After emerging as the market leader in three of the four southern states, Fresh and Honest now plans to capture the coffee market in Andhra Pradesh. Venkatachari Jagannathan reports.
Chennai: Tucked away from the hustle of Chennai's Dr Radhakrishnan Salai, is the headquarters of the Rs80-crore Fresh and Honest Café Limited. Here its CEO, R Shivashankar (41), is brewing new plans for his hot beverage vending machines that should quickly set the cash registers ringing.
Till recently a company selling beverages, Fresh and Honest, a part of the Sterling group, has now added noodles and corn flakes to its product basket by signing up deals with Indo Nissan Foods Limited (makers of Top Ramen noodles) and Kellogg's. "We added these two products on the basis of feedback from our corporate clients," he points out.
He is on the lookout for other beverages that could be made with hot water / milk and talks are on with Nestle for sourcing soup powders. Fresh and Honest at present imports the dehydrated soup powder and local sourcing would help to ease the price burden on the end consumer. "We wish to keep the retail prices of all that we sell within Rs10. Right now our soup retails at Rs12 per cup; we are looking at a retail price of Rs6 to 7 per cup."
Fresh and Honest imports soup powder and Swiss chocolate powder from two Swiss companies Haco and Domaco respectively. The coffee bean, dip tea packs, milk and sugar are sourced within India. The coffee bean is sourced from Chikmagalur, Karnataka. Café Coffee Day is a division of Amalgamated Bean Coffee Trading Company Limited. Georgia, according to industry officials also sources coffee bean at Coffee Board auctions.
Apart from selling coffee and tea, Fresh and Honest also sells at all its vending machine installations hot Swiss chocolate, milk shakes and vegetable soup.
However, it is the coffee that brings the lion's share of the turnover while tea and other products chip in with 10 per cent and 5 per cent respectively.
The vending machines are of two types: premix and bean-to-cup. Premix machines are those in which the beverage is churned out of the ready coffee-and-milk powder and sugar mix. Priced around Rs8,000-10,000 per unit, the premix machines are common in the country. The major players are Nestle, Hindustan Lever Limited (HLL), Tata Tea and Tata Coffee, who sell the premix powder. There are around 50,000 premix units in India.
The premium bean-to-cup machines on the other hand provide fresh filter coffee after the roasting and grinding takes place at the press of a button. The major players in this segment are Fresh and Honest, Café Coffee Day and Georgia.
Fresh and Honest imports the machines and installs them at others' premises. It supplies the making ingredients and maintains the machine. The vending machines are owned and maintained by the company.
"Our machines are fully automatic. We preset the parameters on the amount coffee bean to be ground and the milk, on the basis of local tastes. Only our engineer, not even the machine operator, can alter the specs. The machine is capable of producing 16 coffee variants," says Shivashankar. The machines are equipped with micro-processors which capture varied data. Each machine has a milk warmer so that fresh milk can be used.
Priced at around Rs2.5 lakh apiece, the company imports the machines from two companies: Swiss Ergo and Thermoplan. The company follows a business model whereby the ownership of the machines remains with the company. It supplies the consumables like coffee beans, dip tea packs, milk, sugar, soup powder, Swiss chocolate powder and others and the machine operator on a specific demand by the installer.
"We charge the party who orders installation on a per cup basis, subject to the condition that there should be a minimum sale of 180 cups per day, so as to make the installations viable. We charge extra for machine operator if provided by us."
Fresh and Honest plans to add 1000 machines every year to last year's 1,800. The company sells around 3 lakh cups of hot coffee per day out of its 2,300 installations (hotels 450, institutions / corporates 1,500 and public places 350) in 22 major Indian cities. The company also has installed around 300 cold beverage (cold coffee/tea) vending machines.
As a growth strategy, Shivashankar is planning to populate smaller towns with his vending machines.
Speaking about the market dynamics of the different segments, he says, "The price per cup (Rs6) is not a major issue at public places and hotel installations. The daily volume is also high in these places."
On the other hand the initial installation and the recurring costs constitute a major issue in the case of corporate installations. As a result corporates initially prefer premix vending machines and later switch over to bean-to-cup machines. "Nearly 30 per cent of our corporate installations are the premix machines," says S Ravi, product manager-institutions.
The most critical aspect is the after sales service as vending machines operate 24 hours. "In the case of hotels the machines have to be up and running 24X7 and the bean delivery is also crucial. The real challenge is catering to the hotels in small towns," says P I Shevathaan, product manager. Reaching the installations in small towns fast is a challenge, and keeping it running 24X7 is a challenge, and Fresh and Honest meets this challenge with its nationwide service network and also by providing substitute machines.
Fresh and Honest sells around 3 lakh cups of coffee per day. The company competes with Café Coffee Day and Georgia in the bean-to-cup segment. In terms of number of installations Fresh and Honest has the highest number – 2,300 hot machines and 300 cold machines. Cold machines are the ones that give out cold beverage – cold coffee/tea. So in total Fresh and Honest has 2,600 installations. The combined total installations of rivals in the bean-to-cup segment are around 400. This firmly establishes Fresh and Honest as the market leader.
Apart from the filter coffee vending machine, Fresh and Honest entered the espresso coffee segment by tying up with illy Café, the world's largest espresso coffee player. The company would install machines at five star hotels and Barista outlets – another coffee chain owned by the Sterling group. According to Shivashankar the roll out of illy machines will pick up in three months.
Meanwhile the company is developing its filter coffee powder brand Alive by launching it in Andhra Pradesh. With this the brand is present in all the four southern states that account for nearly 90 per cent of the Rs300 crore filter coffee powder market. The state wise number of outlets where Alive is expected to be in three months time is: Tamil Nadu 14,600; Andhra Pradesh 12,700; Karnataka 9,400 and Kerala 5,100.")
According to Shivashankar the all India coffee powder market size is 39,360 tonne per annum (tpa). Of that the share of instant coffee is 18,700 tpa and that of filter coffee powder is 20,660 tpa. And within the filter coffee powder segment the share of pure 100 per cent coffee powder is 200 tpa and that of coffee - chicory blended powder is 20,460 tpa.
Fresh and Honest entered this segment last year taking advantage of its plant's huge roasting and grinding capacity.
Alive coffee powder is a mix of 70:30 coffee and chicory, whereas Tata's Mr. Bean and HLL's Green Label is a mix of 53 coffee and chicory 47.
With a target of 10 per cent market share Fresh and Honest is promoting the brand mainly through wet sampling. "We hope to sell 70-90 tonnes per month in a year's time," remarks Shivashankar. The company has budgeted around Rs5 crore for promoting Alive.
"We are also contemplating the launch of 100 per cent pure coffee powder," he discloses. When asked about the company's plans to leverage Alive with its vending machine business, he says, "We will not do that. The vending machine business is under the Fresh and Honest brand and it will remain so."
However the launch of Alive has given a lease of life to the company's two other products, namely soya milk and tofu (soya paneer) sold under the brand Soyfresh. The two products launched several years ago have not been able to make a mark at the market place.
"Reaching just two products to the retail outlets was a problem. But with the launch of Alive, we are now in a position to distribute these two soya products to wider network of retail shops," explains Shivashankar. His plan is to promote soya milk and tofu on a health plank. The company has started targeting the medical fraternity by sponsoring health conferences as a step towards the Rs100 crore turnover this year.