Daybreak - How a coffee startup is giving global giant Starbucks a run for its money in India

Episode Date: October 16, 2023

In March this year, the world's largest coffeehouse chain, Starbucks, finally crossed the Rs 1,000-crore rupee revenue mark in India for the first time. So far, it has 350 outlets in India. Now, carrying a cup of Starbucks around has almost become like a lifestyle statement.In many ways, Starbucks entered the Indian market with a huge advantage because India's undisputed coffee leader, Cafe Coffee Day (CCD), was already declining at the time.But while Starbucks is looking at the bigger picture and hasn't managed to become profitable yet, an Indian coffee startup, Third Wave, has entered the scene and is giving the global coffee giant a run for its money.Tune in.Free ReadThe invisible hand behind startups' crazy valuation runDaybreak is produced from the newsroom of The Ken, India's first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get alert, as soon as we release our first studio recording, episode, please follow intermission on Spotify and Apple Podcast or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. 11 years ago, when the world's largest coffee chain opened its first store in India in Mumbai, people went nuts. Starbucks had come to India, the Starbucks. For most Indians, it was something that they'd seen in Hollywood movies,

so of course, everybody wanted a couple. There were never-ending cues of people outside the outlet, hot and sweating, in the crowd, but ready to wait as long as it took. Similar scenes played out in Delhi as well when a few months later another Starbucks opened in Cannot Place. It was insane. I was there, not standing in the queue.

I don't have that kind of patience, but I remember how eager everybody was. And social media was brimming, with pictures of people posing with Starbucks cups, inscribed with their names on it, which were often misspelled. If you know, you know. What I'm saying is having coffee at Starbucks became a lifestyle statement of sorts. At the launch event, Howard Schulz, the then-CEO, had proudly declared how, in its 40-year history, India was the first location where Starbucks was sourcing and roasting its coffee locally.

He said that it was a part of being respectful to the country and taking advantage of the huge coffee plantation heritage of the Tatars. More than a decade has passed since and Starbucks has 350 outlets in India. In fact, in March this year, the coffee giant crossed the 1,000-crow-rupy revenue mark. Sounds like it's going great for Starbucks so far, right? Well, I'm afraid there's a problem. And it is called Third Wave, a specialty coffee startup.

It was actually one of the first Bangalore culture things that I was introduced to when I moved here. Apparently, all the tech bros and gals with their MacBooks and Apple watches go and work from Third Wave. Within a span of seven years, Third Wave has opened more than 100 outlets across the country. and Starbucks, the global coffee giant, 350 in 11 years. In fact, Third Wave will match Starbucks in terms of the number of outlets by next year if everything goes according to plan. And just so you know, Starbucks is yet to achieve profitability in India,

despite being a 50-year-old global coffee powerhouse with the backing of Tartan. So how can a startup like a startup like her? third wave, pull it off. And the bigger question, who is going to win the coffee war in India? Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nick Dha Sharma, and I don't chase the new cycle. Instead, thrice a week on Mondays, Wednesdays and Fridays, I will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 16th of October. My colleague and the Ken reporter Noha noticed something quite interesting while reporting the story.

All Starbucks cafes in the primest of the prime locations of Bangalore, Mumbai and Delhi have something in common. I'm talking about the Church Street outlet in Bangalore, the Khan market one in Delhi and the Chao Party one in Mumbai. Each one of them happens to have a third wave outlet very close to it. And this, my dear listeners, is not by chance. It is a very conscious choice. And the reason actually makes sense. Chains like third wave and blue tokyi believe in the concept of Nash equilibrium or clustering. Nash equilibrium is a situation where no one can benefit by changing only their own strategy.

If any changes are to be made, they have to be done by all the players. Basically, the idea is that being near competitor, means more potential customers around and moving away from them could mean missing out on these customers. Matt Chittaranjan, the co-founder and CEO of Blue Tokai Coffee Roasters, which is a specialty coffee startup just like Third Wave, told again that there is a rationale behind why these young chains are clustering around Starbucks. He said, and I'm quoting, are sales increase when these other brands move in and vice versa. He said that their data shows that having a Starbucks nearby actually helps them.

