The Rise, Fall, and Revival of Cafe Coffee Day: A Debt Story

In India, chai pe charcha toh hoti hi hai, but when it comes to the country's youth, good mood is mostly sponsored by coffee.

Coffee has been a comrade for workaholics and those burning midnight oils for a while now. 🪔

You would agree that talking about coffee brings up the memory of a renowned coffee brand- Cafe Coffee Day, more commonly known as CCD.

However, this established coffee company has a unique story. It has seen ups and downs similar to a roller coaster ride. You will be inspired to know how once on the verge of vanishing due to a huge debt, it not only survived but also reduced its debt to an unexpected low.

Let's get into knowing this unique success story of CCD.

The Buzz About CCD & Debt Formation

At present, CCD has a market capitalisation of around ₹1,130 crore.

Back in 1996, when CCD was launched, it took an out-of-the-box approach and opened its outlets as a coffee shop-cum-cyber café. You can even say that CCD introduced this concept by designing these outlets as cyber cafés.

With the vision “Big things can happen over a cup of espresso," founder V. G. Siddhartha dreamed of a successful coffee chain. Everything was going well until he accumulated ~₹10,000 crore in debts, making the company’s financial status unsustainable.

Although CCD has taken an unbelievable leap in the past few years and reduced its debt to ~₹1,350 crore, the story behind all of this is more dramatic than you think.

Let's dive in from the very beginning!

CCD’s Founding Story

In 1993, V. G. Siddhartha started a coffee trading company, Amalgamated Bean Company (ABC), while also working as a management trainee at JM Financial. As years passed, achieving profits with ABC, he planned to start his own chain of cafes in the country. Finally, on July 11, 1996, in Bangalore, Karnataka, he laid the foundation of Cafe Coffee Day (CCD) with an initial investment of ₹1.5 crore.

There were certain challenges that Siddhartha initially faced. He even had some strategies to overcome those challenges.

• Changing India’s Tea Culture: Revolutionising the tea-drinking nation by introducing espresso-based coffee drinks and café culture was a big task.
• Competition: While facing challenges from international chains like Starbucks and Barista, CCD required strong domestic differentiation.

He tackled every challenge with strong determination, and the beverages he introduced to establish CCD in India’s tea-drinking culture helped it gain rapid popularity. In the next two decades, the number of CCD outlets rose to over 1,700, making it the largest coffee retailer in the country.

CCD even served over 1.6 billion cups of coffee annually across six countries, with a presence in Austria, the Czech Republic, Malaysia, Nepal, and Egypt. However, it decided to close its international operations, facing the threat of bankruptcy.

Moving ahead, let’s see how CCD operates by understanding its business approach & strategies.

Business Model of CCD

If you look into the model, you will find that it is built on controlling the entire coffee production process, managing inventory efficiently, and tailoring products to various customer segments. Maintaining a vast network of cafes also falls under this hefty process.

A commitment to sustainability, strategic investments, and strong branding has greatly contributed to its success.

The strategies of CCD which have helped it achieve big in the market are:-

• Vertical Integration: CCD owns the entire coffee process right from bean cultivation to furniture for cafes, which ensures quality and cost efficiency.
• Efficient Inventory Management: The coffee chain ensures quality by managing imports as it sources snacks locally apart from growing its coffee.
• Market Segmentation: Considering different income groups, jobs and locations, it introduces customised consumer products.
• Strategic Locations: In addition to operating over 2,000 cafes in India alone, it has a strong market presence internationally.
• Sustainability: It includes biodegradable packaging, uses eco-friendly practices, and an electric vehicle fleet.
• Customer Service & Branding: It provides high-quality service and maintains a vibrant atmosphere with catchy slogans to strengthen the brand. Some famous ones are “A lot can happen over a cup of coffee,” “What's your coffee mood?”, “School of Cool,” and "Let us catch up on CCD.”

On top of everything, under its financial strategies, ₹10 billion was invested in 2010 for store upgrades and expansion.

Even certain key initiatives added to the success that CCD has achieved to date:-

• 3A Approach: This approach focuses on accessibility, affordability, and acceptability for easy access, reasonable prices, and popular products.
• Diversified Outlets: CCD chains offer full-size cafes, kiosks, and vending machines for wider reach.
• Customer Engagement: Along with using social media efficiently, events such as Café Concerts attract younger customers.

