After a recent visit to Chaayos, where my wife and I noticed a severe lack of footfall, I became curious about its financials and how it manages to survive. A quick dive into the numbers revealed that Chaayos generated only ₹248 crore in revenue in FY24, with a mere 5% growth, while posting losses of ₹54 crore. With around 200 stores, this translates to an average revenue per outlet of just ₹1.25 crore per annum—a modest figure for a brand with ambitious expansion plans.
Intrigued, I expanded my research to other coffee brands like Third Wave Coffee, only to find a similar financial struggle. Third Wave reported ₹241 crore in revenue but losses exceeding ₹100 crore in FY24. With ~114 cafes, this translates to ₹2.11 crore in revenue per outlet annually—slightly better than Chaayos, but still far from profitable.
Wanting to understand how successful coffee chains operate, I examined Starbucks US, which has operating margins of ~18% from in-store sales across 18,000+ locations. Their per-store revenue ranges from $1.2M – $1.4M per year, at least 5x the revenue per outlet of Third Wave. A rough calculation of their sales volume suggests that each store processes ~400 orders per day at $10 per order (coffee + food).
The Core Question: Do Indian Cafés Reach This Scale?
If we assume an average order value of ₹400 for Indian coffee chains like Third Wave, their estimated daily orders would be 140-160—just one-third the volume of a Starbucks in the US. Even Starbucks India appears to operate at significantly lower volumes, with estimated daily orders ranging from 180-200 per outlet—far lower than the ~400 orders per day in the US.
On top of this, store rents in India are surprisingly close to US levels. In prime locations like Bengaluru’s Commercial Street, retail rents average ₹250 per sq. ft. per month (~$3), compared to $5 per sq. ft. in the US—a smaller-than-expected discount considering the lower purchasing power in India.
Adding to this challenge, intense competition from various coffee and tea brands, often backed by aggressive PE/VC funding, has led to an oversaturated market where profitability is hard to achieve.
The Indian Coffee Market: A Tough Landscape
Unlike Western markets, where coffee is a daily habit, India presents a unique challenge. Per capita annual coffee consumption in India is just ~70g, compared to 1.3kg globally and 5.1kg in the US. Even within India, serious coffee drinkers are concentrated in small tier-1 city pockets, with limited footfall outside select locations like BKC (Mumbai), Indiranagar (Bangalore), and Lokhandwala (Mumbai).
The habit-driven nature of coffee consumption in the US fuels frequent store visits, while in India, coffee remains an occasional indulgence rather than a daily necessity.
Beyond demand issues, high real estate costs further limit profitability. Despite lower revenue per store, Indian coffee chains pay retail rents comparable to US counterparts, making it difficult to absorb fixed costs. With daily order volumes often under 150 per store, margins remain razor-thin or negative.
To make matters worse, the Indian café market is oversaturated with brands expanding aggressively despite financial losses. This rapid expansion, driven by private equity (PE) and venture capital (VC) funding, prioritizes growth over sustainability, leading to a high-risk environment with no clear path to profitability.
The Urban Planning Factor: A Hidden Barrier
Unlike dense, transit-oriented Western cities that encourage high café footfall, Indian cities suffer from poor urban planning. Car-dependent areas and scattered retail zones reduce foot traffic, making it harder for cafés to achieve sustainable walk-ins.
Even in major cities, the lack of dense urban centers with predictable footfall patterns makes café economics unreliable outside a few premium locations.
What’s the Sustainable Path Forward?
Given these challenges, a traditional café model is unlikely to succeed at scale in India. Instead, coffee brands must rethink their approach and adapt to the unique market dynamics.
One possible direction is to move away from aggressive expansion and focus on smaller store footprints in premium locations with high footfall. Rather than trying to mimic Starbucks’ vast network, Indian coffee chains could transition toward “experience centers” that offer a premium, differentiated environment to attract a more loyal, high-spending customer base.
Another potential avenue is leveraging FMCG and D2C channels to drive scale. Selling packaged coffee, instant mixes, and ready-to-drink beverages through retail and e-commerce can help brands reach a wider audience beyond their café locations. However, this approach comes with its own challenges, as it pits them against established giants like Nescafé and Bru, who already dominate the home-consumption market with strong distribution networks and brand recognition.
Encouraging habitual out-of-home (OOH) coffee consumption is another key challenge that needs to be addressed. With less than 10% of total coffee consumption happening outside the home, Indian brands need to find ways to create a daily ritual around café visits. Better pricing strategies, loyalty programs, and corporate coffee partnerships could help shift behaviors over time, though it will require sustained efforts to change deep-rooted consumption patterns.
Perhaps the biggest roadblock is the stronghold of tapri chai culture in India. Roadside tea stalls remain the go-to choice for millions of Indians due to their convenience, affordability, and deeply ingrained habit. Competing with this informal yet highly efficient ecosystem is a formidable challenge, as any organized coffee or tea chain will struggle to match the flexibility, pricing, and accessibility of a neighborhood chaiwala.
A profitable, scalable coffee brand in India will need to tackle these structural challenges head-on. Whether through experience-driven cafés, packaged product expansion, or behavior-shifting incentives, the industry must find ways to make coffee a habit rather than an occasional indulgence if it hopes to replicate the success of global coffee chains.
Lessons from McDonald’s and Domino’s in India
Unlike coffee chains, McDonald’s and Domino’s have successfully adapted to the Indian market by localizing their offerings, optimizing costs, and creating a habitual dining culture. McDonald’s, for instance, re-engineered its menu to cater to Indian tastes, introducing products like the McAloo Tikki Burger and Masala McEgg, which appeal to a broader, value-conscious audience. By maintaining an affordable price range and focusing on high footfall areas with smaller store formats, they have ensured steady demand. Today, the average McDonald’s store in India has a revenue of INR 6.3 crore per annum.
Similarly, Domino’s Pizza built its success on delivery-first operations, focusing on convenience rather than relying solely on dine-in traffic. Their 30-minute delivery guarantee, hyper-local store placement, and deep market penetration into tier-2 and tier-3 cities allowed them to build a repeat consumption habit—something coffee chains have struggled to establish. Today, >60% of Domino’s Pizza’s India revenue comes from delivery.
Both brands have shown that habit-driven, localized, and convenience-oriented strategies are essential for sustained success in India. If coffee chains want to thrive, they may need to rethink their positioning—not just as occasional indulgence cafés, but as affordable, habitual, and convenience-driven offerings that fit seamlessly into the daily routines of Indian consumers.
References
- https://investor.starbucks.com/news/financial-releases/news-details/2024/Starbucks-Reports-Q4-and-Full-Fiscal-Year-2024-Results/default.aspx
- https://www.northmarq.com/insights/research/coffee-wars-market-share-battles-and-investment-opportunities-starbucks-startups
- https://www.business-standard.com/india-news/khan-market-rents-reach-rs-1500-per-sq-ft-a-month-breach-pre-covid-levels-123072500164_1.html?utm_source=chatgpt.com
- https://coffeeboard.gov.in/Publications/Coffee_Consumption_2023.pdf
- https://inc42.com/buzz/chaayos-loss-halves-to-inr-54-cr-in-fy24/
- https://entrackr.com/fintrackr/third-wave-coffee-revenue-crosses-rs-240-cr-in-fy24-losses-up-2x-7591001
- https://www.thearcweb.com/article/third-wave-sushant-goel-kfc-westbridge-ceo-A29hKhDW90YvVC5o
- https://www.bseindia.com/xml-data/corpfiling/AttachHis/1d7e3419-b151-4560-8c40-ea004c7693bc.pdf
Yash Tambawala 