Take Third Wave's outlet in 17th main HSR layout in Bangalore, for example. It makes 40 lakh rupees in monthly sales on an average, and this is despite having around 10 other cafes within a 300-meter radius. So what else is behind the range? rise of third wave as a Starbucks competitor. Stay tuned to find out. If you have even been skimming the headlines in recent times, you must have definitely come across the term overvalued startups. If you haven't, that's okay too. I'll catch you up. Sometime between 2020 and 2022, startups in India had a crazy valuation run. Venture investors pumped billions of dollars into

startup to fund their hypergrowth narrative. Well, spoiler alert, it all came crashing down soon after. The reality eventually caught up with these fantastical valuation numbers, and most startups have now accepted a drastically lower valuation. In hindsight, one cannot help but wonder how could there be such a massive disconnect between projected valuations and the actual results? Well, most valuations seem to be based on the ask and you shall receive principle. What do I mean by that?

Say a company wants to raise billions of dollars from private investors at a certain valuation. This number is agreed upon beforehand between the company and investors. Then they just do some backworking to arrive at a number they've already agreed upon. Ashwadaamudran, the Dean of Valuations at NYU, calls this Kabuki valuations,

where the end game is predetermined and companies just find ways to get there. In a story by the Ken, staff riders Gaurav and Anand talk to Ashwaddamodaran and many other experts in this field about this. They unveiled the often undiscussed secrets behind how companies actually engineer these valuation numbers. This story is definitely going to surprise you and if you're interested, it has been made available for free for exactly 24 hours. Just for today, the 16th of October. So go ahead, give it a read and share away with your friends before the counter runs out. I'm Aksha from the Ken's Newsroom.

Thank you for listening to us. If you like what we do, please rate and review us wherever you get your podcasts. And now, back to Snigna. Who was the OG pioneer of the Bean to Cup concept in India? No, it was in Starbucks. Any other guesses? CCD or Cafe Coffee Day. This was back in the mid-90s, way before Starbucks.

By 2016, CCD had more than 2,000 outlets across the country. It was the undisputed champion of coffee chains in India. But we all know the story of its downfall, financial troubles, and then the mysterious death of its founder, Viji Siddhartha, in 2019. A former manager with the direct-to-c customer or D2C coffee firm Sleepy Owl told Noha and I'm quoting, when Starbucks came in, it had a free run because CCD was on its way down. Now, Third Wave has entered the scene and it is trying to turn the tables.

From having one outlet for every four Starbucks stores a year ago, Third Wave now has one for every three. And it plans on open. opening 250 more outlets by 2024. And how is it planning to do this? The answer again has something to do with CCD. Since September 2022, Third Wave has added 35 new stores, and some of these new stores used to be old CCDs.

If you remember, CCTV outlets were always in prime locations. In the last five years, CCD has cut down the number of its cafes to 4169. Remember, I told you, in 2016, they had more than 2000. So you do the maths. Kunal Ross, the assistant general manager of operations and sales with Arakou coffee, told the Kent that Third Wave has actually taken advantage of CCD reducing their footprint and moved into those spaces.

So, not only is Third Wave getting these prime hotspots, it is also getting the CCB. customer base. So what drove these people to CCTV-turned third wave cafes? A former manager at Sleepy Owl told us that it was all about the pricing. He said, and I'm quoting, it was absolutely perfect. You can term it as a better Starbucks. End quote. Stay tuned for more on Birdwave's pricing strategy.

In 2021, Starbucks wanted to understand the Indian market better. So it hired the Boston Consum. consulting group. And they recommended three things to appeal to the budget-conscious consumers here. Lower-priced menus, localized bite-sized food varieties, and smaller-sized beverages. So in July, Starbucks launched its smallest-sized drink called PICO, which was 180-ML, and the price started at 180 rupees. But Amrit Anshu Prasad, an executive at Third Wave, took a little bit of told us that he believes Starbucks brought in PICO looking at Third Wave's beverage pricing structure, which was 25% cheaper. But now, Third Wave is also working on the smallest

beverage size based on customer feedback. Also, about localized menus, Starbucks revamps its menu eight times a year. Blue Tokai does it four times. But Third Wave refreshes its offerings every two months and also launches new products occasionally. But is that enough? Not really. Prasad told us that a lot of Starbucks's regular customers are switching to third wave stores and that they see almost a 60% customer retention. Also, Prasad and a Starbucks store manager told again

that a Starbucks store on an average would get about 450 orders in a day. But once Third Wave came into the business, picture, the number dropped to about 300 a day. The matter became so serious that Starbucks actually signed a lease agreement with a Bangalore Mall that says that no premium coffee chain can operate on the same floor as Starbucks. As you can see, the competition is heating up and we don't exactly know how it will end. But there's one thing that we know for sure, and this is what a Starbucks manager told us. The war is being won by coffee.

Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings. A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode, was edited by my colleague Rajiv Sien.