'We give the market what it wants...

STRATEGY SPEAK/ Naresh Malhotra

Cafe Coffee Day was among the first coffee cafes to start operations in India in 1996, but was the last to go national (end-2001).

Today, with 153 cafes in 37 cities, Cafe Coffee Day is the largest chain in the country, while Barista, its closest competitor, has 120 outlets. How did Coffee Day whip up such a potent brew?

CEO Naresh Malhotra says it was a combination of affordable prices, attention to customer needs and a strong back-end support system. In a conversation with Business Standard, Malhotra talks about the chain's slow and steady growth strategy

India is largely a tea-drinking nation, and coffee has always been a fringe player. While coffee cafes have existed in Europe since the 15th century, in India coffee drinking was restricted to niche segments like intellectuals, the south Indian traditionalist and the five-star coffee shop visitors till the late-1990s. This started changing slowly after 2000 "" and not because there were many cafe players in India by then.

The direct causes for this change were probably the increasing spending power among urban youth and the increasing exposure to global trends.

Hence, even as our first cafe was set up in Bangalore in 1996 "" an idea that struck our chairman V G Siddhartha, while on a visit to a coffee shop in Singapore "" it proved to be an idea whose time came only by the turn of the century. By then, most other players had joined the bandwagon.

We've seen the hard days when every customer had to have every item on the menu explained. That's one reason we waited until 2000-01 to start expanding nationally.

Another reason was that we wanted to put our back-end systems in place. Transporting fresh roasted coffee from our estates in Chikmagalur to faraway places like Mussourie in the north and Jamshedpur in the east "" we are the only national player present in both cities "" was a logistical nightmare.

If, in the thirst for growth, we did not pay attention to this aspect, we would have faltered midway. We believed in being more sure-footed.

From bean to cup
We've been in the coffee estate business for the past 125 years: which means we do not look at the coffee chain business as a short-term business. We invested approximately Rs 1. 2 crore in our supply chain and chalked out what we called a B2C (bean to cup) supply chain strategy.

The supply chain had to support the expansion plans of adding four to six new cafes every month, which led us to adopt industry best practices and, in some cases, develop our own modules.

We went in for a decentralised distribution strategy instead of a hub-and-spoke model, and set up regional hubs in Delhi, Mumbai and Kolkata. These cities then linked to the towns in their neighbourhood.

The sourcing policy at these hubs included both local and centralised sourcing, based on the volume lead time and value of the materials. We followed a continuous replenishment policy by integrating vendors upstream. For items that had fluctuating demand and large volumes, the inventory was managed by vendors.

By implementing a web-based ordering and electronic order processing system, we cut order-to-delivery lead-time considerably. Our online inventory tracking process operated with the use of two supply chain modules: one at the cafe level "" called the POS (point of sales) module "" and another at the distribution centre level. This was developed internally.

What's on the menu
Although our core competence was in the coffee business, the demand for food and beverages in the cafes meant that we increased our menu to include over 250 customised food and beverage offerings to cater to different geographic and demographic segments.

At our cafes, every coffee menu is combined with the right kind of eats, whether a dessert or a snack. Menu changes occur once in four months to prevent food fatigue.

We believe in regular customer feedback and research so as to determine changing tastes and preferences. And in food and beverages, customer preferences have changed drastically in the past three years. Why would the consumer pay for anything he does not like?

In May 2003, a food and beverage survey of 700 customers led us to make changes like having a partly-fixed, partly-changing menu: for example, sandwiches are always on the menu , but the fillings now change from time to time. We also introduced wraps as monthly specials and also introduced more Indian snacks like kathi rolls, paneer tikka sandwiches and veg potlis.

Also, we found that customers prefer food that's more filling. So we offer light meals like pasta or biryani, instead of a snack. While the beverage menu is standard, the food menu changes for different cities. We found that consumers in Lucknow, for instance, like potlis, but other cities prefer the samosa.

In Amritsar, customers want larger sandwiches, while consumers in Pune want a choice of breads for their sandwiches. And, in keeping with customer feedback, we started offering granitas (crushed ice and flavoured syrup) and crushes in addition to the regular coffees.

An important decision we took in our outlets was to provide table service and not enforce self-service. Our finding was that customers did not want their names to be shouted out when their orders were ready.

Another advantage of table service is that we can engage customers in conversation and persuade them to try more dishes on the menu. This is something that cannot be done in a self-service set-up, when there are people queueing up, waiting to be served.

Putting consumers first
We strongly believe that customers are the best consultants we have. In 2001, we conducted an extensive survey of over 2,000 people where we asked what the brand "Cafe Coffee Day" meant to them.

Based on the feedback "" we were perceived to be south Indian "" we redesigned our logo, look, and feel of the cafe, as well as our brand positioning.

