SVKMS NMIMS

School Of Law, Mumbai

A project on
Pricing Strategy of coffee chains in India
In compliance to the partial fulfilment of the marking scheme, for Trimester VII
of 2016-2017, in the subject of Managerial Economics
Submitted To
Prof. Mitali Gupta
for evaluation.

Submitted by:
Submitted To:
Ms. Mitali Gupta
Assistant Professor (Economics)
School of Law, Mumbai

Vidhi Agarwal
B.B.A., LL.B (Hons.)
A073
2016-2017

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Table of Contents

Serial

Particulars

Page no.

No.
Chapter 1

Introduction

4-5

Chapter 2

Literature Review

6-7

Chapter3

Methodology

Chapter 4

Analysis

Chapter 5

Conclusion

16

References

17

8
9-15

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Table of Abbreviations

Serial No.

Abbreviation

Full Form

CCD

Caf Coffee day

VS

Versus

DC

Demand Curve

CBI

Coffee Board of India

UK

United Kingdom

MRP

Maximum Retail Price

Chapter 1: Introduction
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Background of the topic: The humble cup of coffee that cheers up mood, initiates
conversation and relaxes you from a tiring day is brewing up a storm in India. The Indian
ready-to-drink tea and coffee market has picked up a great business in the last 5 years.
Reports say that the market is expected to grow to a whopping 2,250 crore by 2017- thanks
to the cafe culture among urban youth.
The domestic market, which currently stands at an estimated 1,100 crore, is dominated by
outlets like cafe coffee day, baristas, costa coffee, coffee world, coffee bean & tea leaf. The
latest entrant is Starbucks and with many more in the pipeline. More than 1,200 cafes have
sprung up across India in the past decade, mostly from six organized chains, clocking an
average annual growth of around 40 percent. They have made the cafe industry -- currently
capped at 1,000 crore -- one of the fastest growing organized retail segments.
The coffee market in India has been growing due to the demand for ready to drink coffee and
has become a part of an individuals daily consumption basket. Due to changing cultures,
consumers are becoming aware of domestic and foreign brands, which are boosting the
consumption levels. The export promotion schemes and other subsidies by the GOI, and
increasing trend of eating out coupled with the rising share of young population has driven
the market. Well-established coffee shop chains, such as Cafe Coffee Day (CCD) and Barista
have enhanced their pan-India presence. In 2010, Cafe Coffee Day and Barista had 970 and
200 stores, respectively, and they have only continued to expand in the present years.
Meanwhile, several relatively new players, such as Costa Coffee, Coffee Bean, Gloria Jeans
and Java Coffee, are trying to establish a footing in Indian coffee retailing. 1
Experts say India is a tough market to crack for coffee retailers. The first problem is that
unlike burgers or pizzas, coffee does not generate huge sales. So while fast-food joints see
high footfalls and sales volumes, cafes are seen as meeting spots where people come to
socialise rather than consume what is on offer on the menu.
"This is the big difference between a cafe and a fine dining or a casual dining restaurant.
People quite often are keen on meeting up with friends and acquaintances and may not
necessarily have something substantial at a cafe. The ticket size, therefore, is smaller in

1 Pinto Viveat Susan. Coffee chains wake up to new reality. http://www.businessstandard.com/article/companies/coffee-chains-wake-up-to-new-reality-114102300611_1.html.

business-standard.com. 26.08.2016
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comparison to a quick-service restaurant or a fine dining place," says Anand Ramathan,

associate director of consultancy firm KPMG.
Statement of Problem: From seed to sip, price of coffee increasing multi fold times. Does
the customer at a coffee shop end up paying much more than what it costs? The researcher
wants to study the pricing strategy of the coffee chains to answer the question above.
Major Objectives:
a. To study the pricing strategies of coffee chains in India.
b. To study how different coffee chains discriminate on prices.
c. To study whether what customers pay for a cup of coffee worth or not.

