BloomBerg – Swish Tea Cafes Chasing Riches Reinvent Poor Man’s Chai in India

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That sweet and milky tea concoction called chai is getting an image makeover in India. Driving the change is the other beverage — coffee.

Rising incomes and demand for a refined experience transcending chai are spawning posh tea lounges in the nation’s biggest cities, a transformation mirroring 15 years of coffee revolution that brought Starbucks in 2012. Entrepreneurs are pooling their savings to set up these tea houses, inspired by the $175 million initial public offering planned by the parent of Cafe Coffee Day, a chain backed by KKR & Co.

Tea is a bigger opportunity than coffee because consumption of the leaf-based beverage beats its rival 30 cups to one, says Nitin Saluja, who runs 12 tea outlets under the name ‘Chaayos’ in and around New Delhi. Euromonitor International data show per capita spending on tea in the second-most populous country was $1.7 a year in 2014, versus $18 in the U.K., showing potential for up-selling a premium version of the drink.

“If at all any company becomes the Starbucks of India one day, it will be a chai company,” said Saluja, 32, who started his chain in 2012 after quitting a management consultancy job in the U.S. “The reason why Starbucks became so huge in the U.S. is that they started serving a beverage that was already popular in America, but in a better way. We are trying to sell something that is inherent in India’s culture. That is the opportunity we are tapping into.”

The ventures are seeking to strip chai of its street credentials and elevate it to a higher price point, while introducing middle-class Indians to finer leaves from around the world.

What it means is a relatively well-off Indian now has more and better tea options in a relaxed environment: A cup of Japanese Sencha or Mumbai’s favorite “cutting chai,”which is otherwise had during a rushed break from work amid the hustle and bustle of crowded sidewalks.

Even though India is the world’s biggest consumer of tea after China because of sheer population, the annual per capita consumption is among the lowest. The state-run Tea Board of India’s figure is about 800 grams (1.8 pounds) compared with 2 kilograms in the U.K. and 1 kilogram in neighboring Sri Lanka.

“People’s awareness has increased and tea intake has been steadily growing in India,” said Ruchi Sally, founder and director of Elargir Solutions Pvt., a retail consultant based in Singapore and Mumbai. “Simply opening a place for people to hang out won’t work, because you already have Starbucks and other coffee shops. You need to have a good value proposition.”

Saluja hit upon the idea of setting up Chaayos about three years ago when his craving for a decent cup of Indian chai after breakfast in Houston went unsatisfied. He quit his job and started off with his total savings of 2 million rupees ($30,400), he says.

Now, he has plans for 50 stores by May 2016, including in Mumbai and Bengaluru. In May, New York-based Tiger Global Management LLC, which has emerged as the biggest backer of e-commerce startups in India, led a $5 million investment in his company.

Earthen Pots

Tea Trails is another chain that started off in December 2013 with 8 operational stores, two of them franchises. Uday Mathur, a co-founder and director of Zone8 Tea World Pvt., the company that runs Tea Trails, says he has plans to scale that up to 500 stores in about four years.

“We will still be only scratching the surface at that point of time,” said Mathur, 57, who founded and ran a chain of pre-schools before selling his stake to private equity funds.

His stores offer about 80 varieties of tea, including the Indian chai in earthen pots for about 70 rupees, more than seven times the price of its street avatar.

No Formula

The best locations to have outlets are colleges and offices where young people with decent purchasing power hang out, according to Mathur. His product cost is less than 20 percent of the selling price and he expects to break even at Ebitda level in the financial year through March 2017, he said.

There’s no clear formula for success in the food and beverage business. Chirag Yadav, 32, who started ‘Chaipatty’ in Bengaluru in 2009, expanded in the city with two franchised outlets but had to shut them down soon because of differences with partners. He still has dreams to expand.

Meanwhile, tea producers like Manjushree Plantations Ltd. have attempted to move up the value chain by selling high-end leaves at airports in their own boutiques, which are similar to those run by Singapore-based TWG Tea Pte. in Southeast Asia and the U.S. The Indian grower also has tea houses in Mumbai and New Delhi.

The biggest challenge for these businesses will be in picking prominent locations that lure customers while keeping rental costs under control in a country where high real estate costs make it tough to turn a profit. Spending on real estate by supermarket chains as a percentage in India is two to three times higher than the global average.

Average tea prices at weekly auctions held across India have risen 8.6 percent this year to 128.07 rupees per kilogram, according to the Tea Board.

Coffee Day

The mushrooming of coffee houses across the country in the past 15 years has familiarized Indians with the global experience of enjoying a non-alcoholic beverage.  Coffee consumption in India has jumped 50 percent since 2000 to 1.2 million bags of 60 kilograms each, according to data from the U.S. Department of Agriculture.

Cafe Coffee Day, owned by Bengaluru-based Coffee Day Enterprises Ltd., runs about 1,650 outlets across India, more than three times all its rivals combined, according to a report by consultants Technopak Advisors Pvt. Rivals include Barista Coffee, which was formerly owned by Luigi Lavazza SpA, and U.K.-based Costa Coffee, besides Starbucks.

No Private Equity

Tea Trails’ Mathur says the Coffee Day IPO is good for the entire industry. It makes investors “more receptive to models like ours,” he said.

For him, the focus now is on building the brand and wait for valuations later. He is open to selling a stake at a later stage, but he says he’d shun private equity, a sentiment echoed by Yadav, because that would mean loss of independence.

“I don’t want to bring them in at this stage,” he said. “We don’t want to have PE guys breathing down our neck.”

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