Daybreak - Theobroma's dilemma: how to continue scaling while staying true to the 'artisanal' identity

Episode Date: October 16, 2024

Back in 2004, two sisters, Kainaz and Tina Messman, decided to turn their life-long passion for food and baking into a full fledged business. They set up Theobroma, a small cafe tucked away in a corner of Mumbai’s posh Colaba. Today, there are more than 200 Theobroma outlets in over 30 cities across the country. The bakery chain’s evolution has been nothing short of remarkable. It has managed to build a profitable business that too in a category known to have products with one of the shortest shelf lives. The chain now commands a valuation of well over Rs 3,000 crore. In fact, investors like Chrys Capital, Bain Capital and Carlyle Group are queueing up to buy the 20-year-old brand. But being in the big leagues has meant changing up its strategy. Over the years, Theorobroma has cut down the number of baked and semi-baked items on its menu, and instead filled their shelves with longer lasting products like cookies. It’s been able to do that because of its massive, centrally located commissaries. And these strategic shifts have paid off big time. Because now investors are valuing the company at 7-9X its revenue. All of this is good news for its current promoters, the Messman sisters and the private equity investor ICICI Ventures, which invested $20 million between 2017 and 2019. Both are likely to exit with handsome returns. But once that happens, where would that leave Theobroma? Most industry experts say that sailing through with new owners is no picnic. Tune in.Daybreak Unwind recommendations for folk songs:Rahel: Genda Phool, Delhi 6, 2009Snigdha: Sketches of Darjeeling by Bipul Chettri, 2014Anushka:  Mor Bani Thanghat Kare by Jhaverchand MeghaniHari: Kalakkatha Sandana Meram by Nanjamma **Correction: Snigdha mistakenly said Mame Khan instead of Mangey Khan while talking about the Manganiyar singer's death. The error is deeply regretted.Daybreak is now on WhatsApp at [phone]. For next Thursday's Unwind, send us your recommendations to us as texts or voice notes. The theme is "coming of age."

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 Ramon, Ganesh, 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 an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts 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. 20 years ago, two sisters, Kenna's and Tina Messman decided to turn their lifelong passion for food and baking into a full-fledged business. They set up a small family-run cafe.

tucked away in a corner of Mumbai's Porsche Kulaba neighborhood. They sold all sorts of European-style desserts, things that most people in India hadn't even heard about before. But one thing in particular really put them on the map. They're brownies. By now, I'm sure you know which bakery I'm talking about. In the last two decades, Theobroma brownies have traveled from that tiny cafe

the size of a one BHK in Mumbai to different corners of the country. Today, there are more than 200 Theobroma outlets in more than 30 cities across India. The bakery chain's evolution has been nothing short of remarkable. It has managed to build a profitable business, that too, in a category known to have products with one of the shortest shelf lives. Today, Theobroma commands a valuation of well over 3,000 crore rupees. In fact, investors like Chris Capital, Bain Capital and Carlisle Group are Q.O.B.O.R.R. up to buy the 20-year-old brand. But being in the big leagues has meant changing up its strategy.

Over the years, Theo Broma has cut down the number of baked and semi-baked items on its menu and instead filled its shelves with longer-lasting products like cookies and cakes. A big part of this success is because of its massive centrally located commissaries. And these strategic shifts have paid off big time. Because now, investors. investors are valuing the company at 7 to 9 times its revenue. To put that into context, it is the same valuation that cafes and fast food chains like Blue Tokai, Chai, Chios and Wow Momo's command. All of this is good news for its current promoters, founders, Kianas Mezman and the private

equity investor ICICI Ventures, which invested $20 million between 2017 and 2019. Both are likely to exit with handsome returns. But once that happens, where would that leave Theodroma? Most industry experts say that sailing through with the new owners is no picnic. Take the case of Nerulas, which was once Delhi's favorite fast food chain. Things went south very quickly after the exit of its founders back in 2012. It also does not help that there is a lot more competition in this space now. Theobroma may once have been very unique and novel, but now it is up against.