Key Strategies of CCD

Even with its products’ affordability, competitive pricing and diverse menu, CCD has achieved success in capturing the attention of a large group of customers. These are further explained below:-

• Affordability: The lower prices compared to premium chains target students and office workers.
• Competitive Pricing: It offers good value compared to local coffee shops. As per a 2016 survey, it was preferred over Starbucks in Chennai for its affordability.
• Premium Competitors: With prices ~1.5x higher than CCD, Starbucks is one of its competitors that targets higher-income customers.
• Diverse Menu: For extra revenue, it also offers snacks, sandwiches, and desserts for varied tastes.

Check out the below given stats from CCD's Annual Report FY23 to understand CCD’s growth from 2021 to 2023.

The above table shows the number of CCD cafes, the cities in which they were located from 2021 to 2023, and more.

Now that you've gone through the detailed analysis of CCD's business model and key initiatives, why miss out on the bigger, more vital bit?

Let's dive into the Indian coffee industry!

Industry Overview

Over the next decade, the Indian coffee chain market is predicted to grow substantially. According to the latest research by the Custom Market Insights (CMI) team, it is expected to record a Compound Annual Growth Rate (CAGR) of 8.1% from 2024 to 2033.

Not just that, this big market is projected to reach $160.6 million (₹1,332.9 Cr.) in 2024, covering all coffee chain establishments, from major brands to local players!

Under the Future Market Projections, the coffee market in India is expected to nearly double by 2033, reaching $323.8 million (₹2,687.5 Cr.). These numbers reflect the dynamic growth of the sector and its adaptability to consumer preferences.

Major Factors Behind Industry's Growth

Have a look at eminent drivers that are escalating the industry’s and, as a result, CCD’s growth:-

• Growing Urbanisation: As new job opportunities are coming up in metropolitan cities, the demand for convenient and quality coffee options is rising.
• Increasing Disposable Income: People nowadays spend more as they earn more. So, sipping a beverage of their choice in a coffee shop is a common sight.
• Changing Lifestyles: With busy schedules, there comes a need for a convenient go-to store to get the desired coffee as you move with your routine.
• Health-Conscious Offerings: With people's increasing focus on health and wellness, introducing health-conscious menu options in coffee chains is drawing their attention.
• Technological Integration: The adoption of mobile ordering apps, contactless payments, and digital loyalty programs is enhancing customer experience and operational efficiency, attracting a tech-savvy consumer base.
• Expansion to Suburban Areas: Coffee chains are tapping into the untapped potential of suburban areas, broadening their market reach and catering to a diverse range of consumers.

Collaborations and Limited Editions

CCD's partnerships with local artisans, artists, and celebrities to create exclusive and limited-edition coffee offerings are creating a buzz among the people. This will make their coffee outlets more popular.

In addition, coffee chains are appealing to a wider audience and establishing deeper connections with local communities. This is being done by introducing region-specific coffee blends and culturally inspired offerings under Cultural Diversity Embrace.

After learning about the positive predictions about the coffee market in India, you might want to know CCD’s current financials and its future plans. But before you do so, it is important to understand why it became indebted, so that you can clearly analyse the figures of its performance at present.

Why CCD Got Into Trouble?

After establishing CCD, Siddhartha expanded into other sectors as well, most likely with a vision to achieve more milestones for CCD. However, he entered many unrelated businesses, such as logistics, real estate, and IT services, which strained the core coffee business.

All these diversifications contributed to the company's eventual struggles. This diversified vision of its owner proved to be a “double-edged sword” for the coffee shop chain.

He had various investment ventures that indirectly influenced his business operations. Below are some of them:-

1. Coffee Business:

Coffee Plantations: Growing coffee beans.
Coffee Powder: Processing and packaging coffee for retail.
Vending Machines: Expanding coffee access through automated (or premixed) solutions.

2. Real Estate:

Development Projects: It Includes the "Global Village" IT park in Mysore and other real estate investments.

3. Financial Services:

Sivan Securities: Stock trading venture.

4. Resorts and Leisure:

Developing and managing resort properties.

5. Furniture:

Designing and furnishing café spaces.

6. Investment Ventures:

Stock Market Investments: Early investments in stocks such as Infosys.
Mindtree: Significant investment leading to substantial returns.

This extensive diversification had its significant pitfalls. By focusing on so many areas other than his core coffee business, he fell into the trap of "management bandwidth".

For CCD’s owner, this meant struggling to maintain control and coherence across the company. As an outcome, it led to substantial debt and operational challenges.

Downfall and Bankruptcy Fears

Coffee Day Enterprises Ltd. (CDEL), the parent company of CCD, accumulated massive debts totalling around ₹10,000 crores across Siddhartha's private and public companies. Because of it, CDEL faced scrutiny from the Income Tax Department over alleged tax evasion and undisclosed income, making this debt burden unsustainable.

