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Coffee Wars in India: Caf Coffee Day takes on the Global Brands

Coffee Wars in India:


Caf Coffee Day takes on the
Global Brands
By Group AC1
Divya Naik
Harshit Pandey
Mandar Rajendra Bothara
Ravi Teja Reddy
Varun Subramanian

Group AC1

Coffee Wars in India: Caf Coffee Day takes on the Global Brands

INTRODUCTION:
This executive summary is in response to the case Coffee Wars in India. This involves the
approach of Caf Coffee Day (CCD), a division of Amalgamated Bean Coffee Trading Company
Limited, in response to increased competition from Starbucks Coffee Company (Starbucks) in
CCDs home market of India. The issue CCD is looking to address is how to prevail over global
coffee chains such as Starbucks entering into Indias coffee market. The crucial symptom of this
hazard is a loss in market share of the market.
BACKGROUND:
CCD currently has approximately 60% of Indias coffee market with nearly 1500 stores. It
focuses on the middle and upper middle class aged 30 and under. It operates small cafes, larger
lounges and squares, and express outlets that each sell a variation of coffee, snack, and meal
options at a comparatively affordable price. Starbucks currently has 11 stores in India and
charges a premium price for specialty coffees and snacks to upper class and professionals aged
25-40. It is looking to expand at an unknown pace in the next several years in India.
Q 1: What should be the important goals for Siddhartha and Venu Madhav when considering
their responses to Starbucks entry into India?
We think that CCD should be extremely wary of Starbucks entry into the Indian market and our
stance is based on the following arguments. Starbucks has deep pockets. It can stay in the
Indian market for a long time, maintain low prices, operate on razor-thin margins or even
losses, but in the process bleed the competition to death. In the short term, Starbucks will
hardly pose a threat to the profit and loss sheets of CCD, but in the long term, there is no
reason why India should be any different from China or many other major urbanizing,
globalizing emerging economies where Starbucks has managed to penetrate the local markets
and upend local players.
Another key success driver for the coffeehouse industry is the strength of its supply chain. From
sourcing to the store via distribution logistics, CCD owns almost everything under its parent
brand. It has the necessary cold chain and logistic infrastructure and procurement process in
shape via its sister firms. Starbucks will find it quite difficult to navigate these supply chain
systems in India. The only way for them is to partner with other firms as supply chain partners,
and continue focusing on its USP of in-store coffee experience.
In India, evidently Starbucks has realized taking CCD head-on in the affordable segment may
not be as good an idea as making its own market in the premium segment. So, smartly,
Starbucks has priced its coffee at the median, higher than CCD and CCD Lounge.
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Group AC1

Coffee Wars in India: Caf Coffee Day takes on the Global Brands

CCD's Siddhartha shouldnt get distracted by the woes of the competition. All foreign coffee
brands are looking at the top 5% of the Indian market i.e. high income group consumers. But
they are focusing on the dynamic youth population. Roughly 70% of Indians today are below 35,
and their goal should be to reach out to them."
Madhav should be keen to expand the reasons consumers stroll into a CCD not just for a
relaxed cappuccino but for breakfast, lunch and dinner, too
Overall they should deepen the engagement with consumers and expand their network.
Q2: What are CCDs most important competitive advantages and biggest competitive
challenges?
CCD Competitive Advantages:

CCD has a 3000 acre of land under coffee plantation. The supply of coffee beans to CCD
were of best quality and would not cost at market rate. This provided competitive
advantage of price.
The organization was totally integrated vertically, from its beans to the furniture in the
cafes and lounges, in as much as a large portion of its rivals outsource the dominant part
of their supply chains
It likewise offers excellent quality in its novel and in-house recipes, mixes and blend and
has a well-established and loyal customer base
CCD had a 1st movers advantage in the market, when it formally started as a concept of
Cyber Caf, it had no competitors. Due to this its products were sold in a premium price.
Its target segment was of youth from age group 15 to 30, of which 60% were its regular
customer, this made possible for their staff to make an emotional connect with them to
increase brand loyalty.
CCD did not adopted the franchising model. This saved a lot of their setup time, when
opening a new outlet.

Competitive Challenges:

As CCD opened outlets of its own, its setup cost had been high.
Renting cost had been increasing and hence opening new stores became costly.
High attrition rate was being faced by them, attracting right talent was becoming
challenge for them.

Group AC1

Coffee Wars in India: Caf Coffee Day takes on the Global Brands

With increase in exposure towards luxury, the expectation of costumers to CCD has
increased.
Caf business just like fashion business, menus needs to be revamped more often, as
much as once a quarter, unlike once in 2 to 3 years previously.
It became difficult for CCD to keep reasonable footfall round the clock.
A major competitive challenge that CCD has in relation to Starbuck in particular is its
lack of global presence and therefore the loss of excitement that Indian culture find in
the new experiences.
Starbucks have a premium image and its world no 1, so all the upper segment customer
of CCD may get carried away by Starbucks
With opening of international market, competition became more intense
Lastly the store is concentrated in only two major urban areas in India, with various
other metropolitan cities untouched.