dozens of cafes and bakeries, all of which offers similar products. So to stand out, it needs to be more than just a bakery. Welcome to Daybreak, a business podcast from the Ken. I'm your host, Nickda Sharma, and I don't chase the news cycle. Instead, every day of the week, my colleague Rahal Philipos and I will come to you with one business story that is worth understanding and worth your time. Today is Thursday, the 17th of October. These are a key part of the Theobroma puzzle. That is because the toughest nut for a baker to crack is ensuring that all of its offerings are fresh. And these large 10,000 to 15,000 square feet centralized kitchens help Theobroma deliver on that promise. These commissaries are generally located in the heart of

the city and it is here that products are prepared, packaged and parcel. It all happens in one place, which also ensures a level of uniformity and quality across stores. These massive kitchens aren't just in big cities. Even smaller tier two cities like Bhopal have commissaries. But how did the brand get to this point? Well, Thio Broma really blew up after ICISI Ventures came on board in 2017. But the man that gets a lot of the credit is Rishi Gore. He joined ICICI Ventures as its chief.

executive back in February 2020. Despite the pandemic, Gore sped up expansion and branched out to Hyderabad, Bangalore and many other non-metro cities as well. He did that using a combination of bakery cafe and kiosk models. And just like that, Theo Broma's store count and revenues grew exponentially. Gore was also the one who pushed the commissary model. But Theo Broma's success backfired in one very specific way. Competition. In the recent past, several specialized cafe chains, the likes of Lopera, Zed the Baker, have adopted the same commissary model and are going all out with it. Take Zed the Baker, for instance. It has a 12,000 square feet commissary in Cunningham Road in Bangalore that serves more than a dozen of its stores in the city. But the bottom line is, commissary or no

commissary, running a pastry chain is not easy. It takes expertise and a lot of money. More on that in the next segment. At one point, Theo Broma was aspirational. People would trek all the way to Kulaba to buy a brownie. It was everybody's go-to dessert. But as more and more brands enter the scene, people's preferences have also been shifting. That was clear when the Ken reporter Pranati visited an outlet of Zeta Baker in Indira Nagar on a weekend. It was jam-packed with customers placing a mix of dine-in and takeaway orders. Down the same road, the turnout at Theobroma was dismal. It barely had any customers other than half a dozen food delivery executives. Now, that is not good news. Because while there is a 60-40 mix among customers between eating out and ordering food online,

food chains make more profits with footfall. That is because, because the average order size is higher offline. Ambience, things like the look and smell of a bakery, are very important. And unfortunately, Theo Broma seems to be trailing behind its competitors in that department. A recurring complaint from a lot of customers that the Ken spoke with was that the prices shot up and the portion sizes have reduced. And they are not imagining it. The company deliberately cut down its portion sizes,

like its sandwiches went from the usual two slices to a single serve about four to five months ago. And the funny thing is, it is not cheaper than before. For example, if a regular sandwich costs $250 earlier, it sells half of that now for half the price. Overall, there is no rate reduction. On the other hand, a bigger-sized sandwich, say at a Chios or Zed the baker, costs more or less the same as Theo Broma's regular sandwiches. the company's USP, its brownies and pastries, just aren't flying off the shelves like they used to before. So what's next for Theobroma? I'll tell you in the next segment. The potential market for a bakery chain in India is huge. One expert said that it is as big as France and the UK

combined, possibly even bigger. And the existing market will double within the next four years. Now, amid all this, Theobroma makes about 75 lakh to 1 crore rupees quarterly per store on an average. The business really picked up, particularly after the pandemic. This also had to do with the growing demand for packaged goods through quick commerce channels. But other chains are catching up as well. Zed the Baker, for example, makes almost the same revenue poor outlet. These brands like Zed the Baker and Lopera are also looking to expand soon. So they are all in the process of opening more outlets.

