Journey of Mr. V.G. Siddhartha

Chairman of Coffee Day Company

1

I. EXECUTIVE SUMMARY

In 1996, young entrepreneur V.G. Siddhartha raised the coffee from a brew to an experience. V.G.

Siddhartha is the chairman of the Bangalore-based Amalgamated Bean Coffee Trading Co. (ABC)

and the man behind India’s largest café chain, Café Coffee Day (CCD). Coffee Day has been a

pioneer. It has brought about a paradigm shift in the cafe space in India. CCD has redefined the

coffee experience; it has been a trendsetter in the cafe space with the mission “to be the best

Cafe chain by offering a world class coffee experience at affordable prices”. CCD, amongst several

multi-national coffee-chains, has a very strong competitive advantage against other businesses.

A competitive advantage Siddhartha has had from the beginning is the ability to cut costs

significantly, by sourcing his coffee from his own plantations. From farm to the cup, there are no

middlemen. Sticking to Vertical Integration Model and Clustering mode of retail expansion has

allowed him to continue to expand and diversify: today, almost everything that Café Coffee Day

needs is sourced in-house.

This report addresses to how CCD has reached this position, how Siddhartha extended his family’s

coffee plantation into a retail coffee chain which has become a leading player in an industry he

virtually created and how it sustains its competitive advantage worldwide.

2

II. INTRODUCTION

A. INTRODUCTION OF THE COMPANY AND THE ENTREPRENEUR

Amalgamated Bean Coffee Trading Company Ltd., better known as ABCTCL, is the largest and the

only fully integrated Coffee retailer involved right from plantation to retailing to exports. The

'Coffee Day Group' pioneered the concept of cafés through 'Café Coffee Day', a chain of youth

hangout coffee parlors.

The heritage concept of coffee, dating from over 140 years has been nurtured with care by V.G.

Siddhartha, Chairman of Coffee Day Company. Launched in 1994, the Group is now a Rs. 500

crore, ISO 9002 certified company, making its mark across the coffee value chain. The offshoots

include over 1000 Café Coffee Day joints, around 400 Fresh & Ground stores, over 1000 Coffee

Day Xpress kiosks, and a sizeable 10,000 vending machines from Coffee Day Beverages. Cafe

Coffee Day has also recently expanded outside India with its outlets in Austria (Vienna), Czech

Republic, Dubai & Karachi.

Indian entrepreneur V.G. Siddhartha extended his family’s coffee plantation into a retail coffee

chain which has become a leading player in an industry he virtually created. Siddhartha is that

rare individual who effortlessly wears hats —as both a smart investor as well as a die-hard

entrepreneur and this is what probably makes him a winner in both arenas. He is both an

operations guy as well as a finance.

While working as a financial analyst, Siddhartha discovered that Indian coffee farmers were being

paid far less for their product than their overseas counterparts due to a government monopoly

on pricing. His family had owned and worked a coffee plantation for three generations and he

began buying other plantations and lobbying successfully for market liberalisation.

Cafe Coffee Day's divisions include:

Coffee Day Fresh 'n' Ground, which owns 450 coffee bean and powder retail outlets

Coffee Day Square, a high level coffee bar in Bangalore

Coffee Day Xpress, which runs 900 plus Coffee Day kiosks

Coffee Day Beverages, which runs over 14,000 vending machines

Coffee Day Exports, its exporting wing

Coffee Day Perfect, its fast-moving consumer goods packaged coffee division

Coffee Day B2C Plant, Coffee vending machine manufacturing division

3

B. PROFILE AND BACKGROUND OF THE ENTREPRENEUR

V.G. Siddhartha saw coffee as a ‘Lifestyle’ drink, while drinking coffee in homes was coming down.

With the act “Big-Picture Thinking” Siddhartha turned the brew into the enterprise.

V.G. Siddhartha is an Indian businessman born in Chikkamagaluru, Karnataka, India. Siddhartha

obtained his Masters of Science in Economics from Mangalore University, Karnataka. After his

Masters he went to Mumbai and joined J M Financial Services as a management intern on the

Indian Stock Market, leaving out his family business of growing coffee. After two years he

returned to Bangalore to look after family business. But he was not happy with the size of their

ambition. He wanted to make it really big. Eventually, the cultivation grew from few hundred

acres to few thousand acres because of his desire to increase the cultivation. But because of the

fickle coffee prices the traditional growers got fed up and started selling out their business to

Siddhartha. At the same time, Siddhartha was feeling helpless about how to carry out with a

business of inconstant pricing.