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Chapter 2: Literature Review

The researcher read various articles on the topic of research and a review of a few of them is
presented below:
2.1The hipster coffee revolution has finally come to Indiai
The chain cafe market in India is worth 1,820 crore ($292.6 million). This
constitutes around 27% of the overall caf market valued at 6,750 crore ($1.1
billion), according to Techno Pak2. Any brand with more than three outlets is
considered to be a chain. Incidentally it is chains like the home-grown Cafe Coffee
Day (CCD) and Seattle-based Starbucks that have really paved the way for this
incipient coffee revolution. In the past decade-and-half, young Indians have flocked to
these joints to hang out with friends. In the process, coffee consumption has picked
up. According to the Coffee Board of India, consumption has been rising 5-6% every
year.
2.2Caf Coffee Day (CCD): A Case Analysisii
Indian Coffee Chains market is quite mature which is evident from the fact that Caf
Coffee Day alone maintains more than 1000 Cafs in 141 cities in India. In 2010, the
average bill amount at coffee outlet was between rupees 135 and 150. This is expected
to rise to rupees 245 by 2016. With customers paying significant amount for their
coffees, they are also expecting a lot from an outlet. Factors such as menu, ambience,
service and brand name are playing an important role while choosing a coffee outlet.
2.3Coffee chains wake up to new realityiii
Experts say India is a tough market to crack for coffee retailers. The first problem is
that unlike burgers or pizzas, coffee does not generate huge sales. So while fast-food
joints see high footfalls and sales volumes, cafes are seen as meeting spots where
people come to socialise rather than consume what is on offer on the menu. The
second problem is the emphasis on location. Retailers say managing rentals is
becoming a huge problem because of the shortage of properties at good locations. As
a result, retailers often have to shell out a disproportionate amount on rentals. For
every 100 worth of sales at a cafe, 35 is the consolidated cost of the product
including food & beverage, while the balance 65, which is the gross margins for a
cafe, has to cover operational expenditure such as rent (15-18 per cent), staff (10 per
2
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cent), utilities (6 per cent) and store-level promotions (4-5 per cent). After deducting
the costs, the net margin on a cup of coffee is only about 10.

Chapter 3: Methodology
3.1 Conceptual Framework: The business dictionary defines pricing strategy as Activities
aimed at finding a product's optimum price, typically including overall marketing objectives,
consumer demand, product attributes, competitors' pricing, and market and economic
trends.iv
Pricing strategy refers to method companies use to price their products or services. Almost
all companies, large or small, base the price of their products and services on production,
labour and advertising expenses and then add on a certain percentage so they can make a
profit. There are several different pricing strategies, such as penetration pricing, price
skimming, discount pricing, product life cycle pricing and even competitive pricing.
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There is a difference between price and pricing. The price is the amount of money you want
for each product unit. Pricing is the process you need to go through to figure out what price to
attach to each unit. Pricing, therefore, is a strategic process that you must learn, and use, for
business success.
3.2Objectives:
a. To study the pricing strategies of coffee chains in India.
b. To study how different coffee chains discriminate on prices.
c. To study whether what customers pay for a cup of coffee worth or not.
3.3 Hypothesis: Customers end up spending a lot in coffee chains and pay way more than
what a cup of coffee is worth.
3.4Data Source: The researcher has undergone a secondary research depending mainly upon
online database to procure information on the research topic. Main source of data was the
Coffee Board of India.
3.5Technique of Research: The technique used by the researcher to complete this research
paper is qualitative method of research. The reason being the researcher in this paper has
analysed the data given in various journals and articles mainly on the internet. There is no
measurement of collected data. By analysing the data given in various journals and articles
the researcher would analyse the pricing strategy of the coffee chains operating in India. The
researcher would also analyse the case of Starbucks coffee and compare its pricing strategy to
other coffee chains in the industry.

Chapter 4: Analysis
Price directly affects the profitability of your cafe, so setting the right prices is crucial to
success. Cafe pricing strategies need to take into account not only your costs, but also the
style of your cafe, and your target market. You can charge higher prices for table service than
for counter service, or for premium or specialized items. You will also need to consider
location. If you are in a high-end neighbourhood or district, or offer "Internet cafe" services,
you can charge more. A few of the pricing strategies commonly used by cafs these days are
as under. These strategies could be divided into qualitative and quantitative models depending
upon their effect on the customer and the company.
4.1 Quantitative Models of Pricing

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4.1.1

Mark-up Pricing: Mark-up pricing, or cost-plus pricing, is done when you know all
costs associated with producing one cup of coffee. Beans, water, cream and sugar
make up your cost of goods sold. Labour and
other overheads such as rent and utilities comprise
your remaining costs to produce. Total these costs
for a period and divide by the number of cups
sold. Add a percentage for profit, the mark-up, and
you have your per-cup price. While this is an
excellent exercise to understand how fixed and variable costs affect profit, market
conditions will probably influence your pricing strategy more directly.

