Storm in a Coffee Cup

“Nobody wishes to die. Even those who seek heaven don’t wish to die to get there.”                                                                      – Steve Jobs

The circumstances under which the founder of Café Coffee Day died are tragic. What is more tragic is the mileage different segments are trying to extract from the event.

Mr. Siddartha built a retail empire comparable to the best in the world. His coffee outlets represented a refreshing change for the aspirational youth. The outlets were great places to meet and have fun or even a serious dialogue, all over a cup of coffee.

In a farewell note, the authenticity of which is under question, Mr. Siddartha alluded to his failure to develop a sustainable business model as the reason for giving up.

As an academic, I see any organization through a set of lenses that are different from what others see. I am respectful of other viewpoints but will not allow respect to cloud my understanding.

The fact, uncomfortable as it is, remains that nine out of ten ventures fail.

Nine out of ten new products fail.

Success is the exception, not the rule.

We glamorize the exception and do not learn from failure.

The parent company of Café Coffee Day, Amalgamation Plantations, is one of the largest of its kind, with 12,000 acres under cultivation. With a track record of 130 years and high-valued oak and other trees complementing the coffee, the plantation was a rock-solid foundation.

As one of the leading exporters of coffee, Mr. Siddartha could have maintained his plantations and led a charmed life.

The entrepreneurial mindset got the better of him. He chose forward integration – a chain of retail outlets where people could meet in an inviting and pleasant environment, and enjoy high-quality coffee.

Forward integration is a tricky process. You need infrastructure. You need to furnish the interiors. You need to hire people. While the value proposition that much can happen over a cup of coffee is enticing, the resources required increase in complexity. Globally, the ROI in retailing is a measly 2%.

Add to this an exponential growth in the number of outlets and the processes bring in more complexity. On several roads, I have seen outlets on either side of the road and wondered who was responsible for location decisions.

The outlets were neither full-fledged restaurants nor coffee-only shops. They provided an assortment of snacks that not many seemed to cherish.

As if the complexity of forward integration was not enough, the company went in every direction one could think of – software and financial services to mention two of them. Unrelated diversification and relentless expansion proved to be a combination difficult to manage.

My thumb rule for services is that they are nonviable below a 70% capacity utilization. Except for the airport outlets and a few in the central business district, I did not come across outlets that met this criterion. I have met my students in outlets for hours without seeing a single customer.

What would I have done differently:

  1. Linear and not exponential growth.
  2. Stick to the knitting – serve only coffee through automated machines (like the ones you see in airport lounges).
  3. Make sure every outlet makes a decent profit – you cannot run a business like a charity.
  4. Avoid unrelated diversification – takes up too much time and effort without the corresponding return.
  5. Own the outlets – investments in real estate have historically appreciated over time.
  6. Manage with zero debt – a mantra that the best companies follow almost like a religion.

I will readily concede that my approach would not create thousands of jobs. My approach would not make Café Coffee Day the household name that it became.

In contrast, my approach would have given a business model that was both sustainable and scalable, perhaps by the next generation.

The global experience of family-owned businesses (for perspective, more than 95% of global businesses are family-owned or controlled) is that they rarely survive beyond two generations. Here we have a company with a history of 130 years. It could have become a model for others – if the founder had understood the distinction between an audacious dream and fantasy.

Much has been said and written about the troubles the entrepreneur had with the tax authorities.

I will say only this – unless we rapidly move into the top ten in “ease of doing business” we can forget about becoming an economic superpower. I see clear signs of our getting into the “middle-income trap.” The top ten percent own over fifty percent of national wealth. As I have written earlier, unless the holdings of the rich are below twenty-five percent, there is no space for a significant middle-class. We need visionary leadership that is willing to take away the discretionary powers of the executive for the well-being of the nation.

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