The Bulb moment:

Then he looked at the basics of coffee business, the numbers threw him off. The world grows

around 120 million bags of coffee bean every year which costs around $7 billion approximately.

But when the same bean is retailed as a cup of coffee the value becomes $100 billion. Siddhartha

thought himself that he wanted to chase the $100 billion mark, not $7 billion. So, he called his

advertising agency and discussed them about his idea of retailing a cup of coffee. They cautioned

him about the reducing intake of coffee in south Indian homes.

4

Siddhartha wanted young boys and girls to taste his brew during their hangout, parties, get-

together etc. He wanted them to taste their choice of coffee, cakes and sandwiches, watch music

videos, check their emails etc. The first Cafe Coffee Day outlet was set up on July 11, 1996, at

Bangalore, Karnataka with the tagline ‘A lot can happen over a cup of coffee’. Today Cafe Coffee

Day chain has thousands of outlets in all States of India. Café Coffee Day also has international

outlets in Karachi, Vienna, Dubai and Prague.

C. AN OVERVIEW OF THE IDEA GENERATED

Just as the origin of Coffee in India started with seven magical beans from Yemen, the entire

ABCTCL’s empire was inspired from a single plantation, the Shankara Kudege Coffee estate in

Chikmagalur, bought in 1871 by the ancestors of VG Siddhartha. Although in the pre-1990s Coffee

trading was a government monopoly, Siddhartha’s strong intuitive optimism motivated him to

buy coffee plantations in the hope of liberalization to come by. This preemptive strategy paid off

when the country underwent Liberalization, Privatization and Globalization in 1991 and the

Government eased FDI regulations. In 1993 the Amalgamated Bean Coffee Trading Company Ltd.

was formed which focused solely on coffee exports. In 1995, within just two years of inception,

ABCTCL became the second largest coffee exporter from India.

In 1996, realising the limited growth opportunities in the B2B exports business, ABCTCL decided

to enter the business-to- consumer (B2C) market in two major ways. It opened Fresh ‘n Ground

- the first ‘neighbourhood coffee store’ in 1996 with the promise of selling freshly ground coffee,

which today has a footfall of about 1 Lakh customers a day. Inspired by the Singaporean internet

cafes that served beer, ABCTCL launched the first Cafe Coffee Day (CCD) in Brigade Road,

Bangalore, in 1996. Bundling coffee with internet surfing proved to be a runaway success and

gave CCD the first mover advantage into a segment that promised endless growth.

Until the year 2000, the growth in Cafe segment was rather slow (only 14 CCDs), as ABCTCL faced

many technical glitches in scaling up this bundled offering. In late 2000, it took a bold move of

disassociating itself from the internet service and focused on launching full-fledged cafe targeted

at the youth (15 to 30 year olds) cleverly positioning itself as ‘a place, between home and work,

to hang out with friends.’ This considerably increased the expansion pace and by the year 2001,

ABCTCL had 35 CCDs operational, predominantly in the four southern states.

However, in 2001, Barista entered the Indian market in a big way opening about 80 stores by the

end of the year. ABCTCL instantly switched to rapid expansion path, simultaneously building

capabilities to facilitate its rapid growth. CCD followed the Clustering mode of retail expansion,

5

where over 10 CCD outlets populated a radius of say 2 km, closely interspersed with competitor

Cafes.

The presence of competitors such as Barista led to Co-Category Creation. The combined efforts

of both players resulted in increasing prevalence of Cafes and a growing consumer base. However,

this also led to a coercive need to expand and CCD began to explore new formats of Cafe Retailing

arising from a rigorous market research based on ‘Dwell Time’.

Thus, in 2002, the company launched a ‘quick café’ under the brand name CCD Xpress, which

now has about 922 outlets in the country. The company also started International operations in

2005, launching its first cafe in Austria – the country with the highest Coffee consumption.