Q3: What are Starbucks most important advantages and challenges?


Starbucks most important advantages are:
1.

Brand name : Starbucks is a most widely recognized speciality coffee brand in US and has a
strong international image, due to which they have even been offered prime locations, such
as the Delhi airport, to open stores and be an anchor tenant to bring in more walk-ins. It has
also let them position themselves as a premium brand and charge higher prices.

2.

Strong business partner: The strong joint ventures and strategic alliances that the company
has establish all over the world made it possible for them to create and develop a
sustainable supply chain of high quality. Tata was an excellent partner for Starbucks. They
offered many premium locations and are also well connected, which helped them open
stores quicker than any other foreign brands. In addition to it, Tata was also a large coffee
producer that gave the ability to Starbucks to offer a local coffee brand rather than import
coffee at higher prices.

3.

High quality services: Their point of differentiation was their service quality, product
innovation and new customer segments such as professionals and premium customers.

4.

Diversity of customers: Starbucks can attract a broad cross section of customers, from
working professionals to tourists and well-travelled customers, also who have been to
Starbucks elsewhere.
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Group AC1

Coffee Wars in India: Caf Coffee Day takes on the Global Brands

Challenges:
1. Maintaining high quality customer service: Currently, Starbucks have employees at their
cafes who are quite articulate and can provide good service, compared to CCD stores where
the experience is very transactional. But, providing this in a few stores is relatively easy,
with only around 10 stores currently operational. This would become a major challenge as
the number of stores expands.

2. Real Estate: Starbucks international brand image has helped them make a few inroads in
the real estate side, being able to get prime locations at a lower rate, since their presence is
perceived to result in higher number of walk-ins. But, this is only in the initial stage, and
they would face the same real estate price problems CCD has had to face once their easy
expansion stage is over and this would result in higher operational costs.

3. Pricing: Starbucks being 50% more expensive than CCD in India, theyve only managed to
attract a certain segment of people. Having differentiated themselves as a premium service
provider, they get to concentrate only on 5-7% of the market, compared to the 40% CCD is
currently looking to cater to.

4. Sustaining Early Consumer Interest: The tremendous curiosity Indians have in foreign
brands has helped generate overwhelming revenues in the initial days, but sustaining this,
that too with the high pricing, would be very difficult, as eventually, the excess enthusiasm
does fade, as was observed with McDonalds in its initial phase.

Q4: Which of the following paths should Siddhartha and Venu Madhav follow
and why?
- Slight Course Correction
- Bigger, bolder, aggressive reaction

Group AC1

Coffee Wars in India: Caf Coffee Day takes on the Global Brands

Evaluating the options:

Slight Course Correction

This involves the following:


1. Planned upgrade of 150 stores per year
2. Increasing the size of new stores (1000-1200 Sq. ft.)
3. Spending about $3Mn on advertising
This course would define a stance of wait and watch for the CCD. The Starbuck entrance
in the market is no doubt a threat for the existing player. But it is hard to predict their
move in coming years. The market is new for Starbuck and it would take time for it
understands the Indian market. CCD has market share of 60% with 1469 stores (8 times
that of nearest competitor) It has clear reach in terms of its target market.
Starbuck has received an overwhelming response from the customers. But is still needs
time to settle in the new market. Currently CCD can go for little course correction and
maintain its stance.

Bigger, bolder, aggressive reaction

Starbuck have a plan to open 300 stores across India. They have Tata group as partners which
can help them to open these stores. They also have a strong Brand name and global presence.
Although, no foreign Brand has come closer to CCD, Starbuck has a clear advantage. It has good
response from consumers.
In view of the above facts, it is necessary that CCD takes certain steps to counter the new
threat.
The aggressive plan has following steps:
1. Raising the number of squares and lounges by 25% to 30%
2. Upgrading 200 or 300 cafe stores per year.
3. Doubling or tripling the brand spending.
Recommendation:
Starbuck being an international brand has clear advantage in Indian market in terms of pubic
favour. It has capability of taking the competition to cut throat levels. It has Tata group which
can provide with cheap raw material as well as location advantage. Hence, an aggressive policy
would surely cause the problem to escalate.
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Group AC1

Coffee Wars in India: Caf Coffee Day takes on the Global Brands

In view of case fact, it is important that Starbucks strategy is taken into consideration. The
segment they are catering right now is mere 5% - 7% (High end segment). The average charge in
a Starbuck cafe is very high (2 to 3 times). Indian customer being price sensitive has clear dislike
for increased bills.
The overwhelming response that Starbuck received in its opening week can be attributed to
customer fade of new foreign brand. It is also seen from the case facts that regular customers
especially the younger segment may try new high end offering but would prefer regular price
for daily consumption.
Hence, CCD can have a balanced stance for now and may go for aggressive expansion only if it is
required.

Group AC1