AFE Coffee Day (CCD) wants to become a global brand

after its success in India. By 2012-13, CCD plans to be a big

global chain both with organic growth and acquisitions. By
the end of this year it will have 900 cafes and 2,500 by 2012-
13. CCD already has its cafes in Austria and Pakistan and
wants to set up cafes in Poland, Russia, Hungary, Dubai,
Kuwait, China and Saudi Arabia. The company has received investment from Darby
Templeton and Deutsche Bank to the tune of $100 million for expanding its network. In
August 2008, CCD announced that leading international brand consultant Landor will
help it to reinvigorate its brand and take it to the next level. Only the brand name and
logo saying 'A lot can happen over coffee' will remain the same. CCD will now focus
more on projecting a feeling of togetherness (friendship, romance or office meeting in an
informal environment) and celebration which are critical core values. Accordingly the
cafe ambience, the look and feel inside will be changed.

Mumbai: Coffee Day Resorts Pvt. Ltd, which operates the Cafe Coffee Day retail chain,
will use a recent investment of Rs960 crore in the firm to at least double its coffee shops
to 2,000 and increase the network of its Way2Wealth venture.

Growth strategy: A Cafe Coffee Day outlet. Three private equity firms have agreed to
invest Rs960 cr to buy nearly 25% of the company. Hemant Mishra / Mint

“We will also use some of the money to buy coffee retail chains in China, the Middle
East and eastern Europe, and 10-15% of our sales will accrue from international
markets,” chairman V.G. Siddhartha said in a phone interview from Bangalore.

Three private equity investors—Kohlberg Kravis Roberts India Advisors Pvt. Ltd
(KKR India), Standard Chartered Private Equity Ltd and New Silk Route—on
Wednesday agreed to invest Rs960 crore to buy a nearly 25% stake in the company,
which also owns a private equity fund Global Technology Ventures, three resorts in
southern India under the Serai brand and Terra Firma Pvt. Ltd, a waste management
business.

Siddhartha said management control of the firm would remain with him.

“We are excited to partner with a company that has achieved significant domestic scale
and is ready to enter a new phase of growth,” said Sanjay Nayar, chief executive officer
of KKR India, which invested Rs360 crore of the Rs960 crore in Coffee Day after almost
a year of negotiations.

Coffee Day’s strategy for growth involves eliminating middlemen, not just in buying
beans but also in the running of the outlets; the 1,000-strong chain is entirely owned and
managed by the company.
The firm’s closest competitor, Barista Coffee Co., which was acquired by Italy’s Luigi
Lavazza SpA in 2007, operates around 200 outlets in India.

Coffee Day already owns 20 coffee shops overseas. Siddhartha said he plans to double
the number in about four years.

The coffee shop business in India has lately seen considerable foreign participation, with
brands such as Costa Coffee, Gloria Jean’s Coffee and Lavazza, among others, setting up
cafes in India.

Competition is expected to intensify when Starbucks Corp., the Seattle-based chain of

coffee shops and the world’s largest in this business, decides on a local partner to enter
the Indian market.

The founder of Cafe Coffee Day is unfazed. “If I beat them here, I can beat them
anywhere,” he said.

Siddhartha’s move from the very beginning was to take advantage of the coffee
plantations he inherited to add value to and vertically integrate the business. He gradually
built up the 350 acres his father owned by acquiring coffee plantations that came under
the hammer due to global swings in coffee bean prices. This has helped him scale up
faster than the competition as well as keep a tight leash on costs.

“We control our costs as we own 10,000 acres of coffee plantations that provide us
25,000 tonnes of coffee,” Siddhartha said. The firm buys an additional 25,000 tonnes a
year from the market to stock its cafes.

The coffee plantations owned by Siddhartha grow close to $12 billion (Rs54,120 crore)
worth of coffee beans a year, while the global trade is as much as $120 billion, he said.

“We have invested in a company that has established its presence in the consumption
business and has a couple of ideas. We are at an early stage of evaluating them,” said
Jacob Kurien, a partner at New Silk Route, which manages a $1.4 billion fund and has
investments in 12 Indian companies.

New Silk Route is betting on the potential upside of these new ideas that will have a
substantial scale in the future, Kurien said.

IT'S not a job that many in corporate India would envy. At least, not for the time being.
For, Yogesh Samat, the new Chief Executive Officer of Barista Coffee Company (BCC),
has inherited a pile of problems as the man in charge of the coffee retail chain which had
come to India over three years ago, with the vision of ushering in a `coffee drinking
revolution' in the country and redefining `pub hopping'.
Somewhere down the line, however, the BCC gameplan went awry. Explains Jagdeep
Kapoor, Managing Director, Samsika Marketing Consultants, "While Barista started off
with a clear strategy, it tried to spread too fast. As a result, it spread itself thin."

Adds an ex-Barista senior manager, "Things started going wrong with the Tatas' funding,
which led to Barista expanding indiscriminately. The sole objective seemed to be to open
more stores with the purpose of creating shareholder value."

The market is rife with stories that Tata Coffee hiking its equity in Barista Coffee
Company is `inevitable', up from the 34.3 per cent it had picked up over two years ago.
The Amit Judge-promoted Turner Morrison Group holds the rest of the stake. "BCC is
obviously under pressure to perform; the only way is through more funds," says an
industry analyst. Samat declines to comment on the matter. "These are board matters. I
cannot comment," he says, adding that within a year-and-a-half, Barista Coffee Company
was projected to begin making net profits.