ABCTCL acquired Emporio, of the Czech Republic in order to facilitate expansion in Eastern

Europe, in June 2010. These helped build economies of scale and attain cost-leadership status

both in India and overseas. In its path to exploring newer CCD formats, ABCTCL launched CCD

Square, a high-end fine dine hangout that offers a holistic coffee journey, in 2008, in Vittal

Mallaya Road, Bangalore. It also started the CCD Lounge in 2010, at Koramangala, Bangalore, a

Cafe that offers plated meals and a greater variety of Food and beverages.

D. NATURE OF BUSINESS

The parent company, Coffee Day Co. is a multi-business organisation which includes agri-business,

retail, logistics, investments, and infrastructure verticals in its portfolio. Following is a brief

description of each business vertical:

1. Agri-business

This could be considered the family heritage for Coffee Day Co. The promoter (V.G. Siddhartha)’s

family has been in the coffee business for more than 140 years (since 1870). Currently, the group

owns 11,000 acres and manages another 3000 acres. Eighty per cent of the plantations grow

Arabica coffee and the remaining 20% grow Robusta. The largest producers of Arabica coffee in

Asia, all their estates are UTZ certified for best management and traceability practices. (Coffee

Day was the first company in India to get the UTZ certification, a certification provided for

responsible professional coffee growing.) They employ more than 3000 skilled plantation

workers. Coffee Day Company’s Amalgamated Bean Coffee Trading Company Limited is the

largest integrated (growing, processing and retailing) coffee company in India.

6

2. Retail business

Coffee Day Company’s retail business consists of the Cafe Coffee Day chain, Coffee Day Xpress,

Coffee Day Beverages, Coffee Day Fresh and Ground, and Coffee Day Exports.

Pioneering the coffee cafe concept in India, Cafe Coffee Day was launched in 1996 with equal

weightage on being an Internet cafe and as a specialty coffee cafe. All cafes are company owned

and operated. There are 45 Cafe Coffee Day Lounges that are targeted towards families and the

trendy affluent and offer more varieties of food (breakfast, lunch items etc.) and better ambience.

The Cafe Coffee Day Square is the high end cafe serving single origin coffees from across the

world. It is targeted towards international customers and affluent Indian customers.

The Coffee Day Xpress is the regular café with varieties of coffee, tea, cold beverages, and limited

food options. It is targeted towards the youth and the average middle class Indian consumers.

Currently there are thousands of Coffee Day Xpress and many of them are at high footfall and

captive locations such as large corporate campuses, office buildings, hospitals, metro and

railways stations, and so on. Internationally too there are CCD cafes in Vienna and in the Czech

Republic.

Coffee Day Fresh and Ground deals in retailing of fresh ground coffee powder in 22 different

blends. There are 412 outlets in South India and 4500 clients in the HoReCa (hotel, restaurant,

catering) segment.

Coffee Day Beverages also sells indigenously manufactured coffee vending machines. They have

about 6500 corporate accounts and 18,000 vending machines have been placed across India

serving freshly brewed coffee. About 50 million cups of coffee and tea are dispensed monthly

from these vending machines. They also retail single-serve solutions in coffee in the form of

capsules and sachets and the company has plans for more variants as well as aggressive

expansion plans.

3. Logistics business

The CCD group owns Sical Logistics which is a single window multi modal logistics solution

company. Sical handles more than 26 million tons of bulk cargo and 600,000 TEUs per annum

across all major Indian ports. It is also the market leader in surface logistics with a pan-India

presence. It also has cold chain operations for the captive needs of CCD and container train

operations between Chennai and Bangalore.

7

4. Investments business

With his investment banking experience, stock market operations have been one of Mr.

Siddhartha’s major strengths. Apart from his own investment firm, he has significant investments

in multiple IT and technology based business ventures (viz., Mindtree, DSP Technologies, Way 2

Wealth, etc.).

5. Infrastructure business

Coffee Day Co. owns Tanglin Development Ltd. that develops world-class infrastructural facilities

for technology enterprises. They have a 120 acre campus in Bangalore with SEZ approval that

houses companies like Mindtree, Accenture, EDS, Kyocera, Texas, Textron, Sonata, Keane etc.

They also own the Tech Bay at Mangalore and the Integrated Township at Mumbai. Apart from

these, there is the Coffee Day Hotels and Resorts Chain (the Serai Resorts) at multiple places in

the country (Karnataka, Kerala, Rajasthan, Andaman and Nicobar Islands) targeted towards the

affluent class.

