A recent report by consulting firm on “Indian Cafe Market” says that the market is estimated to be around $230 million and is expected to grow to a $410 million industry by 2017 at a CAGR of 14 per cent.
The café chains contribution was highest and accounted for 42.2 per cent of total quick service restaurant market.
Indian café market is dominated by Café Coffee Day followed by Barista and Costa Coffee. This huge change in the demand pattern can be attributed to the rising per capita income, rapid urbanisation and up-gradation in life style.
Starbucks has positioned itself as the premium product which promises a rich coffee experience. It has followed an aggressive pricing to selectively target the niche segment who can afford the high price for coffee. While Cafe Coffee Day (CCD) has been targeting the middle class customers who value the product for the price, Starbucks has been targeting the premium segment.
In a survey posted by Market Outlook it is seen that 33.6 per cent of the people prefer to spend Rs 100-200 a day, and 28.2 per cent Rs 200-300 a day whereas only 2.7 per cent people prefer to spend between Rs 400-500 a day. The average spending per person in CCD is Rs 150-180 . Thus the entry of Starbucks will affect Barista and Costa Coffee where the average price is higher than CCD. Also, huge drive of people towards the premium segment requires enormous changes in the economy which is very unlikely considering the present market scenario.
At present Starbucks has 22 outlets in 3 metro locations in India and plans to open 100 more in the next year. The store locations are located at places where the catchment value suit the premium target segment. So ideally, Starbucks cannot expand profitably beyond the Tier-2 cities. But as CCD caters to different target segments through the premium lounges and regular cafe outlets, CCD has the potential to tap the tier-3 and -4 cities as well. Also, Starbucks could not go for franchising as the main value proposition of experience cannot be replicated easily by 3rd party franchises across all outlets.
The initial high turnover of Starbucks is mainly due to the novelty factor, the initial euphoria is because of the curious behaviour of Indian consumers. Experts quote that Starbucks would continue with high sales is a mere hype and the average sales per outlet may decrease going forward. Maintaining highest sales per square foot of area will be a challenge as Starbucks continues opening new stores in the same cities. Until they have established outlets throughout India, it is tough to predict the brand loyalty among price sensitive Indian markets.
It is true that the Starbucks-Tata alliance has deep pockets to wipe out the competitors by predatory pricing. But if the prices are reduced, then all middle class segment people may rush in to buy coffee there and the key value proposition of experience will be lost. Starbucks wouldn’t stand as a differentiated player anymore and the premium segment customers may get confused with the promised value and the delivered value.
Starbucks’ key strategy in other countries is convincing the coffee lovers to spend some extra money for the ambience and experience. As the economy advances, there will be a growth of premium segment people from the upper middle class. The macroeconomic factors and the growth of Starbucks can affect the premium CCD lounge and Square outlet sales. Now it is time for CCD to pull up their sleeves and focus on increasing the sales at their regular outlets and express stores. CCD should aggressively focus on improving the revenue per outlet by increasing the footfall and average spend per transaction. As the youth segment is becoming more diet conscious, CCD can also introduce new items on the menu like low calorie food, variants of low calorie coffee, teas and desserts. Karaoke or live music events for emerging artists (with customer dedication) can further enhance the ambience at the lounges. A ranking preference survey has shown that CCD is the most preferred brand (49 per cent) compared to Starbucks (31 per cent), it is essential to strengthen the loyalty programs through increased use of loyalty cards and surprise offers, personalised merchandise, sending cards to customers on birthdays and anniversaries. To suit the changing professional pattern, selected CCD outlets in centre of cities can extend the service time till 2 am and highway outlets can open the shops at 6 am.
According to a survey on youthful diet pattern, young Indians buy take away meals 2.3 days per week and skip breakfast for 2.1 days per week which presents huge opportunities for quick service restaurants. CCD can also bring in easy to carry breakfast combo menus that would serve hungry professionals and youth.
(Pooja Sagar and Harini. A are pursuing PGP in management from IIM Ahmedabad.)