Today, however, dealing with an exodus of key senior management personnel from
departments such as marketing and finance, turning around the business in quick time,
and coping with non-performing stores are just some of the problems Samat has on his
plate. Samat will obviously need to use all his Hindustan Lever experience if he has to
steer BCC back into healthy growth mode.

The 40-year-old newly designated CEO, however, is putting up a brave face. Ask him if
he believes he took over as CEO on the back-foot, and he counters, "No. It's a challenge."

Priorities at BCC have been redefined — consolidation instead of expansion, and taking
the business into a different phase are now on the agenda. Explains Samat,
"Organisations are not always on hyper-growth path. We are now readdressing the
business at a fundamental level. We expect to be in consolidation mode for about a year."
As far as people in key positions quitting the company (including global business head
Sandeep Vyas) in the post-Ravi Deol era is concerned, Samat is of the opinion that
"organisations undergo transition and change; we are in that phase now". Two senior
managers have been brought in from the Tata group — Brotin Banerjee as Head of
Marketing & Strategy has moved from Tata Chemicals, whereas K. Venkataraman has
been brought in from Tata Tea as Head of Finance.

Meanwhile, the reorganisation exercise at the coffee retail chain is being implemented on
several fronts.

Relocation of outlets and exiting non-starters are perhaps the most significant of these.
While calling store relocation a "routine exercise for any retail chain", Samat admits,
"We will exit unsustainable outlets. From the locations currently, we will knock off about
10." The unviable stores that BCC proposes to shut down will be those from a
combination of metros and SEC B and C towns and cities. Most of these will be
standalone stores. For the record, about 15 Barista stores are in malls, the rest being
standalones, 130 in all.

For obvious reasons, Samat expects the ratio of mall stores to increase against
standalones.

Industry experts are of the opinion that BCC should have done this (that is, exit non-
performing stores), much earlier. Says Samsika's Kapoor: "Instead of quantity and
spread, Barista should concentrate on quality and focus. What's the point in supporting
stores which don't perform?"

Another change that has taken place at BCC is that for the first time since the coffee
chain began operations in India, it is taking the franchise route to expand operations.
While one theory suggests that the Tatas want to de-risk the existing business model,
industry watchers are sceptical whether this strategy will work for BCC in the long run.
"The company wants to raise money through franchising because its funds have dried up.
However, the franchising model may not, by and large, be feasible when it comes to
expanding in high-risk cities (for example, Amritsar)," points out Marya Gaurav,
President, Franchise India Holdings.

Cost reduction at the operations level will be the other key ingredient of BCC's new
brew. While Barista has talked of cost-cutting exercises in the past as well, Samat says
the chain is now addressing its supply chain economies slightly differently. "Cost
reduction implies engaging the entire value chain and driving operating efficiencies.
Besides, investing in training is a high focus area for us now," he says. Insiders say the
coffee chain is now reverting to the stringent three-week-training schedule for its
frontline staff.

Brotin Banerjee, Head of Marketing and Strategy, says product development and
innovation within foods and beverages is on course. "Two levels of research have been
done. Product innovations on the food and beverage front are expected to be rolled out
next month onwards," says Banerjee.

According to sources, these `innovations' could include a range of `non-coffee beverages',

and speciality teas. While the objective of the exercise is obviously to broaden the
consumer base and woo non-coffee drinkers to the store, industry experts sound a word
of caution. "This would not be the Barista as it was originally conceptualised," says an
analyst.

On the price front, across-the-board price reductions by up to 25 per cent, which BCC
undertook beginning April this year, have generated satisfactory response, claims Samat.
"There has been a 47 per cent increase in footfalls in the past four months," he says.
International coffee blends, for example, are priced at Rs 45 now, against Rs 80 or Rs 90
earlier. Prices of classic cold coffees were brought down by over Rs 10. So were prices of
standard cappuccino coffees, from Rs 40 previously to Rs 30. Frappes, too, saw price
reductions from Rs 55 to Rs 40 per cup.

On the possibility of further price reductions, Samat says, "As long as we can get a larger
number of consumers, we are open to ideas. Further price reduction is not impossible; in
fact, it might just be a possibility."

Pursuing marketing strategies such as selling coffee-related merchandise at Barista stores

will, meanwhile, be reviewed in the consolidation phase.

Among other strategies is customising stores to suit localities, says Banerjee. "Depending
on the type of footfalls and clientele a store generates, we will alter the ambience
accordingly. For example, some Barista stores are frequented more by young people, for
which we are planning a younger look," says Banerjee.

Other exercises such as co-promotions with movies and co-branding with synergistic
product categories will carry on as routine marketing exercises.

As for advertising, the coffee chain recently hired Rediffusion DY&R on a first-year
budget of about Rs 3 crore.

And even as there has been a clamp on overseas expansion, BCC retains its joint venture
in Sri Lanka and operates through three stores, in addition to a franchisee agreement for
all the Gulf Co-operation Council (GCC) countries through two stores.

So will all this help Barista Coffee Company to turn around? "It's very tough. Now, there
is a scramble to retrieve whatever is lost," says an ex-Barista senior manager. The storm
in the coffee cup is obviously still brewing.
Barista is a coffee retailing chain which started operations in India in
February 2000. It was promoted with an initial capital of Rs. 20
Crores by Java Coffee Company Ltd., a company owned by the
Turner Morrison group of Lacoste fame. Thereafter Barista has
undergone several ownership changes as well as changes at the
helm.

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