market, consumers are likely to have even more options within the next three years.

For a burgeoning segment of the Indian population, coffee chains are also offering a new snacking/leisure experience. These coffee chains offer an experience similar to that in developed markets. The opportunities for coffee chain growth arise from the favourable demographics with low per capita consumption and increasing income levels, the rise of mid-sized cities and a high population density with its associated potential for the expansion of the coffee shop network.

"The impressive growth expected of specialist coffee chains in India offers numerous opportunities for both local and international players, provided that they can overcome inherent obstacles," says Nitin Kalani, Beverage Analyst at Rabobank International, author of the report.

Sourcing coffee beans is not the key barrier for specialist coffee chains, with coffee beans accounting for an insignificant proportion of the total cost of a cup of coffee. For example, the cost of coffee beans in a 'Cappuccino' is about 8% of the sale price. To be successful, operational efficiency (e.g. managing rent and manpower costs) is more important than focusing solely on raw material costs.

Real estate overheads are a major concern, with coffee chains facing strong competition for acquiring prime premises. Furthermore, coffee shops must be big enough to accommodate a large number of people with around 95% of consumers in India preferring to drink on-site rather than to take away (compared to around 60% in the US). Competition for industry manpower is likely to continue to be a challenge due to high rates of staff attrition. On top of this, the sourcing of other beverages, food and merchandising all an essential part of the coffee shop 'experience' continues to be a problem as players struggle to establish quality, reliable supplier relationships.

India remains a tea drinking country with sales of the traditional beverage still larger than that of coffee. With growth in coffee consumption outpacing that of tea however, coffee culture is expected to continue to flourish for the foreseeable future.

Disclaimer: IRIS has taken due care and caution in compilation of data for its web site. Information has been obtained by IRIS from sources which it considers reliable. However, IRIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. IRIS especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its website.

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