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2019, Forbesindia.com

Cafe Coffee Day: An empire

grown on beans
(http://www.forbesindia.com/art
icle/southern-titans/cafe-coffee-
day-an-empire-grown-on-
beans/41597/1)
By Anshul Dhamija, Deepti Chaudhary| Nov 23, 2015

VG Siddhartha built Café Co ee Day into one of India's largest chains and took it public in October 2015.
Its lukewarm stock market debut has done little to deter the co ee baron or his investors

In 1979, while in his third year of graduation at St. Aloysius College, Mangalore, VG Siddhartha did
not nurture any dreams of becoming a billionaire. His goals were quite the opposite. “I was
impressed by the philosophies of Karl Marx, and really thought I would become a communist
leader,” says Siddhartha.

Almost four decades later, Siddhartha, 56, as chairman and managing director of Co ee Day
Enterprises Limited (CDEL), has a professional career that is a far cry from the communist dreams
he nurtured as a student in pre-liberalised India.

In October this year, he took his diversi ed company CDEL—which runs India’s largest cafe chain,
Café Co ee Day (CCD)—public. The listing saw the company garnering a valuation just north of $1
billion, but on November 2 when its shares made a debut on BSE, it ended the day at Rs 270.15
apiece, down 17.64 percent from its issue price of Rs 328.

It’s early days yet for CDEL, and top global private equity (PE) investors including Kohlberg Kravis
Roberts, Standard Chartered Private Equity and New Silk Route—that collectively invested $200
million in CDEL in 2010 for a 34 percent stake—are staying invested. Their faith in the promoter or
the business hasn’t been shaken by the initial market performance, they say.

And though analysts attribute the disappointing IPO to CDEL’s varied business interests, the
investors consider them ‘balancers’, which would play out well in the long run. CDEL has business
interests in sectors such as real estate (technology parks), logistics, nancial services, hospitality
and information technology (IT). As of FY14, its co ee business (which includes CCD, a co ee
vending machine business, an export business and a chain of co ee retail stores, Fresh & Ground)
reported revenues of Rs 1,143.5 crore, accounting for around 50 percent of CDEL’s total revenue.
The group’s logistics business accounted for 36.9 percent of the revenue followed by nancial
services (7.53 percent) and technology parks (3.30 percent).

Siddhartha’s path from an aspiring communist to a billionaire (with a personal net worth of $1.05
billion, according to Forbes) has had many twists and turns. Ashok Soota, who founded IT services
company Mindtree in 1999 with a $2-million seed fund from Siddhartha, believes that his friend’s
ideological evolution since 1979 has been “very sensible”. And while he may have embraced
entrepreneurship, “as a human being, he is very unassuming and doesn’t seek publicity,” says
Soota, who exited Mindtree four years ago to start another IT services venture.

As of September 2015, CDEL and Siddhartha (in his personal capacity) have a 20 percent stake in
Mindtree, a publicly listed company valued at approximately Rs 2,360 crore.

The co ee baron’s shift in ideology can be traced to the fact that he did not agree with the way
Marx’s teachings were being promulgated by various communist leaders across the world. Ideology,
he tells Forbes India, had taken a back seat and given way to corruption, nepotism and dictatorship.
He also quickly realised that India had little to o er a left-wing idealist such as himself. “India was so
poor that there was no scope to become a Robin Hood. That’s when I realised that rather than
being a wealth distributor, I should become a wealth creator,” says Siddhartha, who, at one point,
had even aspired to enlist in the Indian Armed Forces. This dream, however, was cut short in 1976
when he failed to pass the National Defence Academy examination.

Since then, much has changed for the Bengaluru-based rst generation entrepreneur who enjoys
strong political ties. He is the son-in-law of SM Krishna, India’s former external a airs minister who
also served as chief minister of Karnataka from 1999 to 2004. Incidentally, it was under Krishna’s
leadership as chief minister that Bengaluru witnessed a boom in the IT sector. And Siddhartha, like
many other entrepreneurs, rode the IT wave indirectly, since the better-paying jobs improved
spending power among the youth.

