Can Third Wave & Blue Tokai Coffee kill Starbucks?

In the heart of India, where the aroma of adrak wali chai has long dominated the air, a revolution is brewing. The world's largest tea-drinking nation is awakening to the allure of coffee, and not just any coffee – the nation is embracing specialty coffee, the highest grade coffee produced in unique microclimates.

This transformation has sparked not just a fierce battle between two corporate giants in India – Tata and Reliance but also has given birth to some revolutionary start-ups.?

Starbucks, in a joint venture with Tata, aims to expand its footprint beyond large cities, planning to open a staggering 1,000 stores across the country in the next four years. On the other hand, Reliance, partnering with Pret A Manger, entered the scene, adding another dimension to the coffee clash.

International players like Tim Hortons and local start-ups such as Third Wave Coffee and Blue Tokai Coffee Roasters are also vying for a share of the burgeoning specialty coffee market in India. The stage is set, and the cafe industry is buzzing with excitement.

The coffee craze in India is not just a passing trend; it's a significant cultural shift.?

The country's coffee cafe market, valued at $300 million, is predicted to grow by 12% annually, according to Euromonitor.?

This surge in demand for specialty drinks has not only created a battleground for established players but has also paved the way for innovative startups.

The Origin: Café Coffee Day and the Birth of Indian Coffee Culture

The tale of coffee in India began in the mid-90s when Café Coffee Day (CCD) pioneered the bean-to-cup concept in India. Founded by V.G. Siddhartha, CCD combined European-style cafe ambiance with a range of coffee-based beverages, resonating uniquely with Indian consumers.?

I vividly remember how it was a go-to spot for dates and important meetings in India, which now happen at Starbucks and other cafes.

Despite initial challenges, CCD succeeded in creating awareness and loyalty by offering high-quality, freshly brewed coffee in a comfortable socializing environment.

However, as India's coffee culture struggled to gain traction, Starbucks entered the scene in 2012, marking a turning point. With CCD facing financial troubles, Starbucks had a free run, catalyzing a new era for the Indian coffee industry.

The Rise of Specialty Coffee Startups

As Starbucks expanded its footprint, a new wave of specialty coffee startups emerged. Blue Tokai, backed by Deepika Padukone and investors like A91 Partners, started gaining traction and footfalls by focusing on quality and introducing specialty coffee in a market dominated by commodity brands.

Third Wave Coffee, valued at around $155 million and backed by investors like Nikhil Kamath and Unacademy's Gaurav Munjal, positioned itself as a formidable contender.

Specialty coffee chains have also become investor favorites. Recent data from Tracxn reveals that in the last two years, specialty coffee chains in India received almost $100 million in venture capital. To put it in perspective, they got only $22 million in the four years before that.

Flushed with funding, these baby start-ups are taking on international giants like Starbucks and Tim Hortons in India.

Competition Heats Up: Starbucks vs. Homegrown Startups

In the battle for supremacy, Starbucks faces formidable competition from homegrown startups. "We've lost 30 cups a day to them," revealed a barista in a Delhi Starbucks shop, highlighting the competitive landscape in the capital where Third Wave cafes rival the popularity of Starbucks outlets.

While Starbucks, which entered India in 2012, has more than 300 stores in India, both Third Wave and Blue Tokai have more than 100 stores in India and expanded their stores rapidly across India.?

Third Wave, in particular, plans to open 250 more stores by 2024, challenging Starbucks' dominance

To combat the growing competition Starbucks strategy is to lure Indians with smaller, cheaper beverages and Indian-inspired tea offerings reflects a response to the growing threat from startups offering more economical options.

Indian consumers are value-conscious. If adjusting portion sizes down to what is more normal helps make prices accessible, that's a double win," emphasized Devangshu Dutta.

The company has introduced a six-ounce drink, "Picco," starting at $2.24, and milkshakes priced at $3.33 as part of its revamped strategy, specifically targeting affluent Indians who prefer smaller servings.

Menu Overhauls and Adaptations: Starbucks' Gamble

To retain its foothold, Starbucks has revamped its menu, introducing India-inspired drinks such as South Indian Filter Coffee and Elaichi Chai. ?

With just 11% of Indian households drinking coffee compared to 91% consuming tea, Starbucks is amplifying its focus on "chai" – hot milky tea.?

The company also added bite-sized food options, adapting to local preferences. However, the move has not gone unchallenged, with a Starbucks store manager acknowledging that the company adjusted its food menu after observing the offerings from Third Wave.

A pricing war has ensued, with startups like Third Wave introducing their own range of affordable milkshakes to compete with Starbucks.

Financial Landscape: Profits vs. Scale

Starbucks is navigating challenges to stay profitable in India after a decade, while local upstarts like Third Wave are still finding their feet but are making bold moves.

In the fiscal year ending March 2023, Starbucks India, in collaboration with Tata, experienced a significant 70% surge in revenue, hitting Rs 1087 crore. However, increased expenses resulted in a reported loss of Rs. 25 crore.

Meanwhile, Blue Tokai, another homegrown contender, saw an impressive 80% jump in revenue to ?74 crore in FY22. However, losses widened from ?7 crore to ?12 crore. On a similar note, Third Wave Coffee's revenue nearly tripled from FY21 to ?32.5 crore in FY22, with a corresponding loss of ?14.5 crore.

Despite the profitability puzzle, these startups are boldly expanding, relying on funding to fuel their growth. It's a strategic gamble, betting on future profitability as they aim to make a bigger mark in the market.

Customer Retention: Third Wave's Winning Formula

Third Wave claims a customer retention rate of almost 60%, with regular Starbucks customers reportedly switching to Third Wave stores. The startups' focus on taste, variety, and pricing seems to resonate with consumers, challenging Starbucks' dominance in the Indian coffee market.

Starbucks, acknowledging the threat, signed lease agreements with clauses preventing premium coffee chains, including Third Wave and Blue Tokai, from operating on the same floor in some locations. The battle for prime locations and the customer base left vacant by the decline of CCD has become a strategic aspect of the competition.

The Future: Scaling Up and Capturing New Demographics

Both Starbucks and homegrown startups are eyeing the vast untapped market in India. Starbucks, with its well-established brand, aims to expand in smaller towns, introducing smaller-sized and more affordable beverages. Meanwhile, startups like Third Wave target the millennials and working population, focusing on capturing a higher footfall through strategically located stores.

The Indian coffee market, though evolving, remains largely untapped, with only 11% of Indian homes currently consuming coffee compared to 91% consuming tea. The potential for growth is immense, and the competition between global giants and nimble startups is reshaping the coffee landscape in India.

Conclusion: The War for India's Coffee Soul

In a country where consumers typically purchase Rs10 ($0.12) cups of masala chai from roadside vendors, coffee companies are urging Indians to spend Rs. 500 on flat whites and Frappuccinos.

According to the Goldman Sachs 2023 report, only 60 million Indians currently earn above $10,000 a year, and this number is expected to increase to 100 million by 2027.?

Specialty coffee remains largely inaccessible for the majority of India's 1.4 billion population.

As the battle for dominance unfolds, the future of India's coffee culture remains uncertain. While Starbucks, a premium coffeehouse, grapples with the agility and innovation of homegrown startups, the market dynamics are evolving rapidly. The war may be won by coffee, but whether it's the familiar aroma of Starbucks or the bold brews of Third Wave that prevail, only time will tell. The transformation of India's coffee culture is a journey full of rich flavors, fierce competition, and the promise of a new dawn for coffee enthusiasts in the subcontinent.