“It’s much harder for new cafés to come up now. There are already established coffee players in major cities, so you have to really figure out how to differentiate from us or the thousands of other companies out there.”
Matt Chitharanjan is the co-founder of Blue Tokai Coffee Roasters, India’s pioneer in
third wave coffee culture – where a higher emphasis is placed on coffee quality and brewing methods. With 24 cafés spread across the landscape, Blue Tokai is the biggest speciality coffee chain in India.
As I sip a pour-over of their light-roasted Nachammai Estate coffee, Chitharanjan is talking about the challenges that up-and-coming cafés face. The Indian coffee scene was recently marred by the
death of VG Siddhartha, who essentially introduced the country to modern café culture by establishing Café Coffee Day. Now, with a slew of independent coffee shops coming up, running a café business is a tall order.
“Everybody has this idea that it's very easy to open a coffee shop, but at the end of the day, it's a very difficult, low-margin business,” Chitharanjan tells me. “A lot of people get into opening restaurants and cafés for their own reasons; it's more of something that seems cool.”
‘Why Restaurants Fail’, a four-part study by HG Parsa, puts the failure of restaurants at 26.15 percent in their first year, a far cry from common perception. Parsa’s paper suggests that only 59 percent of hospitality businesses fail by their third year.
So why do cafés around India struggle to keep afloat?
Balancing high rents with the perfect spot
Vaibhav Bindal, founder of Quick Brown Fox Coffee Roasters in New Delhi, blames it on exorbitant rent.
According to a CBRE report, Delhi’s Connaught Place is the ninth-most expensive area to rent a space in the world, with an annual cost of $144 per sq ft (about Rs 10,350). The India Rent Report 2018 revealed an 18 percent rent inflation increase in the Mumbai Metropolitan Region.
“Initially, everybody's just trying to pay off their rent, so the monthly expense is a big thing,” says Bindal, citing location as a crucial factor behind the success of cafés. Chitharanjan concurs, explaining, “The biggest determinant is choosing the rent, so figuring out the right rent to potential sales ratio is the key determinant whether you're able to increase your profit margins.”
Finding the optimum location – reasonable rent and high footfall – is tough. Bindal’s café is in Dhan Mill, a huge space with limited crowds. “For us, initial footfall was a challenge; it definitely started slow. You have to pull in the crowd.”
Though Chitharanjan’s Blue Tokai is now a multi-city chain, when opening the first café in Saket, he took a strategic approach. “We’d started out as an online coffee business, so our first move was to look where our online customers were. That gave us an idea of where people would appreciate the coffee we have.” But he adds that each city has different nuances. “In Delhi, people are more willing to go to out-of-the-way locations, whereas in Mumbai, they're not, because it's a big hassle getting around.”
Now in five cities, Blue Tokai’s customer base has grown exponentially since it first opened in 2015. Chitharanjan says having one café does not cover all the training resources and overhead expenses. “The economics of the cafe itself means that the total revenue is going to be capped for one particular location. It’s also about inaccessibility; above all, people want convenience. If there's only one cafe in town, how many people are really going to go look for it?”
Setting ticket sizes and facing off with the big players
Prices are another massive issue for café owners. Indians are accustomed to coffee from chains like Café Coffee Day and Costa, where you can get an espresso for Rs 116 and Rs 135 respectively. In comparison, a single shot at Starbucks costs Rs 175. Both Blue Tokai and Quick Brown Fox price theirs lower than all these chains, at Rs 110 and Rs 130 respectively.
Though their product has premium pricing, Chitharanjan wanted Blue Tokai to be accessible and affordable to a larger section of the population. “But at the same time, there are extra costs involved in outsourcing coffee, training people, the equipment, etc. So, the pricing has to be on the higher end.” With all that in mind, he tries to achieve a profit margin of 25 percent, but, currently being at 15 percent, he has some way to go.
Bindal weighs in by explaining that margins could result from either a distribution of rent across just a few items or looking at the food cost and other expenses as a whole. “But again, it's not like if we feel it's only 10-12 percent, we can double the price of our coffee. Nobody's going to buy it.”
Neither Chitharanjan nor Bindal sees chains as competition. “This is more of a craft coffee culture. We want to stay true to our roots in terms of transparency, coffee traceability, our crop-to-cup model, crediting the farmers, and serving speciality coffee,” says Bindal. But he does acknowledge that the opening of more
coffee-forward stores like Starbucks’s Reserve and Café Coffee Day’s The Lounge platforms may pose a problem.
Chitharanjan, however, believes the expansion of Starbucks will be great for companies like his, as it will condition consumers to pay more for a better experience. “They obviously have budgets far beyond ours. They'll be able to reach a whole other set of consumers who then get accustomed to a premium coffee experience,” he says. “And then, once you actually care about coffee, you can come to Blue Tokai.”
A major factor contributing to that luxurious atmosphere is the menu. “Broadly, there are two aspects to the menu: the bar and the kitchen,” explains Bindal. The former includes the coffee, tea, and other beverages, while the latter, of course, comprises food. Pricing the menu is tricky, as one has to hit the sweet spot between inexpensive and profitable. “We designed and priced the menu around what would be a good fit for space and area we’re in,” says Bindal.
But the uniqueness stems from balancing the beverage selection. Having started with just light and medium roasts, Chitharanajan introduced dark-roasted coffee following a large volume of requests from customers. “India is a milk-drinking country. At the end of the day, you should have coffee the way you want to have it,” he says, adding, “Coffee connoisseurs like light roasts, but if we only catered to them, we’d be out of business.”
“We don’t need Zomato Gold”
Recently, the hospitality industry has been rocked by the fight between restaurants and food aggregators. The National Restaurant Association of India launched a campaign to
‘log out’ of apps like Zomato as restaurateurs feel short-changed by deep discounting policies.
I ask Chitharanjan where he stands. He pauses, then laughs. “I understand why restaurants are upset about it, but no one forced them to sign up to Zomato Gold. If you feel you have to sign up to catch up with your neighbour who's signed up for it, I don't understand why you want those discount-seeking customers anyway,” he says. “If you have to rely on offering one-plus-one to get people into your restaurant, then maybe your product offering is not what it needs to be.” But he does add that the only party benefitting from Zomato Gold is, in fact, Zomato.
Bindal says Quick Brown Fox has stayed away from the entire situation, using Zomato purely as a listing. “We don't use Gold or any of their other services because we haven't found them financially viable to use.”
Sustaining the business and the environment
Once a café is established, keeping it afloat is, arguably, even more challenging. “You need to run a tight ship,” says Bindal. “If you haven't been a part of the industry, there's a steep learning curve. You need to be efficient, have the right people in place, and serve a good quality product, because people come back for that every day. Good service, good food.”
All decisions need to be made with the idea of building a sustainable business, according to Chitharanjan. He adds that a café should ideally be profitable from the get-go. “For us, breaking even takes around three to four months. The location is either going to work from the beginning, or it isn’t. You have a pretty good idea within the first couple of months of whether it’s going to work or if you need to intervene to fix things.”
Both entrepreneurs previously had careers in finance, agreeing that having that background helped them get through the trials of establishing a business. They also strongly feel that differentiating your café from its competition is a top priority.
“Knowing your numbers is very important,” says Bindal. “Most of these places are passion-driven, but one needs to be realistic too, about their competition, location, and everything else that needs to be looked in to.”Finally, Chitharanjan thinks being environmentally aware is crucial. Climate change has put
60 percent of wild coffee species under the risk of extinction. “Figuring out solutions to climate change and trying to have at least a carbon-neutral footprint are important from a business perspective. Not just for coffee, necessarily, but for the world.”