Cafes seemed to be a good start. In 1996, when he was 37, he decided to enter the cafe business.
With an initial investment of Rs 1.5 crore, he opened his rst CCD outlet on July 11, 1996, at Brigade
Road in Bengaluru. Today, the co ee chain is the market leader (by store count) with 1,538 cafes
across 219 cities in India. It also has an international presence through stores in Austria, Czech
Republic and Malaysia.

The second largest player (by store count) is Barista Co ee with just around 165 cafes, while Tata
Starbucks operates under a hundred outlets in the country. Unlike its competitors, that are mostly
visible in the metros, CCD cafes are found in small towns and far- ung places like Leh.

__PAGEBREAK__Adding to this unassailable dominance is the fact that CCD operates at price points
—thanks to its backward-integrated supply chain of growing and producing co ee—which its
competitors are yet to match. For example, a small cup of cappuccino at a CCD outlet in New Delhi
costs Rs 79, while Barista o ers the same product at Rs 90 and Starbucks at Rs 120, as per data
published in CDEL’s Initial Public O ering (IPO) document.

“To me, he is the Howard Schultz [the chairman and CEO of Starbucks] of India, with the possibility
of doing a bigger and broader play in the toughest consumer markets of them all, India,” says brand
expert Harish Bijoor, who rst met the businessman in the late 1990s on a Jet Airways ight from
Bengaluru to Mumbai. Siddhartha had by then opened nine CCD cafes in Bengaluru, and Bijoor,
who was then the vice-president (marketing) at Tata Co ee Limited, was keenly tracking his moves.
“Siddhartha is a wealth creator in the realm of brick-and-mortar retail,” he says.
Poor public performance
Notwithstanding this remarkable entrepreneurial story, CDEL’s initial share sale did not set re to
the imagination of the country’s small investors, who were looking to invest in an India
consumption story. Café Co ee Day is perhaps only the second homegrown food and beverage
company to go public, after restaurateur Anjan Chatterjee listed his company Speciality Restaurants
Ltd in May 2012. Despite a sluggish economy, Speciality Restaurants’ IPO was oversubscribed 2.5
times.

In comparison, CDEL’s IPO was oversubscribed just 1.81 times, garnering interest mainly from
institutional investors. “There would have been more interest in the company if CDEL had to list just
its co ee business. People wanted to buy a co ee consumer story and they weren’t interested in
logistics, hospitality or nancial services,” says Amarjeet Maurya, senior research analyst (mid-caps),
Angel Broking.

A research note by Angel Broking points out that on a consolidated basis, CDEL reported a 30
percent compound annual growth rate (CAGR) in revenue over FY2010-15 to Rs 2,479 crore. On the
earnings before interest, taxes, depreciation, and amortisation (Ebitda) front, it reported a 26
percent CAGR over the same period. However, on account of higher depreciation and interest costs,
CDEL incurred a consolidated net loss of Rs 87 crore in FY15. “It has diversi ed across other
businesses, which however have failed to deliver impressive nancial performances so far,” the
report stated. The brokerage rm also believes that CDEL’s IPO was “priced at a slightly higher
valuation”. Says Maurya: “In the next two years, I don’t see it doing something magical that would
dramatically change their bottom line numbers to justify their current valuation.”

Siddhartha, who has built his company from the pro ts that he made in stock trading, remains
unfazed by these challenges. He believes that CDEL’s non-co ee businesses (of which roughly Rs
2,600 crore is the company’s shareholding in two listed entities—Mindtree and Sical Logistics Ltd)
will bene t shareholders in the long run. And that’s just the way he likes to play the game. “One
thing I believe in as an investor is that if you don’t take a long-term call, you can’t create value,” he
says. At the same time, like any hard-nosed businessman, he keeps a close watch on returns. He
adds rather cryptically, “Any investment that doesn’t give me between 17 and 21 percent returns in
the next two to three years… I will do whatever is right [with it].”

Of the total proceeds of Rs 1,150 crore from its IPO, a little over Rs 400 crore will be pumped into
the company’s co ee business (the cafe and co ee vending machine businesses). About Rs 500
crore will be used to reduce CDEL’s debt of Rs 1,000 crore.

