
Café Coffee Day operates 1,750 stores across India
Source: Associated Press
Coca-Cola Co. may soon take a significant step forward in its nascent coffee strategy if the soft drinks giant succeeds in its efforts to acquire India's largest cafe operator.
Reports first emerged in June that Coca-Cola was in talks with Café Coffee Day, the 1,750-store chain that dominates India's young coffee market, over a potential deal but the two parties could not agree on a stake size. The Economic Times reported Aug. 19 that negotiations were set to be revived. In the interim, much has changed.
Coffee Day Enterprises Ltd., the parent company of the chain, has been divesting assets to pare down its 49.7 billion rupees of debt incurred from the huge loans secured by its real estate and logistics subsidiaries. V.G. Siddhartha, the company's founder, took his own life in late July, citing the financial predicament of the company in a suicide note, according to local media. Its shares fell close to 70% in the two weeks after Siddhartha was first reported missing July 29. The stock as of Aug. 30 was trading at 74.75 rupees, equating to a market capitalization of 15.79 billion rupees.
The late Siddhartha and his wife Malavika Hegde, as well as the other controlling shareholders, owned 53.93% of Coffee Day Enterprises, according to Bombay Stock Exchange data, while private equity giant KKR & Co. is among the minority shareholders.

Strategy shift
Café Coffee Day's appeal for Coca-Cola is evident: Soda companies are seeking to diversify from soft drinks in the face of heightened concerns over the health impact of excessive sugar consumption and rising obesity. Coca-Cola has been clear in its intentions to branch out into coffee, most notably with the $4.9 billion purchase of U.K.-based Costa Coffee.
"For someone who wants to get into the coffee retail chain business in India, the best business to get into is Café Coffee Day. They have the brand, the presence. They have already executed most of the things that consumers look for," said Siddhartha Khemka, vice president and head of retail research at Motilal Oswal Financial Services, in an interview.
Vishnu Vardhan, senior analyst at Euromonitor International, credits Café Coffee Day as a pioneer in introducing coffee culture to Indian consumers in 1996.
"Unlike some of the international brands like Starbucks Corp., which has a more international menu, Café Coffee Day is targeted at a wider audience with their elaborate menus. Café Coffee Day's menu has a good mix of Indian and international cuisines," said Vardhan.
Starbucks entered the Indian market in 2012 through Tata Starbucks, a joint venture with the Tata conglomerate's Tata Global Beverages Services Ltd. unit. It has since expanded to 157 stores in India, but analysts reached by S&P Global Market Intelligence said Café Coffee Day is unlikely to lose its market-leading position any time soon thanks to its affordable price point and wider footprint in second tier Indian cities.
Most importantly, Café Coffee Day may play a crucial role in helping Coca-Cola achieve what Costa Coffee has so far failed to do in India, the world's second most populous nation. The British coffee chain has dwindled from 100 stores to about 50 since Starbucks entered the Indian market.
"An acquisition of Café Coffee Day would certainly give Coca-Cola a huge boost in terms of market coverage, and one that could also be a platform for converting some of the locations to Costa stores operated directly by the company," said Devangshu Dutta, CEO at retail consultancy Third Eyesight.
Storm in a coffee cup
Dutta blames Costa Coffee's travails on its premium price range and the conservative management by its Indian franchisee, Devyani International. This franchise agreement complicates Coca-Cola's plan to grow Costa Coffee in India, and the conglomerate is reported to be in talks for Devyani International to exit the agreement.
Devyani International did not respond to requests for comment from S&P Global Market Intelligence about the current structure of its deal with Costa Coffee, but the RJ Corp.-owned company first brought the British chain to India in 2005 under an exclusive franchise agreement.
Safir Anand, senior partner and head of trademarks, contractual and commercial intellectual property at law firm Anand & Anand, said Coca-Cola would have to integrate Costa Coffee and Café Coffee Day if it acquires the Indian chain, provided that Devyani International's agreement remains exclusive. "If Coca-Cola were to acquire Café Coffee Day and not involve Devyani International, and in fact eat into Devyani International's business by competing with Costa Coffee, then it would be a legal violation of the contract," said Anand.
Anand explained that Coca-Cola would be unlikely to run into anti-competition issues as café retail is classified as discretionary spending and there are plenty of other smaller players in the market such as Barista, which has a couple of hundred stores, besides Costa Coffee, Starbucks and Café Coffee Day.
However, Varun Beverages, a sister company of Devyani International under the umbrella of RJ Corp., is the largest PepsiCo Inc. bottler in India. Anand said the situation is unlikely to cause regulatory issues as long as Coca-Cola limits its business with the Indian group to coffee.
It would matter little as Coca-Cola would be getting a foothold in a large café chain like Café Coffee Day, which would help to widen the distribution of all of its beverage products. India accounted for only 1% of Coca-Cola's $41.28 billion of global sales in 2018, according to data provided by the company.

Depending on the quality of its brand, businesses such as Café Coffee Day are typically valued between two and four times sales, according to Himanshu Nayyar, analyst at Systematix Shares and Stocks. The Economic Times report said the owner of the brand was seeking a valuation of between 80 billion rupees and 100 billion rupees, about four to five times sales, in initial negotiations with Coca-Cola.
Coffee Day Enterprises' coffee operations reported fiscal 2019 sales of 14.68 billion rupees and a post-tax net profit of 410 million rupees.
India, a tea-drinking country where meals are largely consumed at home, is slowly warming to the cafe culture. Euromonitor International estimates the specialist coffee and tea shops market in India to be about $400.7 million in 2018, but that figure could rise to almost $650 million by 2023.
As of Aug. 29, US$1 was equivalent to 71.71 Indian rupees.