These premium cafes are also competing with the mass cafe segment. For context, a mass Tio coffee chain will need customers coming in every day or at least twice or thrice a day. Ibita margins for a premium cafe chain could be in the 10 to 15% range. But for mass brands, it would be in the lower single digits. As to Theo Broma, its abeta margins in FY2023 stood at 7%. which is an improvement from the company's loss-making stage five years ago. But like I mentioned earlier, the exit of its promoters is being seen as a red flag by some people. A few industry experts are of the opinion that the external investors focus on a company's

growth often comes at the cost of quality. But other founders insist that this is exactly how good brands are built. It is not that black and white. There has to be a balance. To scale, you need to have external capital. But it is also important to have the right investor and partner who realizes that building a good brand without compromising on quality takes time. The bottom line is, the bakery business is not a piece of cake. Hang in there because this episode is not over yet. Coming up next, Daybreak Unwine.

Hello and welcome back to Daybreak Unwined. It's Thursday and you know what that means. Snikta and I are here to help you, but more importantly, help each other figure out what to do this weekend. So whether it's chilling at home, reading a book or watching something or, you know, even going to check out a new place in town, we want to know what you are up to and what you have planned this weekend. Yes, but, you know, last weekend was the beginning of the festive season in India. So we thought why not do things a little differently, right? So why not talk about folk music? Because we do listen to a lot of folk music during this time of the year, right?

And we wanted to find out what your favorite songs are. Unfortunately, a lot of you did not respond on WhatsApp for recommendations. But we did manage to get a few recommendations at least. Yeah. You know, we've really been feeling the festive spirit here, Sikda and I. And I'll be completely honest, my exposure to folk songs was pretty limited for the longest time. This isn't a genre that I kind of actively seek out. So I learned a lot.

It's probably the same for me, you know, except for, you know, some of the Bollywood music that actually comes from folk music. That's the kind of stuff we know about. Or like, because I'm from Dajling, so I know a little bit about, and Bengal. So I know a little bit about Nepali folk music, a little bit of, Bauerl music. And Bauerl also because I'm a big fan of Bob Dylan. Ah, he was very inspired by Boul. So yeah.

You know, it was only while working on this and while kind of checking out the recommendations that we got and like our conversations while we were preparing for this. That I realized just how much mainstream music is actually inspired by folk songs and folk traditions. Yeah. And actually, my recommendation for this week is kind of linked to that. because there's this one song that I've grown up listening to I've been listening to for a really long time and it's one of those yearworm type songs

that you can't get out of your head once you listen to Gendah Fool Oh my God, I love that song It's this Hindi movie that released I think in the 2000s The 2000s, the book 2000s Great movie When I was a baby Great movie, great music

Gendah Fool in particular really stands out to me I'm sure you've heard it's Nikaa. Yeah. If our listeners haven't, please do check it out. I recently found out that Gendha Fool is inspired by the Dadaaria folk music style that originates in Chathisgar. So it's this very conversational style of music, right? It's like banter but in music form. And it's usually very humorous.

And it describes kind of interpersonal relationships, familial relationships in a really funny way. Hence, the lyrics of the song Go Sassural Gendha. Yeah, and they're making fun of all the in-laws, right? Yes, yeah. Sas-Gali Dewe. Yeah. So it's very, very catchy.

And typically, the Dadaaria style of music is, you know, used to be sung traditionally on the paddy fields of Chathisgar. So that's my recommendation. Snikda, I want to hear yours. Right, I have many. but actually talking about Gendha Fool and Dadaria, it's also reminding me of some of the songs from Gangsa Vassipur. Great soundtrack.

Yes, amazing. So basically Sneha Khan-Walker, who made music for Gangs of Wasipur, she went around Bihar, Jarkan, seeking out housewives to sing all the music. And one of the songs that is reminding me of Gendapul is TARBijli's Fatla Amare Pia. And it's actually sung by a very famous Bihar

folk singer, her name is Shradah Sina. And she sings a lot of... So if you go to Bihar during Chachapuja or anywhere, most of the music is all Shradda Sina singing. So it's very funny. Again, making fun of the in-laws. Like, why... Basically, she's saying that why is my husband so thin?

Mother-in-law, what have you done? And something you pointed out a little while ago and I found really funny, because it's so true, is that a lot of folk music is quite NSFW. Like, tongue-in-cheek. That is true, yes. It is... Very true.

