Better margins attract VCs to specialty coffee startups

TLDR:

• Specialty coffee chains are attracting more venture capital than direct-to-consumer (D2C) players.
• The growing coffee consumption in India and falling cost of capital expenditure are driving venture capital interest in specialty coffee chains.

Specialty coffee chains in India have raised close to $100 million in venture capital over the past two years, signaling a growing interest in the industry. Investors are particularly attracted to coffee chains due to better unit economics compared to D2C players without any retail presence. The falling cost of capital expenditure and increasing coffee consumption in India have contributed to this trend. Previously, high retail costs were a major challenge for coffee chains, but now the cost of capex has come down, making it more appealing for investors. Additionally, the perception of specialty coffee as a product has shifted in recent years, leading investors to see greater value in the retail aspect of the business.

Blue Tokai, a specialty coffee chain, has 90 cafes across India and generated 65-70% of its revenue from physical cafes in FY22. The rest of its revenue comes from the online segment. Last year, Blue Tokai raised $30 million in funding, led by A91 Partners. Another specialty coffee chain, Third Wave Coffee, secured $35 million in a Series C funding round.

Investor interest in coffee is not new, with chains like Starbucks, Barista, and Café Coffee Day previously operating in India. Starbucks entered India in 2012 and currently operates about 390 stores through a joint venture with the Tata Group. Despite challenges faced by some existing chains, the recent entry of delivery services has improved the economics of the specialty coffee business. Approximately 20-30% of business for specialty coffee startups now comes from delivery, leading to increased profitability. However, investors are less optimistic about D2C coffee brands that lack a physical retail presence.

The Indian coffee market is predicted to be worth $0.5 billion in 2023, with a compound annual growth rate of 9.04% until 2028. The specialty coffee market represents about 5% of the formal coffee market in India.