• In 2019, the Income Tax Department seized Siddhartha's Mindtree shares worth ₹655 crore to recover ₹636 crore in taxes.
• CCD's diversification into unrelated businesses like logistics, real estate, and IT services also strained the core coffee business.

And the tragic death of Siddhartha by suicide in July 2019 pushed CCD to the bottom of an uncertain future.

At this point, you have learned about the reasons behind CCD’s debt. Now, get ready to explore the inspiring phase in its journey, which has led it to stand strong and confidently where it is today.

CCD Reborn Under Malavika’s Leadership

Born in 1969 in Bengaluru, the daughter of former Karnataka CM S.M. Krishna, Malavika Hegde took over as CEO of Coffee Day Enterprises Ltd. (CDEL) in December 2020. At the very start, she faced the challenge of addressing a debt of over ~₹7,200 crore, arising from various pressures.

Soon after Malavika took over, she started focusing on stabilising operations, managing debts, and reviving CCD’s core coffee business. This also included selling non-core assets since they were not directly contributing to the coffee chain's success, so that she could concentrate on rebuilding CCD’s primary operations, all while generating funds to help pay down debt.

The company's debt burden was reduced to ₹1,363 crore by March 2024 with her untiring efforts. She transformed this brand into a giant success in the market. Now, the company has not only paid off the maximum of its debt but is also moving ahead with conviction.

Now, it's time for you to check out CCD's financials and analyse carefully how it is performing after tackling all the stumbling blocks.

CCD’s Financials

In recent years, CCD has faced many ups and downs, from a decline in sales to experiencing losses to confronting changes in shareholders' confidence, etc. Here is the detailed information regarding it:-

• Declining Sales: From ~₹3,575 crore in 2019 to ~₹923 crore in 2024
• Losses: Reflecting that the business is not profitable
• Headquarters Sold: CCD Square sold to Strata for ~₹150 crore
• Debt Reduction: From ~₹7,000 crore in FY19 to ~₹1,360 crore in FY24
• Shareholder Confidence: Promoter’s holding dropped from 53.19% in FY19 to 8.21% in FY24, with ~24% of shares pledged

There has been an undesired decline in its sales accompanied by a reduction in the promoter’s holding clearly representing the shaken confidence of shareholders in the company. Even in response to lowering the financial pressure, the company had to take the difficult decision of selling its headquarters.

All these are evidence that CCD is clearly targeting its survival, which is the opposite of the expansion done before Malavika’s ownership.

However, among all these losses, one positive thing that happened for the company was the reduction in the remaining debt to be paid off.

Peer Comparison

Looking at CCD’s Current Market Price (CMP), the company is at the very bottom when compared to its other competitors from the data below. This collapse in its CMP might be a reflection of the company’s financial struggles.

Return on Equity (ROE) is a critical indicator of any company's efficiency in generating profits from shareholders' equity. Considering the company is CCD, its 5.64% ROE is relatively decent. This indicates its ability to generate returns on investment, which is lower compared to some of its peers.

On the other side, CCD is less leveraged compared to many of its competitors, with a Debt-to-Equity ratio (Debt/Eq) of 0.48. Debt/Eq is another vital data for CCD that shows its relatively solid position. This low ratio of CCD can be seen as a positive sign for its financial stability, depicting a more conservative approach to debt.

Above is a peer comparison table showcasing where CCD stands now amongst its competitors.

Taking everything into account now, the lower CMP and ROE make this coffee chain brand a less attractive investment, according to market views. Meanwhile, its competitors, with higher profitability in their baskets, hold comparatively stronger market positions.

Click on this link to know how CCD fell under the massive pile of debt.

The Bottom Line

The success story of CCD that you have witnessed here is not an ordinary one. A woman with determination stood strong after losing her husband, tackled all the odds their company was facing, and transformed the business started by her husband into a worldwide success.

By March 2024, its debt burden had been significantly reduced, with ₹1,363 crore to clear. However, sales have steeply declined from ~₹3575 crore to ~₹923 crore in the last five years. Apart from experiencing losses, its headquarters were sold, and even the promoter’s holding dropped in the last five years.

While the competition is still stiff in the market, CCD's strategies will decide where it moves ahead. CCD has ruled the Coffee Chain Market by being the first to start the trend in India, but its future is still a concern as to what steps Malvika takes.

It will be great to see how this coffee giant continues to capture the market and make everyone feel awake with their coffee.

Disclaimer: The stocks, policies, and companies mentioned above are not recommendations from Finology Insider and should not be considered a substitute for professional advice. We strongly recommend consulting a financial professional or conducting thorough research before making any investment decisions.