Coffee culture in India may be flourishing right now but more than sourcing, it is real estate overheads that pose the biggest obstacle for both national and international chains, claims a Rabobank report ` Rajaccino’, The Rise of Coffee Culture in India .

“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.

According to 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 instance, the cost of coffee beans in a cappuccino is about 8 per cent 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 for coffee chains as most of them face strong competition in terms of acquiring prime premises. Coffee shops must be big enough to accommodate a large number of people with around 95 per cent of consumers in India preferring to drink on-site rather than take away (as compared to around 60 per cent in the US).

Competition for industry manpower is likely to continue to be a challenge due to the high rates of staff attrition. Besides, 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, says the report.

Although specialist coffee chains’ contribution to India’s total coffee consumption by volume may not be significant, coffee shops have added more visibility to the coffee culture. The first specialist coffee shop by Café Coffee Day opened in 1996, and the company has since grown to a 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 multiple international chains are trying to expand their base in this important market, consumers are likely to have even more options within the next three years, adds the report.

Specialist coffee shop chains, which have established themselves as hangout places for urban youth, are projected to reach 4,000 in numbers by 2015 (with a CAGR of 21 per cent). 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, however, will continue to be the key challenges, claims the report.

>purvita@thehindu.co.in

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