In just five years of debuting in India, Costa Coffee has achieved operating profit at the enterprise level. And Santhosh Unni, chief executive officer, says that’s significant considering the various pressures on the Indian retail industry.
The pressure points are many. Unni says while coffee prices are at a 14-year high, sugar and milk costs are soaring, having a direct impact on margins. Soaring real estate rentals are another major point of concern. On top of this, coffee retailers have only a limited option of passing on the cost to consumers. “We are in a market creation mode and hence have to be prudent,” Unni adds.
The only silver lining is that competition is also going through the same problems.
But won’t the entry of global retailers like Starbucks and Dunkin Donuts increase competition in an already cluttered market place? Unni says the biggest challenge today is the relatively small size of the cafe market and new coffee retailers will only grow the market. According to industry estimates, India, in the current context can take 5,000 cafes and there is space for three to four large pan-India players.
“In any case, we are fighting them in 26 countries and we will also fight them here”, Unni adds.
The UK-based retailer, which entered India in 2005 through the Jaipuria Group as its master franchisee, has already drawn up an aggressive expansion blueprint, under which it plans a four-fold increase in the number of stores in the next three years. The current number is 75.
But it has tough competition in terms of presence. Café Coffee Day, India’s largest café player, has over 1,000 outlets and is planning to open one café every third day. It is followed by Barista with 200 cafes at present. Barista also has a huge expansion plan in place.
But Costa Coffee claims it has the highest average realisation per customer despite its late entry into this segment. The company now has an average billing size of Rs 150 per customer – high by industry standards. “Late entry into the coffee retailing segment has actually worked in our favour as we could learn from the existing players,” Unni claimed.
Unni says the goal now is simple: Costa Coffee wants to become a mass market player. The plan is to aggressively open new channels like presence in airports, multiplex among others. Our endeavour is to maximise consumer touch points and penetrate deep,” Unni says. The coffee chain is also opening bigger stores with an increased average size of 1300 sq ft from 1000 sq ft earlier to accommodate more customer footfall.
It is also adopting location-specific branding strategies to drive footfall. Local store managers have been given the freedom to design the brand strategy as per his needs. For example, an outlet near a college will need to have a different brand strategy from the one inside a mall – that’s something difficult to dictate from the head office, Unni says.
The mean age of its customers now is 25-28 years, but the move is to reduce it further by building strong propositions for a younger audience. Digital media is of course a big platform for this, and Costa Coffee has launched a Facebook page a couple of months ago.
However, analysts say players like Costa Coffee face a Catch 22 situation in its drive to enter the mass market. The mass segment gives you volumes, but margins shrink in a cost-conscious segment. That’s where Starbucks and Café Coffee Day enjoy the edge as they have captive coffee sourcing.
Source : Business Standard
