Why Café Coffee Day’s immense popularity didn’t translate into big profits

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VG Siddhartha, the founder of Café Coffee Day (CCD), pioneered an upscale coffee drinking culture in India along with Barista’s Amit Judge. Yet, after two decades of consistently expanding the franchise, in a letter he is reported to have sent to board members and employees, Siddhartha called himself a failed entrepreneur. Yesterday (July 31) morning, the Mangaluru police said that his body had been found on the banks of the Netravati river. How could it be that the largest café brand in the country found it hard to turn a profit?

From their earliest days, I was more inclined towards Barista than CCD, preferring the placid colour scheme and straight-backed chairs of the Delhi-headquartered chain to the dark walls and tables of the Bangalore-based rival, which made its smaller outlets feel claustrophobic. As far as the product went, CCD served a marginally better cup, and was also a little less expensive. Siddhartha’s firm diversified into tiny take-away outlets at one end of the spectrum and roomy, food-focussed lounges at the other, appearing to win the contest against Barista, which peaked at around 200 stores.

CCD’s growth did involve a few absurdities, like the opening of an outlet in Vienna, a city whose coffee culture has been listed by UNESCO as valuable intangible heritage. By and large, though, it developed steadily and smartly.

Struggling for a foothold

Costa Coffee and The Coffee Bean and Tea Leaf, among other franchises, tried to find a foothold in the market, but never grew large enough to threaten CCD’s’s pre-eminence. That meant Siddhartha had a dozen years to establish a nation-wide presence before the entry of the Starbucks, the model all others emulated.

Yet, the annual results speak for themselves: a net loss of Rs155 crore ($22.4 million) in the financial year 2015, and Rs80 crore in 2016. A negligible net profit of Rs8 crore in 2017 on sales of over Rs3,000 crore. In 2018 and 2019, a net profit of Rs49 crore and Rs60 crore respectively, both bolstered by large gains in exceptional items. In 2019, the firm received Rs98 crore from the sale of a subsidiary called Global Edge Software, one of over 50 companies that feed into CCD’s consolidated results. Without that exceptional gain, the company would have eked out only the tiniest of profits, despite sales totalling over Rs4,200 crore.

A common cause for such underperformance among Indian companies is simple embezzlement, which can take the form of handing out exorbitant contracts to privately held entities owned by the promoters. However, what I have learned about Siddhartha from interviews I read following the tragic news that he had gone missing and from his purported final note suggests he identified deeply with the CCD brand.

The son of a wealthy farmer, he grew coffee on his own land, was for a time a successful trader in the capital markets, and made early investments in a number of successful information technology companies, including Infosys. Such a wide range of expertise, combined with his commitment to his creation, appears to preclude the possibility of dishonesty, laxity or a lack of imagination lying at the root of CCD’s poor results.

It is not as if other coffee chains are flourishing. Barista has been cutting locations, and Costa Coffee has virtually disappeared, retaining only its airport franchises as far as I can tell. Starbucks is doing better than either, despite the atrocious food it offers, but the Seattle-based chain’s collaboration with the Tatas has not yielded a profit till date. Yet, visit an outlet of these coffee chains at any given time and it will be occupied by a reasonable number of customers, and frequently brimming with them.

It’s true that the most lucrative clients of cafés worldwide, the ones who want a take-away cup of Joe to shake them fully awake on their way to the office, barely exist in India. Here, cafés rarely open at dawn, and are at their busiest in the evening and night. Despite their minimal comforts, they are seen as places to hang out, like Central Perk from Friends, a sitcom that peaked in popularity in India just as the coffee franchises were starting up. Instead of an early black coffee gulped down while checking emails, we prefer sweet, milky concoctions sipped at leisure in the company of buddies or colleagues.

Funding models

Notwithstanding these drags on overheads, if a café serving expensive beverages and snacks that is well occupied through most of its opening hours can’t make a comfortable profit, which retailer could? Further, with the economies of scale favouring a franchise of over 1,000 stores, CCD ought to have been earning heaps of money. The paucity of profit (absent fraud, which must remain a potential explanation) can only be attributed to India’s dreadful business infrastructure. Rents are ridiculously high, power and fuel are way too expensive, and productive employees are difficult to find and retain.

No wonder so many people see a solution in abandoning bricks and mortar for apps and websites. Those aren’t making money either, in fact they’re losing more than CCD ever did. However, as one businessman pointed out, the online model is based largely on funding through equity rather than debt, and therefore has the advantage of being unlikely to push entrepreneurs to kill themselves.

The story was originally published on scroll.in. We welcome your comments at ideas.india@qz.com.

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