4.1.2

Competitive Pricing: If you are lucky enough to be the only place in town that sells
coffee, you are a price setter; that is, you have
comparative freedom to charge whatever you
want. In practice, you will have competition
and what they charge will have a bearing on
your price. Two approaches are penetration
pricing and skim pricing. Penetration pricing is also known as undercutting. You
charge less than competitors to lure customers away. Skimming refers to charging a
little bit more than the competition, perhaps to establish your coffee as a premium
product.

4.1.3

Demand Curve Pricing: Demand curve pricing looks at your customer base. In
simplest terms, as you raise the price of your
coffee, demand for it will fall, and lowering
your price will bring in new clients. As you saw
with competitive pricing, this is not always the
case when customer perception is altered as in
the premium product scenario. Other factors
affecting demand curve strategies are things like
convenience and location. Using demand curves may require market surveys and
other customer feedback methods.

4.1.4

Price Bundling: One pricing strategy popular in cafes is to bundle several items
together. For example, if you normally charge $3 for a large cappuccino and $5 for a
sandwich, you can offer them together for $7. Customers will see this as a bargain,
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and it will help you to increase sales. You will also need to keep in mind how much
your customers are willing to pay. For example, if you and your competitors are both
offering similar items, you will need to charge the same or less for those items, or
make sure they are a higher quality.
4.1.5

Flexible Pricing: Use a spreadsheet or specialized program to determine what prices

you need to charge to break even. Remember that many suppliers request payment
upfront for new cafes. You can then raise or lower the prices of certain items in order
to achieve the profit you need. If you use a menu format that is easy to change, you
can adjust your menu more frequently to reflect your costs. By changing prices in
small increments and featuring high profit items as daily specials, you can design your
prices to help you increase sales of certain items.

4.2 Qualitative Models of Pricing

4.2.1 Loss Leader Pricing: Charging less than cost on a cup of coffee is a recipe for
disaster if coffee is your main product. However, if you have a new line of breakfast
sandwiches, for example, you may include a cup of coffee at a low price to encourage
purchase of the higher-margin sandwich. A car repair shop may offer coffee at low or
no cost to encourage customers to choose them over a competitor. Though not
profitable on its own, the cup of coffee leads customers to other high-margin
4.2.2

purchases.
Menu Strategy: Your menu will have a huge impact on costs, and subsequently on
pricing. You will need to decide not only the type of food you are offering, but also
whether you will be offering free bread and butter, the condiments you will offer, and
what items will be included with each main dish. For example, whether sandwiches
include a side salad and fries. Once you have your menu, you can calculate the costs
of each item. This is your baseline for food costs. You will also need to compute the
rest of your fixed and variable costs before you can set your prices.

4.2.3

Complementary Pricing: Complementary pricing is a strategy where you charge a

very low price, compared to your competitors, for a common item, while raising the
price on other items. For example, you may set the price of your coffee at a very low
price. Then, raise the price of your sandwiches to just a little more than your
competitors to compensate. The low priced item will draw customers in, and once
they are in your cafe, they are more likely to also buy the slightly higher-priced item.

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4.2.4

Customer Loyalty Discounts: This strategy builds loyalty and repeat business by
offering customers something for free or a discount. For example, you may decide to
charge a discount on coffee to customers who bring their own cups. If you are located
in an area with a lot of businesses, you could offer discounts, or a free dessert, to all
the offices on your block. You can also grow customer loyalty by offering
membership discount cards, or by using buy nine get one free" punch cards.

The researcher has thus accomplished the objective of studying the pricing strategies of the
coffee chains and how each pricing strategy is different from the rest. A company can employ
any one of them or two and more of these strategies simultaneously while determining the
price of its product keeping in mind all factors such as rent of the coffee shop, cost of inputs
required, profit margins etc.

