Better margins attract VCs to specialty coffee startups
For coffee chains, 2023 was a landmark year, with at least two specialty coffee retail ventures securing significant fund infusions in the specialty coffee startup ecosystem.
This is reflected in data — Indian specialty coffee café chains have raised close to $100 million venture capital in the last two years, compared with a cumulative $22 million in the fours years before that, according to Tracxn.
This is because of the growing coffee consumption in India and falling cost of capital expenditure, investors said.
Over the years, the real bane of the business has been high retail cost, said V. T. Bhardwaj, partner, A91 Partners, an investor in specialty coffee retail chain Blue Tokai. The capex you invested in a cafe was never great, it was acceptable but not good. For every one rupee you put, you maybe will get a 2x return in three years. The cost of capex has come down because there are more people interested, Bhardwaj said.
Specialty coffee as a product was also unknown previously, Shivam Shahi, co-founder and chief operating officer, Blue Tokai, said.
In the last two years, the perception started shifting, and investors have started giving importance to retail, he said.
The perceived value of the category has gone very high because of the growth coffee is seeing as a category, Shahi said.
Blue Tokai has about 90 cafes across India, according to its website. Its physical cafes account for 65-70% of the overall revenue, while the rest comes from the online segment, according to Shahi.
Last year, it raised $30 million in a round led by A91 partners, in addition to an undisclosed round from film actor Deepika Padukone. Another specialty coffee chain, Third Wave Coffee, secured $35 million in a Series C funding round, led by investment firm Creaegis. During the same period, coffee chain AB Coffee raised a seed round and Hatti Kaapi scooped up an undisclosed round last year, according to data from Tracxn.
Data platform Statista estimates the Indian coffee market to be worth $0.5 billion in 2023, which is expected to grow at a compounded annual growth rate of 9.04% till 2028. The specialty market represents about 5% of the formal coffee market, according to the 2021-22 annual report of Tata Consumer Products.
Investor interest in coffee is not new. Several coffee chains, including Starbucks, Barista, and Café Coffee Day have been trying to succeed in India over the last decade.
Starbucks entered India in 2012 and operates about 390 stores, or cafés, in the country through a joint venture with the Tata Group. A Reuters report says the coffee retail giant plans to operate 1,000 stores in India in the next four years. Starbucks reported a loss of ₹25 crore and revenue of a little over ₹1,000 crore in FY23. In 2014, Italian group Lavazza Spa sold Barista to New Delhi-based Carnation Hospitality for ₹100 crore after failing to turn the group around. Coffee Day slid into bankruptcy in 2023.
The recent breakthrough has been the entry of delivery, Bhardwaj said. Almost 20-30% of business for these startups is coming from delivery. Economics of the business have improved because of that. Earlier, if you had invested ₹10 lakh in a café, you would get ₹20 lakh, contribution margin was 60%. Now you would get ₹30 lakh with the same setup because of delivery, he added.
In conclusion, specialty coffee startups in India have seen a surge in venture capital investments in recent years. The growing coffee consumption in the country, along with the falling cost of capital expenditure, has attracted investors. Coffee chains like Blue Tokai, Third Wave Coffee, AB Coffee, and Hatti Kaapi have raised significant funds to expand their operations. The specialty coffee market in India represents a small but growing segment, with tremendous potential for future growth. The entry of delivery services has further improved the economics of the business, making it even more attractive to investors. As the Indian coffee market continues to thrive, specialty coffee startups are poised for success in the years to come.