It helps that CDEL’s private equity backers are optimistic about its future success. “Siddhartha has
lived up to our hopes,” says Jacob Kurian, partner, New Silk Route. He argues that an
oversubscription multiple is not the best parameter to gauge a company’s attraction. “The more
savvy investors, that is institutional investors, have bought the story,” he says. New Silk Route is not
exiting the company as of now. “It is doing well and will continue to grow.”

For Kurian, cafes were the primary attraction when the PE rm invested in the company ve years
ago; its other businesses like logistics and real estate were seen as the ‘balancers’. What impresses
him most about Siddhartha is his ability to scale, which is particularly rare in India’s food and
beverage space. “People don’t even have 50 restaurants; he created over 1,500 outlets,” says
Kurian.

That’s because Siddhartha understands co ee and its consumption patterns across India.

__PAGEBREAK__The seed of an idea

Co ee runs in Siddhartha’s veins; his paternal side of the family has been growing the bean since
1870. But in 1956, the family split, and Siddhartha’s father was given Rs 90,000 for his share in the
business. With that money, his father bought a 479-acre co ee plantation in Chikmagalur,
Karnataka, around 150 km from the family’s ancestral co ee plantation. The plantation was a
success, but Siddhartha wasn’t willing to retire to his father’s co ee estate at the age of 21.

In the early 1980s, he chanced upon an article on the stock markets in an Indian nancial magazine.
What caught his attention was the person who was pro led: Legendary stock broker, the late
Mahendra Kampani of JM Securities Limited (which later got merged with JM Financial). After
reading the article, Siddhartha had an uncanny intuition of where he had to be and what he had to
do. And that intuition would pave the way for his future successes.

While all his friends were leaving for the US to study, he decided to go to Mumbai and work for
Kampani. And he did so in a rather dramatic fashion. “With no appointment I gatecrashed into his
o ce,” recalls Siddhartha with a smile. Kampani’s secretary, who was incidentally a Tamilian from
Bengaluru, helped in facilitating that unscheduled meeting. “I just went into his cabin and told him
that I wanted to work for him.”

From 1983 to 1985, under Kampani’s training, Siddhartha honed his skills as a stock broker. He then
moved back to Bengaluru to start his own trading business. He was so successful that, between
1985 and 1992, he bought 3,500 acres of co ee plantations in and around his father’s estate.
Dismissing the idea that he has a Midas touch when it comes to stock trading, he says that the
money he made was by way of inter-market arbitration. For example, he says, “I used to buy a
company’s stock in Bengaluru for Rs 10 and sell the same in Jaipur for Rs 11. That’s a 10 percent
arbitration margin per day and that’s how money was made.” (Much has changed since then as the
market is better regulated today.)

In 1992, when he gave up trading, his exit was as dramatic as his entrance. That year, around 15
days prior to Harshad Mehta making the headlines for his involvement in a multi-million dollar
stock market scam, he sold all his stock market investments. “It was written on the wall that
something was going completely wrong,” says Siddhartha, who had bet on big blue-chip stocks like
Infosys.

But even as he was working his way in the stock market, he was thinking of returning to his roots:
Co ee. At the back of his mind, he was constantly thinking about how co ee growers in India, like
his family, could get better prices for their yield. Until 1991, co ee growers in the country were
selling co ee at 35 cents per pound whereas the international price of co ee was $1.20 per pound.
The economic liberalisation removed the stranglehold that the Co ee Board of India (a government
body) had on the trade and allowed India’s co ee growers to sell their co ee directly in
international markets.

Almost overnight, Siddhartha, who had been acquiring plantations and production units, became
the largest co ee exporter in the country. In March-April 1993, he sold 4,000 tonnes of co ee to
international buyers at 80 cents per pound. In August that same year, he sold co ee at $2.5 per
pound on account of a frost in Brazil, one of the world’s largest co ee producing countries. He then
started retailing co ee through a chain of stores under the brand Fresh & Ground, and nally
extended his co ee business to cafes. At present, CDEL also operates 424 Fresh & Ground outlets
across seven states in India.

