Franchise News India: British coffee retail chain Costa Coffee may end its ‘exclusive’ franchisee arrangement with Devyani International after the Indian partner refused to commit more investments in a slowing economy to a business that has not yet turned in net profits.
Costa Coffee, which entered India in 2005 through an exclusive deal with the Ravi Jaipuria Group firm, is likely to appoint other franchisees as well to grow the business rapidly, two people aware of the move told ET.
Global brands that run businesses through franchisee operations earn 3-6% of revenues as royalty for using the brand, and hence push for higher revenues.
An official close to the firm also said Santhosh Unni, CEO at Costa Coffee India, has put in his papers, but the resignation has not yet been accepted.
Saurabh Swarup, the UK company’s marketing head for Middle East & North Africa (MENA), Southeast Asia and India, too has exited as his contract had ended, the person said. A detailed email query to Costa Coffee UK sent on Friday elicited no response till late on Sunday.
RP Gandhi, president and group CFO at RJ Corp, which owns Devyani International (DIL), said the two partners will meet soon to decide whether DIL will remain Costa Coffee’s exclusive franchisee. “Costa Coffee UK wants to discuss the same, for which a meeting has been fixed,” he said in response to ET’s email query.
Andy Marshall, Costa Coffee’s managing director for international franchise, is flying into India in April to discuss the matter with DIL officials, said an official close to the company.
An official familiar with RJ Corp’s thinking said, “Let them (Costa Coffee) explore other opportunities (franchisees). When they are not investing in their home country due to slowdown, how can they expect RJ Corp to do the same here?” The person added that Costa Coffee was given an option to pick up equity in the business three years ago, but it backed out after first committing to invest. The Indian cafe market is estimated at $230 million, or about Rs 1,400 crore, and is expected to grow at 13-14% a year over the next five years.
Globally, most cafe consumers are attuned to a takeaway culture, which helps retailers add margins with very little cost. In India, however, many officegoers and students go to cafes to relax and spend hours over coffee and snacks. High real estate cost and an economic slowdown where consumers are increasingly looking to curb spending have made the scenario tough for cafe chains.
Costa Coffee operates over 100 stores in the country and has around Rs 100 crore in revenues with positive EBITDA levels in the year ended December 2013.
Homegrown Cafe Coffee Day, the largest coffee chain in the country with around 1,400 stores, clocked retail revenues of Rs 810 crore for the year ended March 2013.
Costa’s largest global rival Starbucks entered the market almost two years ago in a tie-up with Tata Global Beverages. Other US chains, Dunkin Donuts (through Jubilant FoodWorks) and Krispy Kreme, have positioned themselves as coffee and doughnut chains, increasing competition in the market.
Harminder Sahni, founder of retail consultancy firm Wazir Advisors, said Costa Coffee is squeezed between Starbucks and Cafe Coffee Day in India. “Starbucks is a marquee brand that consumers seek, aspire and patronise, so it occupies mindspace. On the other hand, Cafe Coffee Day is omnipresent and catches consumers everywhere, so occupies physical space…Costa is neither on consumers’ mind nor is present widely,” he said.
He said the UK chain failed to take advantage of the breathing space it had before Starbucks’ arrival. “The reason could be lack of focus and allocation of resources by the Indian franchisee.”
Besides Costa Coffee, the $1 billionplus Ravi Jaipuria Group also has franchisee rights for food retail giant Yum! Restaurant International’s KFC and Pizza Hut. Ravi Jaipuria is Pepsi-Co’s biggest bottler in South East Asia and runs the cola major’s bottling businesses in Nepal, Sri Lanka, Mozambique, Zambia and Morocco. He also has his own food restaurant, Vaango. Besides soft drinks and restaurants, Jaipuria’s businesses include CreamBell ice cream, education, hotels and real estate.
According to Sahni, the discomfort between Costa Coffee and Devyani International is similar to the partnership between Mothercare and department store Shoppers Stop when the former decided to increase the pace of expansion by entering into a joint venture with DLF for standalone stores.
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