8

III. Business Model

A competitive advantage Siddhartha has had from the beginning is the ability to cut costs

significantly, by sourcing his coffee from his own plantations. From farm to the cup, there are no

middlemen. Sticking to this Vertical Integration Model has allowed him to continue to expand

and diversify: today, almost everything that Café Coffee Day needs is sourced in-house.

His estates not only provide coffee beans for his retail chain and for export purposes, they also

supply the timber for the company that makes furniture for all his Coffee Day outlets. A recently-

acquired logistics company handles the supply chain.

In terms of business strategy, Café Coffee Day maintains a keen focus on the consumer and his

wants, needs, desires, and aspirations at the front end, and a corresponding focus on delivery of

quality and brand experience at the back end. Every month Siddhartha visits around fifty of his

outlets and regularly points out areas where his managers could improve. That’s the reason

investors put money on him, not for sitting in air-conditioned offices.

At the cafe, they sell coffee, food, merchandise and a certain amount of music. A large chunk of

revenue that the parent company generates comes from exports, followed by profit margins

from the cafes as well as coffee powder retail followed by vending division and kiosk division

Express coffee.

Target audience

A typical Cafe Coffee Day consumer, demographically, would be male or female between 15-29

years of age, belonging to middle or upper middle class. About 40 per cent or more are female.

The typical consumers at cafe is young or young at heart. Anybody who is youthful, be it in terms

of age or outlook, would like to hang out at a Café Coffee Day because of kind of ambiance offered.

Customer value proposition

The customer value proposition for Cafe Coffee Day (retail business) is given in the Table.

9

Key resources

Key resources play the most significant part in the delivery of the customer value proposition.

The key resources for the CCD chain are given in Table. Cafe Coffee Day has strong assets to

support a sustainable business model.

Strategies/Approaches:

Reinforcing brand image with the cluster approach strategy

Company-owned stores instead of franchises to not dilute brand value

Lower pricing and ‘no-segmentation’ approach

10

Marketing Mix

Product:

CCD product mix constitutes a wide range of products that appeal primarily to Indian coffee and

snack lovers. Products have a decided Indian taste to it be it food or coffee. Most of the eatables

have been adopted to meet the Indian taste buds like samosa, masala sandwich, tikka sandwich

etc. Thus they have been trying to capture the Indian taste along with classic coffee. The best-

selling item in summer is frappe, which is coffee and ice cream blended together. The young

people favour it. In winter it is cappuccino. Their merchandising includes funky stuff like t-shirts,

caps etc.

Price:

Considering that CCD knows its major customer lies in the bracket of 15- 29 years, it has tried to

derive a policy whereby it can satisfy all its customers. The price for a cup of coffee ranges from

Rs.45 to Rs 80. From the time it first started its operations, there has been only minor changes in

the pricing policy of CCD. The changes have been more due to the government taxes than

anything else

Place:

The strategy CCD has adapted is to place a cafe in every possible location where some business

can be generated. This is a prime factor in determining the success of a retail chain. CCD looks to

cater to their target market with strategically located outlets.

Their outlets are generally located in High Street/ Family Entertainment Centres, gas stations,

near Colleges etc.

Promotion:

CCD is involved in all the areas of serious consumer passion like:

Television: CCD held a contest around a very popular programme on Zee English called Friends.

All the six lead characters are shown often visiting a coffee shop. They have tied up with Channel

[V]s Get Gorgeous contest.

Tie-ups: Besides that CCD also tie up lot of the youth brands. So they have a contest going on

with Levis, another one with Scooty, Liril, latest one with Airtel Friends.

Association with movies: CCD can be seen in movies like Khakhee and Mai Hoon Na

11

Sales Promotion: CCD uses special ‘Cafe Citizen Card’ for rewarding Cafe Coffee Day’s customers.

It is a loyalty program to gain new customers and retain the existing ones.

Process:

The ordering and delivery process in CCD was earlier based on self- service. But now in most its

coffee shops the waiter comes and takes away the order and delivers the order on table.