Yeah. So my recommendation is actually this, it's not pure folk music. I'm sure a lot of our listeners will know about him. And he's this Nepali singer called Bipul Chaitri. And I've met so many people who don't understand Nepali but they know about Bipul Chaitri. So he's done a great job of reviving folk music in the hills of Dajing, Kalingpong. Wow. And so I recommend this.

entire album, it's called Sketches of Darjaling. So every time I miss home, I listen to that album. That's lovely. I haven't heard of sketches of Darjeeling before. I will definitely be checking that one out. Yes. And my other recommendation

is this very famous Manganiar musician who recently passed away Mamie Khan. Incredible music. Yes. Yes. So this song called Chaudhry. Such a beautiful song. Yeah. Yeah. That That song was on my playlist for a very, very long time.

I used to listen to Chowdhury on repeat. Really? And right now, listeners, it's raining in Bangal. I feel it's such lovely weather to listen to these songs. That is so true. Yeah, actually, rain also reminds me of this addu. It's there in the sketches of Dajling album called Asar. Okay.

And he's singing about rain. Oh, lovely. Very beautiful. All right. Should we get to the rest of the recommendations? Yes. Okay, so our first recommendation is from Anushka. Anushka is our former colleague and she is half Bengali and half Kanatiga,

but she was brought up in Gujarat and her recommendation kind of sums up her multicultural background. Take it away, Anushka. Hi, I'm Anushka and I would like to recommend a Gujarati folk song that I really, really like. But I do have the sense that a lot of people might actually already know it and already love it. And perhaps think of Ranvir Singh when they hear it. it because this is a folk song called Moor Bunny Thanggat Kare. And most recently it was used in Sanjalila Bansali's Ram Lila. And it was beautiful.

I love it when it's used in that movie and maybe you've heard it for that reason. But it's a very old song and it has quite a bit of a story to it also. So this song is actually originally a poem and the poem was written in the 1940s by this poet and folklorist songwriter, composer called Jhaverchan Meghany. who's a prolific, prolific Gujarati writer, especially in the folklore literature work of Gujarati literature. I remember him specifically from my Gujarati textbooks because I learned Gujarati growing up in school.

And we had so many of his poems and stories and we used to have to memorize his author profile for exams. So I remember so clearly. I was very happy to find out that this song was actually written by him. and he wrote it in the 1940s as a translation in fact so he went to Shantini Keaton to meet with Rabindana Tagore somewhere in the 1940s or 30s and he read or heard a poem by Robi Thakur called Nobobar Sho

which just means New Year and was so beautiful that he chose to translate it into a Gujarati poem called Moor Banithangat Kare loosely translates to my to dances like a peacock but the full sentence in the poem is Maru Manmour-Bani Thangatkari, which means my heart dances like a peacock. Eventually that became a song and made its way to like Garba, which again is a folk dance popular in Gujarat and outside now. And still it is sang in so many Garba celebrations in Gujarat and has now made its way

to Bollywood. And yeah, it's a great song available everywhere for everyone to listen to. Okay, next up we have Hari. Hari is from Kerala and he has also grown up. up all over. Hari, give us your recommendation. Hello, this is Harry. The folk song that I wanted to recommend is called Kalagata.

It's from this very popular movie called Ayapenongosium. And the song was sung by this very sweet tribal woman called Nanjima. If you haven't seen her, you should definitely Google her. She has the most beautiful smile and it will definitely brighten up your day as well. The song will also brighten up your day. It's a very short song. wrote and sang it. And she actually won a national award for the song as well,

for playback singer. So yeah, there's some trivia for you as well. Okay, so listeners, we're giving you another chance to redeem yourselves because last week you did not send us your recommendations. We told you that we wanted to make a playlist, a festival playlist of folk songs. So send us your recommendations on WhatsApp

and we'll just make a playlist and share it with you. Yes, and with that, We have next week's theme. Next week's theme is one that's very close to my heart and I know it's close to your heart as well, Sinkta. We want you to share your favorite coming-of-age films and TV shows. Yeah. And TV shows.

And books. And books. Yeah. For next week's day break and wind. So the theme is coming of age. You know the drill. We'll link the WhatsApp number down in the show notes. And I'll also just quickly read it out to you.

It is 89711-08379. So, text us your recommendations for next week and that's a wrap. Bye!