Can India’s Coffee Market Find Middle Ground?

When you walk into a coffee shop in India today, especially one of the premium chains like Starbucks, Third Wave Coffee, Costa Coffee or others, you’d spot lounging chairs, customers working on their laptop screens, friends catching up or a business meeting in progress. In stark contrast, if you walk up to a kiosk of a coffee brand like abCoffee, it’s simple, with plain wooden chairs not comfy cushioned ones, only a few tables to sit and virtually no space for you to plant a laptop and work.

For the customers of premium coffee chains, the purpose of their visit is not only the beverage, but the amenities and experience that come with their cups of coffee and they pay a premium for this. But Abhijeet Anand, cofounder of abCoffee said that coffee in India can now be sold for cheaper and “frill-free” and will still find takers.

Coffee consumption in India has seen a big surge post-pandemic. According to research firm Custom Market Insights, the Indian coffee chain market is expected to record a CAGR (compound annual growth rate) of 8.1% from 2024 to 2033. In 2024, the market size is projected to reach a US $160.6 million valuation and is expected to go up to US $ 323.8 million by 2033.

This consumption was largely led by coffee chains opening cafe-style outlets with prices starting from Rs 200 - Rs 250 which positioned coffee as a luxury beverage. International coffee chains like Pret A Manger and Tim Hortons have opened their first few stores in the past few years. Others like Costa Coffee and Barista are doubling down on the Indian coffee market to utilise this growth in premium coffee consumption.

On the other end of the spectrum are the instant coffee offerings at roadside stalls which cost Rs 10 - Rs 20 and machine coffees in offices which are a big compromise on taste for anyone looking for an authentic cup of coffee.

An opportunity to sell freshly brewed coffee at affordable prices in the Rs 75 - Rs 150 per cup bracket presented itself and a slew of brands are cashing in on this. The market is ripe and an asset-light kiosk or small cafe model is the way to go, they say.

“I think this (small cafe) model has more legs than the premium end of the model where you kind of have to look at high investments and high operating costs and then your ability to actually become profitable is sort of a hit or miss. Whereas this one even though the journey in this is going to be slightly longer, the result is going to be surer,” Chaitanya Chitta, co-founder of the coffee chain Slay Coffee majority-owned by Rebel Foods told The Core.

Slay Coffee is currently undergoing changes moving from a delivery-only model to opening retail cafes. It plans on rolling out a franchise system starting with South India.

The Productification of Coffee

The thesis for the ones building mass premium coffee brands is based on two major things — one is that coffee has gained enough popularity to be sold as an everyday product and the second is that an affordable brand can be scaled much more and more profitably than a premium one.

For Abhijeet Anand, the idea flowed from finding the right price for a cup of coffee and working backwards to create a business model that supports that price. After returning from Europe, he realised that while cappuccinos in India are priced at Rs 210 on average, the cost for most players was as little as Rs 17, but they were still not profitable because of the various overheads — rentals, staff and initial investments– which brought down their net margins.

Starbucks India reported a loss of Rs 81.84 crore in FY24, 230% higher than the previous year while it had revenues of Rs 1,218 crore in FY24, 12% higher than the year before. Blue Tokai Coffee Roasters reported a net loss of Rs 54.3 crore in FY23, an increase of 272% from Rs 14.6 crore in FY22, while its sales surged to INR 144.4 crore in FY23 from INR 31.7 crore in the previous year, a 356% jump. Blue Tokai also raised $46 million from investors including A91 Partners, 12 Flags Group, and actress Deepika Padukone.

“Most of the coffee chains in India have positioned themselves as a dine-in, co-working space. We don't do that because we are a product company,” Anand who runs the coffee chain abCoffee told The Core. abCoffee’s aim is to become the “go-to brand for to-go coffee”.

What abCoffee wants to build is a frill-free coffee brand where people come to them for quick coffees, which can be ordered prior to arriving and kept ready to grab and go. Chitta, who previously also ran a bottled beverage brand ‘Oh My Goodness!’ also had a similar thesis. “We need brands across all segments and not just the premium end, because that isn’t scalable,” he said, “Price is an important factor when you look to expand in tier 2 and tier 3 cities in India, an affordable brand will have a wider appeal.”

Another key focus of these brands is to address the needs of consumers who look at coffee as an everyday beverage. Vardhaman Jain, co-founder of Bonomi, a Bangalore-based coffee brand which is pivoting from bottled beverages to cafes, told The Core that their positioning is to be available at affordable prices for those who are currently drinking coffee from machines in their offices or settling for instant coffee as other options are unaffordable on a daily basis.

“The grab and go is basically that I do not want to drink office coffee and I do not want to make coffee at home. At the same time, I do not want to pay Rs 220 every day. That is where grab and go comes in,” Jain said.