Physical evidence:

Logo, image, and brand: CCD has used bright red and green colors in its older logo. RED stands

for leadership, vitality, passion for coffee. The GREEN stroke harks back the coffee plantations

that they own. Cafe is noticeably larger in the logo to denote that CCD pioneered the cafe concept

in India way back in 1996.The font looks as though the letters have congealed out of a liquid The

word ‘Cafe’ was made to appear dominant to indicate Cafe Coffee Day’s introduction of ‘Cafe

culture’ in India.

After recognizing the buzz of conversations that invariably accompanied the coffee being served

at their tables. CCD introduced a new logo with a ‘Dialogue box’ in it. This was to highlight the

strong connection between ‘Coffee’ and ‘Conversations’. Another indication of the dialogue is

the two-way conversation between CCD and its customers

Architecture and Decor: Largely wood and granite based interior with young colors of today, like

lime green, yellow, orange, and purple predominate.

Literature: The literature provided by CCD is indicative of its youthful image. The menus, posters,

pamphlets are all designed to attract young and young at heart

The Tag Line: "A lot can happen over coffee" became a popular line among youngsters. In a bid

to take their coffee chain national in 2000, the management decided to strengthen their brand

pull with an appealing tag line. Factors like ambience, food, music, and atmosphere and meeting

people were identified as the aspects that were drawing people to their Cafes. Encompassing all

these factors in a single line, the sentence "A lot can happen over Coffee,” was phrased.

12

IV. Industry/Sector Analysis

The Indian coffee retail market has been buzzing over the last 12 months with two key players

Cafe Coffee Day and Starbucks on expansion drive. The market size of retail coffee in India is

estimated at Rs 1700 crore plus and expected to grow at a fast pace of over 20% in the recent

times.

Consistent growth of consuming class and increasing time-pressured consumer is giving way to

convenience-based option, primarily driving the growth of cafes. Organised market contributes

near 15% to the total food service market in India. Of the $14 billion market in 2012, unorganised

sector contributes $12 billion. Quick Service Restaurants will continue to absorb maximum share

in organised market in the next 5-7 years with sustained 50% share in the next 5-7 years.

While Cafe Coffee Day (CCD) is the market leader in terms of retail footprint, international chains

like Gloria Jean's, Costa Coffee and Coffee Bean & Tea Leaf have a limited footprints in metro and

mini metro cities.

13

V. Market share of the company

Cafe Coffee Day is the leader in India’s specialist coffee shop sector with a 64% market share,

according to Euromonitor data.

VI. Financial Performance

Revenue: US$ 450 million

VII. Life Cycle of the Enterprise

The Life Cycle Stages in Cafe Industry:

Introduction

Features in low sales with high retail prices for goods, high advertising costs and selective

distribution channel across limited markets. In cafe industry, this is a period of low to negative

profits due to the high costs of advertising and growing of a customer base.

Growth

Features in rapid increases in earnings. Price can stay at its high level if demand for the product

remains high, or it can drop to capture more consumer attention. The growth stage occurred

during the late 1990s through the early 2000s, when chain coffee shops offering specialty coffee

beverages appeared on every street corner across the country.

14

Maturity

Features high brand awareness, wide distribution, lower prices to remain competitive and new

product modifications to create brand distinctiveness. The rise of competing in specialty coffee

chain, all with distinctive brand features to cater to specific demographics within target market

segments.

Decline

Threat of substitution is the symptoms of decline in the industry. Modern coffee makers enabling

consumers to make single cups of coffee in just a few minutes provide new convenience while

removing the need to wait in line for purchase. Fast food chains also have entered the coffee cafe

market, seeking to snatch consumers from established coffee companies by offering comparable

specialty coffee beverages at lower fast food prices.

15

VIII. Challenges

1. Coping with competition from domestic players and entry of Foreign Players

In order to cope with increasing domestic competition, ABCTCL shall have to motivate and retain

its best baristas and brew masters. This would require continuous heavy investment in building

and supporting the company’s, existing supply chain capabilities. Advertising the brand through

various online communities and an additional effort to ramp up the company’s real estate

capabilities to scout for premium locations in the developing regions of tier-2 and tier-3 cities

would be essential to stave away competition.