As an entrepreneur, Siddhartha saw an opportunity in co ee retail well ahead of his peers. The next
logical step was to start a co ee chain.
__PAGEBREAK__From beans to cafes
When he launched CCD in 1996, Siddhartha decided to replicate a Singapore beer pub experience
in Bengaluru. While all things remained the same, including providing for internet connectivity, he
simply replaced beer with co ee. His rst outlet in Bengaluru was a 2,000 square feet space, which
served co ee at about Rs 25 per cup and allowed customers to access internet through 17-inch IBM
computers. The Rs 1.5-crore investment was a pittance for Siddhartha whose co ee export
business was making pro ts in multiples of tens of crores of rupees. “I wanted to sell co ee in
style,” says Siddhartha. At the time, CCD’s prices were ve times more expensive than a cup of lter
co ee available at a local store.

By 2001, CCD had expanded to around 18 outlets in Bengaluru and according to the cafe chain’s
former chief executive o cer, Naresh Malhotra, all the outlets were making losses. Malhotra, who
spearheaded CCD’s operations for six years from 2001 to 2007, remembers how Siddhartha gave
him a free rein to grow the business.

Rival Barista had established itself as the dominant cafe player by 2001. “Barista was targeting
people who were above 25 years, while Siddhartha was of the opinion that we catch the younger
people (15 years and above). His view was to catch them young and grow the cafe business with
them so that they look at it as an extension of their living room,” says Malhotra. That’s pretty much
how the script has played out over the last two decades. As it expanded, CCD moved away from its
initial concept of being an internet cafe, and focussed on its co ee and food menu.

In Bengaluru, home to more than 1,500 startups, CCD—with 200 outlets—became the default
gathering ground where promoters met with angel investors for their rst round of funding.

Angel investor and chairman of Manipal Global Education Mohandas Pai meets with startups at
least twice or thrice a week at CCD The Square, the cafe chain’s agship outlet located on the
ground oor of CDEL’s head o ce in Vittal Mallya Road, Bengaluru. “So far, sitting at CCD Square,
my venture fund Aarin Capital has made 10 to 12 investments in startups,” says Pai. As CCD’s
tagline sums it up, ‘A lot can happen over co ee’.

At present, the chain operates in three distinct market segments with three separate brand
o erings —CCD, CCD Lounge, and CCD The Square—to take on competition at all levels. While the
upscale CCD Lounge format serves exotic co ees, teas, and o ers a menu of international cuisines,
CCD The Square formats serve specialty co ee and o ers customers a ne dining experience.
There are also 590 Co ee Day Xpress kiosks that are operational across India. According to CCD’s
incumbent CEO Venu Madhav, the company plans to open 135 cafes every year.

While there is no imminent threat from competition, Arvind Singhal, chairman and managing
director of retail consultancy rm Technopak, feels that scale alone will be CCD’s biggest challenge.
In the broader food and beverage industry, the biggest challenge faced by entrepreneurs is to
maintain consistency of product and customer experience.

“CCD will also need to be a bit more innovative, both in terms of its beverage and non-beverage
options. When you look to grow to beyond 2,000 outlets the role of operations and product mix
becomes even more critical than it is today,” says Singhal.

Siddhartha, too, believes that there is a lot to be done. “I’m only 70 percent happy with what I have
achieved in respect to cafe retail,” he says. However, he does emphatically state that 10 years down
the line he wants to be a “decent player” in the global market—CCD has plans of expanding its
reach in West Asia and Southeast Asia. Unlike in India where the company operates its own outlets,
the international rollout will be done through the franchise route.
Siddhartha’s journey has been one of single-minded dedication and focus on the co ee space. But
he likes to mix it up by dabbling in other ventures. For one, he owns around 4 million square feet of
o ce space in Bengaluru, which fetches him around Rs 120 crore in annual rental income. And
there is scope for him to build an additional 6 million square feet of o ce space. “Any fool can
make money from real estate. I don’t get stimulated by making money from dumb businesses. I
want to make money from di cult businesses,” he says.

There are two kinds of people: Those who watch things happen from the sidelines and those who
make things happen. Siddhartha, from all accounts, falls into the latter category.