Bonomi sells beverages in three sizes Regular, Large and Extra Large priced at Rs 79, Rs 99 and Rs 149 across flavours. abCoffee’s cappuccino is priced at Rs 97, while espresso is priced from Rs 77 and cold coffee is priced from Rs 107 onwards, all 250ml servings.

Slay Coffee’s small cappuccino measuring 240 ml is priced at Rs 139 and cold coffee is priced at Rs 219.

A 230 ml cappuccino at Blue Tokai Coffee Roasters is priced at Rs 240, while Starbucks charges Rs 299 for a 237 ml cappuccino.

Minimising Costs Is Key

For Anand, creating a product-driven coffee brand allowed him to stick to smaller kiosk style setups, with an average outlet size of 120 sq ft. Its largest store currently is 250 sq ft in size. Slay Coffee is eyeing opening outlets in the 800 sq ft - 1,000 sq ft sizes, Chitta said.

To optimise in such small spaces, both abCoffee and Slay Coffee have been utilising tech-enabled solutions. “Setting up a virtual supply chain management system helped us reduce overstocking, which reduced costs by 10-15%. Day-to-day analysis of inventory on our dashboards has kept food wastage as low as 1% and going cashless has also reduced friction,” Chitta said. Slay is also building a virtual barista training program to maintain quality service as it looks at franchising models.

These innovations have been tried in countries like China and Indonesia by brands like Luckin Coffee and Flash Coffee and have proved to be successful. For example, the only way to order Luckin Coffee is through its mobile application. Customers place orders prior to reaching and simply scan QR codes on their phones to collect orders. This use of mobile apps helps Luckin Coffee and Flash Coffee collect consumer data, by enrolling them to loyalty programmes.

abCoffee is selective about its food offerings, too. With limited space and careful selection of investments, offering too many food items can add to inventory and labour costs. Anand has a simple formula to pick food offerings- anything that can be made within 3 minutes. But Chitta believes that as coffee becomes a part of multiple meals - breakfast, lunch and dinner, offering corresponding food items is crucial.

“People are actually consuming coffees during their mealtimes, you know, breakfast, lunch, dinner, all of that. So in fact, our focus is going to be more on how we bring more healthy, delicious food offerings that kind of goes along,” he said.

Business Models - Tried and Tested

In order to find the right balance of premium taste and affordable prices, a lean business model is essential for these brands. Bonomi initially started as a ready-to-drink bottled coffee seller targeted at coffee consumers as well as those looking to coffee as a mixer for alcoholic beverages. Their bottled coffees are priced at Rs 125 and come in various flavours like hazelnut, vanilla and caramel mocha with a cold brew as the base. They realised that the costs in that model were too high at the scale that they were at to make economic sense at a unit level.

“A single bottle of 250ml hazelnut cold coffee in my factory would cost me around Rs 42. In the kiosk model, I can make the same coffee in a cup for Rs 17,” Jain said. Glass bottles are much more expensive, and breakage while transport adds more to the overhead costs. So, Bonomi has now moved to a 150 sq ft kiosk model starting with two cafes in Bangalore.

While a kiosk model is meant for both takeaways and delivery, AbCoffee is focused on increasing the ratio of takeaways - the current split is 40% delivery and 60% takeaway. However, just six months ago, it was the reverse with the majority of sales coming from deliveries. This wan’t ideal, Anand believes.

“A brand in India, specifically in food and beverage, cannot just be built online. There has to be a split of online and offline. It is a very difficult business to be built just on aggregators,” he said.

Slay Coffee was bought by Rebel Foods, a food company that runs multiple cloud kitchens, as a part of their Rebel Launcher program. Since then, Slay has been a 100% delivery based coffee chain. However, now the company wants to move away from this limitation.

“After certain 100-150 locations, you may not have more locations where you could obviously do just delivery only for a particular cuisine, right? You know biryani or a pizza probably would work but for coffee, you probably don't have that kind of catchment,” Chitta said.

The biggest difference between the delivery and the takeaway models is that the former is influenced by rent while the latter depends on fees and commissions paid to food delivery aggregators. All other costs – staff, raw materials, packaging – remain the same.

Slay Coffee found that its cafes were much more profitable as aggregator costs and marketing costs were lower which offset the rentals.

“In the long run, I think the offline model would definitely work out well provided you have designed it from the get-go to be profitable,” Chitta said. He also believes that the ready-to-drink segment is an underserved one and that the ‘Oh My Goodness!’ products might see a comeback too as the consumer behaviour of buying bottled beverages already exists and they are increasingly looking at alternatives for sugar-filled colas. “We'll bring that back, that's something we are definitely excited about,” he said.