A coffee a day

Tata Coffee's tryst with vending machines has thrown up some good lessons for competition too

In 1996, Tata Coffee, the Rs 178-crore subsidiary of Tata Tea Limited, discovered a way to make typical south Indians take to the taste of machine-made filter coffee.

The Bangalore-based company test-launched 18 coffee vending machines in various retail points and office locations in Bangalore and Chennai.

In a week's time, the company met with sales of 80 to 100 cups per day per machine. In high-traffic locations like some railway stations, cup sales were as high as 300 to 400 a day.

The immediate results encouraged the company to widen the net and increase its vending operations to 1,000-odd machines in the southern metros within two years.

Currently, the company's focus on vending operations is brewing results: 25 per cent of its marketing turnover (sales from marketing packed coffee as retail brands or pre-mixes) comes from sales at its 4,000 vending machines in the southern and northern markets.

Seeing the potential for growth, Tata Coffee intends to grow its vending machine business (branded Jiffy) to account for half its marketing turnover by end-2006.

In stark comparison, despite vending hot beverages since the late 1980s, the vending machine business contributes a tiny percentage of the total hot beverage sales of both fast moving consumer goods majors, Hindustan Lever Ltd (HLL) and Nestle.

But why did the relatively smaller player choose to serve the dark brew to south Indians in this manner? While it primarily started as a visibility exercise, Tata Coffee chose the south because of its base there.

It started vending operations as part of an awareness exercise in 1996 for its instant coffee brands "" Tata Kaapi (pure filter coffee) and Tata Cafe (coffee and chicory mix).

The company also discovered through a dipstick survey of Chennai-ites that out-of-home consumption of both tea and coffee wasn't very low "" in fact, 30 per cent of the city's population liked a cuppa wherever they went, which led to the growth of hole-in-the-wall tea-stalls.

"We started with just the objective of visibility, later the focus shifted to widening the reach of our brands," says M H Ashraff, managing director, Tata Coffee.

The idea was to induce familiarity and repeated consumption among a new set of consumers because retail brands like Tata Coorg and Tata Cafe, launched in the mid-1990s, were fairly new.

By then HLL's Bru and Nestle's Nescafe were well-entrenched in the market and the consumer's mind. So Tata Coffee positioned itself in high-traffic areas like airports and railway stations.

However, visibility came with its own set of problems. First, to be visible in crowded locations like stations and airports, Tata Coffee needed to promote the machines with glow-signs and the works to garner attention and consumption.

This was also necessary because the gestation period for breaking even also depended on the cups sold each day.

So a basic dispensing machine, costing anything between Rs 10,000 and Rs 15,000, would see a recovery of investment only if the machine dispensed and sold 80 to 100 cups a day. (At the time, Tata Coffee priced its coffee at the prevailing market price of Rs 3 a cup, Re 1 higher than the tea or coffee sold at local tea stalls.)

Moreover, public locations like railway stations and airports were tendered locations, meaning high acquisition costs, combined with higher additional maintenance and security costs compared to locations such as retail stores.

Then, vending machines in tendered locations need attendants to dispense the beverage. So, costs at public locations were at least 10 per cent higher than those incurred in other locations.

The other locations weren't trouble-free either. Competition at retail points, for instance, was equally high. In one market, there would be numerous HLL, Nestle and Tata Coffee machines vying for a share of the area with the highest footfalls. Naturally, expansion in these markets was difficult.

"Poaching of prime locations in marketplace was, and still is, common practice. Companies appointed their sales people to identify locations occupied by competition and induce the retailers to set up their firms' machines," says a market insider.

So after an initial dekko at retail points, the company turned its focus to institutional sales "" where HLL and Nestle had a lesser presence.

Even today, out of the 15,000-20,000 vending machines owned by Nestle and HLL, over 70 per cent are in the public and tendered location segment, a number that hasn't changed much in the last five-six years.

Compared to this, out of Tata Coffee's 4,000 vending machines, only 30 per cent are in these locations. "We didn't want to get into direct conflict with the competition," explains Ashraff.

Institutional sales makes sense in other ways as well. Since the number of employees at offices is fairly constant, so is the demand for refreshments.

Which means consumption patterns are guaranteed at offices. Also, it is a cost-effective proposition as the company doesn't have to spend on rentals, advertising or security.

And, in most cases, offices install coin-operated vending machines, doing away with the need for an attendant. These are costs which add to the overheads of a machine, which are upwards of Rs 50,000 per month for each machine.

It is with all this in mind that new entrant Tata Coffee emphasised increasing penetration in the institutional segment.

"We had to align our business towards short-term profitability, so we focused on the volume of business generated per machine rather than the machine count," says Ashraff.

Here, the company implemented a few learnings picked from established players. At that time, vending machines were largely set up through company-owned distributors.

They were made responsible for identifying locations, maintenance, and operations, which included supplying the machines with the pre-mixes (mixture of coffee, sugar and milk powder).

Though it was easier to ramp up the number of machines in various locations through this route since distributors had a feel of depth of the market, the distributor-led expansion faced quality issues.

As a former HLL executive points out, there was always a threat of cheaper pre-mixes being used.

Also, it wasn't a priority area for distributors who also looked after sales of brands through the retail route and pushed those sales instead.

For instance, margins on the tea and coffee brands were 5 to 10 per cent higher than the vending machines' which were between 11 and 14 per cent at best. In the distributor-led strategy, the required degree of control was lacking.

So Tata Coffee opted for the franchisee route to growth. By 2002, the company had roped in about 60 franchisees in the southern and northern markets. And by 2003, the number increased to 4,000 from 2,400 in 2001.

After tapping the northern market in end-2000, the company is now widening its net since it has found that the north is more open to out-of-home coffee consumption as compared to the price-conscious western or eastern markets.

Says Harish Bijoor, chief executive officer, Harish Bijoor Consults, who is a former vice president of Tata Coffee, "Expansion largely depends on the company's ability to manage and control its distributors or franchisees."

He adds, "But vending operations require a different approach. The franchisee network is better if you want to exercise more control on vending operations."

Companies can standardise operations through franchisees and exercise better quality control through minimal checks.

This is largely because, as the margins of franchisees depend on the business generated by each machine, they are more responsible towards increasing business.

"For that, the focus is on making the operation more viable to the franchisee," says a Tata Coffee official.

So the company offered the franchisee margins of about 15 per cent, compared to the competition's 11 to 14 per cent.

The higher rate of return on investment per Tata Coffee machine as compared to competing vending machines has also helped.

Where Tata Coffee offers returns as high as 26 per cent per machine, competing vending machines offer returns that are six percentage points lower.

What has been the end result for Tata Coffee based on all these efforts? Company officials say that the strategy followed has seen the vending machine business grow at a healthy rate of 25 per cent in volume terms this fiscal over the previous fiscal.

"Out-of-home consumption of the beverage in the country has been spurred on by impulse buy categories such as the colas. Now coffee and tea are doing it," says Bijoor.

The numbers bear that out: in Chennai alone, out-of-home consumption has gone up to 43 per cent of the total population from 30 per cent in 1987.

"And there's still room to grow," Bijoor adds. HLL and Nestle are also looking at franchisee-led vending operations with more interest now.

Coca-Cola, too, has recently franchised close to 400 vending machines across the country for its hot beverage brand - Georgia "" with a focus on retail points as well as the institutional segment.

If franchisee-led expansion could lead to a coffee-shop revolution, will the formula work in case of vending machines?