The journey between the coffee cup and lip

Exhibit B: Barista.

Yet another thing Third Wave wants to do is increase sales. By building more kiosks and focusing on delivery.

Now, Delhi-based Barista, one of India’s oldest homegrown coffee chains, started in 2000, had to shut 40 stores down to around 141 by 2018, as per Financial Express. This, despite a renewed focus on adding kiosks and diners. Today, Barista claims to have 249 outlets, of which four are diners.

Starbucks and Blue Tokai

These aren’t two cafe chains you’d expect to be mentioned together. And yet, both focus on two different halves of cafe culture—something Third Wave is big on.

Starbucks, the world’s biggest cafe chain with over 24,000 stores across 75 countries—it has 170 stores in India—and a $100 billion valuation, is in the business of selling a cafe experience. One that Third Wave has dedicatedly emulated.

“[Third Wave co-founder] Sushant [Goel] was very bullish on the fact that we are not going after Blue Tokai. We are going after Starbucks, where you give an experience as a foot in the door,” says Venk Krishnan, an angel investor in Third Wave and the founder-CEO of IT services company NuWare Tech Corp.

But Third Wave is also a niche cafe chain that buys green coffee beans and roasts them on its own, much like Blue Tokai. The idea is to sell the product beyond its cafes—to offices and discerning customers who know their coffee. Delhi-based Blue Tokai remains small, with 28 stores in India.

Starbucks, meanwhile, which runs as Tata Starbucks in India—a joint venture between Kolkata-based Tata Global Beverages and Starbucks Corp—is often credited with large coffee house culture. It runs up to 3,000 sq ft establishments where people often attend work meetings while sipping coffee. The Starbucks brand value is a dream Third Wave aspires to.

“But the model for us is actually not the cafe business. The cafe business is one of the experience parts of the business,” Goel told The Ken.

Except that coffee industry odds are barely in Third Wave’s favour.

While coffee consumption is increasing in India, Indians are not primarily coffee drinkers. According to market research firm Euromonitor, India’s coffee retail market is still small: Rs 7,000 crore ($982 million) compared to tea’s Rs 18,000 crore ($2.5 billion) retail market. In comparison, China’s coffee market is valued at $7.3 billion, with a larger tea market of $9 billion.

In better news for Third Wave, the specialised tea and coffee retail industry in India, which stood at $358 million in 2018, is expected to hit $633 million by 2023.

Third Wave is staring at a tough market to crack. There’s competition between multiple food & beverage brands, low net margins due to high overhead costs, and low order volumes—reducing the chance of profitability, as Matt Chitharanjan, the co-founder of Blue Tokai, explained in a CNBC interview. So, while Third Wave’s revenue jumped 5X to Rs 6.4 crore ($900,000) in the year ended March 2019, its losses ballooned from Rs 8.4 lakh ($11,800) to Rs 60 lakh ($84,000).

Besides, it costs a pretty penny to set up a cafe. Each cafe, on average, costs around Rs 45 lakh ($63,130), with one coffee machine alone costing as much as Rs 10 lakh ($14,000), according to a former Third Wave employee who has helped with strategy and expansion plans at the company. The cafe chain has been extending its deadline for 100 stores gradually, as per a former employee who was aware of company strategies.

“Basically, this is going to need a lot of money. Over a period, it’s going to need at least $50-$100 million. But I see there’s a lot of interest [from investors],” claims Krishnan.

The funny funding loop

Third Wave, co-founded by Goel, Ayush Bathwal and Anirudh Sharma, has opened one store each in Hyderabad and Pune in the past year.

“Now, we’re starting to do other business markets, which is delivery, which is smaller cafes-on-the-go in captive areas, like kiosks,” says Goel. “We definitely want to increase our delivery business. So that’s one of the sort of key levers for this particular year that we want to concentrate on.”

Third Wave has raised $1.7 million from 25 angel investors so far and is valued at $9 million, as per data from data analytics firm Tracxn. But according to an executive who deals with Third Wave, the company has been trying to raise as much as $5 million for over a year now. Goel says that the next funding is being finalised, and will be completed soon. However, eight new stores since March last year, compared with a target of hitting 100 stores, tells its own story.