2. Internationalization into newer markets

The coloured lines in Figure shows the different strategies that firms can adopt for going

international. The bold blue lines highlight ABCTCL’s internationalization strategy. Point ‘A’ shows

where ABCTCL started when it launched its first Cafe. ABCTCL concentrated entirely on category

creation. Over the next few years as it developed more capabilities and strengthened its

operations ABCTCL looked to develop a full line of products to cater to every segment (point ‘B’).

It was after this that ABCTCL looked to go global (point ‘C’).

The approach that ABCTCL has employed for internationalization has served the company well,

but they shall have to monitor a few important issues in order to sustain the growth.

Some amount of customization, based on the operating region, can help the company

gain more acceptance

With Starbucks at the doorsteps and other chains like Costa Coffee rapidly expanding in

the Indian market, ABCTCL must take adequate steps to defend their market share in Indi

16

Given the huge domestic market for its product range and a presence across the entire

value chain will ensure that the company remains cash rich

ABCTCL should examine factors such as coffee consumption patterns, scope for growth

and the intensity of competition in the destination country (e.g. expansion in Vienna,

Austria which has the highest per capita consumption and the recent acquisition of

Emporio4 in Czech Republic to expand in the eastern European market which is expected

to grow rapidly but faces very little competition)

3. Sustaining Rapid growth in a dynamic industry

The reinforcing feedback loop also fuels the growth for ABCTCL, as shown in Figure. Production

of Coffee leads to export and selling, which gives way to new category creation, i.e. introduction

of café segment, which opened the market to new set of customers and in turn increased the

demand for Coffee production. This pattern of reinforcing loops, called ‘Growth Cycles’, converge

on a customer base driving the growth of businesses pursuing “new games” strategies.

4. Balancing Standardization vs. Localization

Creating a more customized menu for its customers in terms of identifying slight differences in

taste preferences across the country will help the company effectively compete with local brands,

and differentiate itself from global/national majors. For example, coffee drinkers in South India

prefer a stronger flavour in their coffee when compared to those in the rest of India. ABCTCL

could incorporate this by offering their traditional coffee (e.g. a Cappuccino) in the form of three

17

variants – light, regular and strong. It could also introduce different size of serving for its coffee

(e.g. small, regular and large). By doing this ABCTCL signals to its customers that it understands

its coffee drinkers and their preferences.

5. Adapting to changing consumer needs

A study by the Coffee Board of India indicates that there exists an Opportunity area – Offices and

Colleges segment – that have a low penetration yet high frequency of consumption. Thus, Coffee

Day can focus on further increasing its presence in corporate premises and university campuses.

Besides this, ABCTCL should also look to maximize its growth in newer segments like highway

cafés and health resorts. Investments in technologies (such as blast freezing food products,

temperature controlled vehicles etc.) to support such formats have already been undertaken and

the company should look to leverage its advancements to feed these formats. Experimenting

with flavored coffee or medicated tea is another way of increasing variety offered to the

customers.

6. Identifying white spaces in the industry

In order to sustain profits and rapid growth in the years to come, ABCTCL should efficiently

explore White space opportunities, identify Profit Pools and formulate Growth Platforms, as

described by the Sustainability Model. Identifying White Space opportunities requires constant

scanning of market along three dimensions – context, customer and competition – in order to

identify the prospective growth opportunity. Identifying pockets of growth and profit in the

company’s portfolio and harvesting or investing in the chosen ones that display promise of

greater returns. Profit Pools for ABCTCL are currently the Cafe Division and Xpress division. The

identification, selection and prioritization of growth platforms based on existing capabilities are

important. Existing growth platforms for ABCTCL are its rapidly growing Vending Division and

Xpress division.

18

IX. Opportunities

1. Introduction of cheaper versions of coffee

2. Tapping the smaller towns/cities

3. Merchandising

4. Tie ups with other companies for promotion

5. Over 40% of the population is under the age of 20, hence untapped market share and

potential for growth.

6. The use of clever collaborations, for example with bookstore, etc.

X. References

www.cafecoffeeday.com

www.casestudyinc.com

brandbrews.coffeeday.com

www.slideshare.net

www.corporatevalley.com

www.moneycontrol.com

articles.economictimes.indiatimes.com

www.studymode.com

The Coffee Day Journey, Cup by Cup - tejas.iimb.ac.in

www.sciencedirect.com