Where would you like to have a cup of coffee in India? When asked this question, many would think of cafes and start evaluating them on certain parameters like brand, price, product quality and ambience. And CCD would emerge as the clear winner. However, the entry of the global giant Starbucks in India poses a dilemma to CCD and café-goers alike. While CCD has to contend with Starbucks to maintain its top spot in the Indian café market, a café-goer has to choose between the two formidable competitors.
The Indian Café Market
The Indian café market is a Rs 1400-crore market growing at a compound annual growth rate of 14 per cent. It offers immense opportunities to existing and prospective players to build on their experience of the Indian consumer and carve out a place for themselves.
In order to grow in any market, one has to understand consumers and align offerings with their expectations. In the Indian café market, factors such as price sensitivity, substitutability, market maturity, demographics and preferred distribution channel define the consumer. It is common knowledge that the Indian consumer is the most price sensitive in the world and can be lured by low price strategies. However, this nature has undergone a paradigm shift and he has started looking beyond price for aspects such as brand and product quality.
Starbucks, a highly premium brand globally, has positioned itself as a brand midway between mass and premium, sounding a bugle to CCD. As for substitutability, Starbucks will not be an exact substitute for CCD due to the slightly higher price and global appeal.
The Indian café market has not reached its maturity yet and there is still a lot of room for growth and innovation. Keeping this in mind, it leaves both CCD and Starbucks vulnerable to each other.
While CCD’s target population are the youth aged between 15 and 35 years, Starbucks gets its major chunk of business from people aged between 25 and 40 years. There is a lot of overlap between both their target populations – the primary reason for CCD to fret.
Starbucks as a threat?
CCD has a pervading presence in India with over 1,400 outlets. It seems an uphill task for anyone eying a share of the Indian café market and looking to take on CCD. However, Starbucks, with 24 outlets in India presently, has the monetary muscle and vision to catch up with CCD in a few years. In fact, Howard Schultz, the CEO of Starbucks, has made it public that they look at India as one of their top five markets, which is why they will pull out all stops to grow here. This will require them to establish an imposing presence in India. Also, their coffee sourcing arrangement with the Tata Kodagu facility enables them to price their coffee products lower than in the rest of the world.
The population aged between 25 and 35 years has earning power and may not mind slightly higher pricing for the the chance to experience a global brand with phenomenal offerings. This will create a significant amount of churn in this segment and may shift the balance in favour of Starbucks.
Looking at Starbucks’ performance in the last financial year, it is apparent that the global giant has been received very well by Indian consumers. Against the Rs 43 lakh odd revenue for each CCD outlet, Starbucks earned Rs 1.3 crore from each outlet. Considering Starbucks’ aggressive pricing, this amount is all the reason for Starbucks to cheer and CCD to be anxious. All these factors make Starbucks a fierce competitor for CCD and a force to reckon with.
The way ahead
It is vital that CCD puts in place a strategy by which it can counter the expansive strategies of Starbucks and maintains its market share. CCD should continue expanding by way of its premium outlets, such as CCD Lounge and CCD Square, in order to cater to a larger premium consumer segment making a move towards Starbucks.
Also, it should continue following differential pricing across different outlets to account for varying rentals and consumer buying power. Fresh new international varieties of coffee and coffee products must be introduced at Lounges and Squares to bring the experience at par with Starbucks.
CCD cafes should continue appealing to the mass market, whereas Lounges and Squares should appeal to the premium segment of consumers. All in all, the task at hand for CCD is strenuous, but that is all that it needs to do to continue serving the Indian consumers the same way it has been doing till now.
(Vikram Kumbhare and Punit Sadavarte are pursuing PGP in management at IIM Ahmedabad.)