In 2002, we launched a 12-page tabloid that's published monthly and circulated at all our cafes. Cafe Beat carries articles on fashion, general interest and news about the chain. For our new uniforms, we involved students from the National Institute of Fashion Technology (NIFT).

Three designs were published in Cafe Beat. Customers were encouraged to vote for the design they liked the most. Almost 4,000 votes were received, after which the most popular design was chosen.

We also give out customer feedback forms along with the bills. The filled forms are collected from all regions and sent to the headquarters on a regular basis, to be read and analysed in detail. These forms also have an email id.

Customers who mail in with serious complaints receive a reply within 24 hours.

The price of a cup
Our strategy has always been to provide the best coffee experience at an affordable price. For this we need to keep operating costs low.

In fact, a large part of our success is due to stringent cost controls. We get coffee beans cheap because we source from our own estates. Most IT solutions were also designed in-house to keep costs low.

We are extremely cost conscious, which we try to inculcate in our employees as well. Travelling expenses and the use of cars and telephones is kept to a minimum. And in many outlets, employees who serve customers do the housekeeping as well, so that we need not need hire extra employees for that task.

We try to cut costs at every stage, without cutting corners. For instance, instead of three hinges for the cafe doors, we use only two; and, instead of six screws in the hinges, we use only four.

We also keep our costs low by sourcing furniture from overseas "" compared to India, east Asian countries and China are far ahead in terms of low-cost, quality furniture. Imported furniture is about 25 per cent cheaper than Indian, custom-made furniture. It's not just furniture. Bangladesh and Sri Lanka produce better quality crockery at similar prices.

Cafe Coffee Day has different food suppliers for different locations. Within one region, we may have as many as three suppliers if there are 40 or 50 cafes. That way, one supplier can serve 15 to 20 cafes. It is too risky to depend on one supplier "" if something goes wrong, the food supply to all the cafes in a city can be affected.

Also, we have found that no one supplier is able to match our requirements in terms of quality and quantity after a period of time, due to the increasing number of cafes.

Since the required economies of scale and rate reductions may not happen, a second and sometimes third supplier is invited to fill the gap.

Thirdly, transportation costs and lead times do not work out for either of us. It is better to work with a local supplier, train him and his staff, make him carry out improvements in his kitchen, and then produce food as per our specifications.

Coffee on the go
Affordability apart, we also felt the need to address consumers on different platforms. Consumers on the go were one consumer segment whose needs, we felt, had to be addressed. That is why in late 2002 we started express coffee machines at petrol pumps, malls, shop-in-shops and offices.

At present we have 130 Coffee Day Express outlets. This month, we will open our first highway outlet on the Bangalore-Mysore stretch. By the end of the year we will have six to eight highway outlets. We already have outlets at two international airports in the country; by the year-end, we will open a third one at Kolkata.

That apart, we also have a catering supply to offices for special occasions and also offer breakfast at certain cafes. We are now exploring the possibility of setting up cafes in B- and C-class towns such as Lucknow, Kanpur and Jamshedpur. We will add 60 cafes and 100 express outlets this year. By the end of the year we will be in another stratosphere altogether.

Full of beans
Cafe Coffee Day generally believes in having clusters of cafes. Within the Mumbai suburb of Bandra, for instance, we have six outlets.

At another location, too, we have six cafes within a span of half-a-kilometre. This does result in a little cannibalisation, but it also means that we blanket that area.

Importantly, none of these outlets is a franchise. A crucial part of our strategy is that all our outlets are company-owned. We believe that while self-owned cafes may be more expensive in the short term, a too-hasty switch to the franchisee model may cost us our brand value.

Besides, self-owned cafes mean greater control on product quality, service and training, which is critical for a relatively-young brand such as ours.

Another policy is that we do not advertise. We believe that we are not yet big enough to justify mass advertising "" on-site promotions and localised marketing initiatives still do the trick for us. We have found that 85 per cent of our customers are through word-of-mouth.

And even without advertising, last year 30 million people visited our cafes. This year, we've hiked that target to 40 million.

A significant part of our success is that in the past three years we have not lost a single member of our 12-member top management team. And out of the 1,000 employees in our organisation, 960 are front line employees and only 40 employees sit in the head office.

Then, employee incentives at the cafes depend not only on sales, but also the profits. Also, if a cafe does not deliver profits within six months of starting operations, we close it. Over the years, we have closed 14 Cafe Coffee Days, while 153 are in operation.

Initially, the competition was priced 30-odd per cent more than us. Today we may not be lower priced, but the low-price image has stuck.

We are in the process of revamping our loyalty programme to make it dynamic and attractive. Previously customers could get 10 per cent discount on purchases made at our outlet and the points accumulated could be encashed for prizes.

In the next couple of months, we will launch a new loyalty programme that will allow instant redemption. We will give the market what it wants, not what we are good at.