CASE STUDY: STARBUCKS

An Overview of the Starbucks Pricing Strategy: Starbucks claims the price increase is due
to rising labour and non-coffee commodity costs, but with the significantly lower coffee costs
already improving their profit margins, it seems unlikely this justification is the true reason
for the hike in prices. In addition, the price hike was applied to less than a third of their
beverages and only targets certain regions. Implementing such a specific and minor price
increase when the bottom line is already in great shape might seem like a greedy tactic, but
the Starbucks approach to pricing is one we can all use to improve our margins. As weve
said before, it only takes a 1% increase in prices to raise profits by an average of 11%.
Value Based Pricing Can Boost Margins: For the most part, Starbucks is a master of
employing value based pricing to maximize profits, and they use research and customer
analysis to formulate targeted price increases that capture the greatest amount consumers are
willing to pay without driving them off. Profit maximization is the process by which a
company determines the price and product output level that generates the most profit. While

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that may seem obvious to anyone involved in running a business, its rare to see companies
using a value based pricing approach to effectively uncover the maximum amount a customer
base is willing to spend on their products. As such, lets take a look at how Starbucks
introduces price hikes and see how you can use their approach to generate higher profits.
The Right Customers and the Right Market: While cutting prices is widely accepted as the
best way to keep customers during tough times, the practice is rarely based on a deeper
analysis or testing of an actual customer base. In Starbucks case, price increases throughout
the companys history have already deterred the most price sensitive customers, leaving a
loyal, higher-income consumer base that perceives these coffee beverages as an affordable
luxury. In order to compensate for the customers lost to cheaper alternatives like Dunkin
Donuts, Starbucks raises prices to maximize profits from these price insensitive customers
who now depend on their strong gourmet coffee.
Rather than trying to compete with cheaper chains like Dunkin, Starbucks uses price hikes to
separate itself from the pack and reinforce the premium image of their brand and products.
Since their loyal following isnt especially price sensitive, Starbucks coffee maintains a
fairly inelastic demand curve, and a small price increase can have a huge positive impact on
their margins without decreasing demand for beverages. In addition, only certain regions are
targeted for each price increase, and prices vary across the U.S. depending on the current
markets in those areas (the most recent hike affects the Northeast and Sunbelt regions, but
Florida and California prices remain the same).
Product Versioning & Price Communication: They also apply price increases to specific
drinks and sizes rather than the whole lot. By raising the price of the tall size brewed coffee
exclusively, Starbucks is able to capture consumer surplus from the customers who find more
value in upgrading to Grande after witnessing the price of a small drip with tax climb over
the $2 mark. By versioning the product in this way, the company can enjoy a slightly higher
margin from these customers who were persuaded by the price hike to purchase larger sizes.
Starbucks also expertly communicates their price increases to manipulate consumer
perception. The price hike might be based on an analysis of the customers willingness to pay,
but they associate the increase with what appears to be a fair reason. Using increased
commodity costs to justify the price as well as statements that aim to make the hike look
insignificant (less than a third of beverages will be affected, for example) help foster an
attitude of acceptance.v
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Comparative Study
For the comparison between star bucks and other coffee chains on the basis of their pricing
strategy, the researcher would like to incorporate an interview of the different coffee chains
which was taken when Starbucks entered the Indian markets.
Undeterred by the entry of iconic US-based coffee chain Starbucks at competitive prices,
entrenched players such as Caf Coffee Day, Barista and Costa Coffee are unlikely to go in
for price war, and plan to continue with differentiated pricing strategy.
Starbucks, which debuted recently into the Indian markets, said it will follow low pricing
strategy across all its forthcoming outlets, including the next one at the premium Taj Hotel.
Starbucks, with Tata as partner, has opted for competitive pricing that is nearly half the coffee
chains charges elsewhere in the world with a cup of coffee costing about 80 for a small
offering and 165 for a large one. Asked if the company will have same prices at its all
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stores, including the one to be launched at the Taj this week, Starbucks Coffee Company
Chairman, President and Chief Executive Howard Schultz replied in the affirmative.
The pricing will be the same across all outlets despite Starbucks having the reputation of
being a high-end premium brand. We try to have value proposition of all kinds equal to
society, especially, when we open in mid-market, Schultz told PTI after the launch of
flagship store in Mumbai.
When contacted, Cafe Coffee Day (CCD), which runs 1,350 stores, said it will continue to
follow a different pricing strategy which includes the rental. It is different for different
outlets. Our pricing depends on consumer potential and what are the input costs that go into
running that store, including rentals. We would have different pricing across different retail
points, CCD Marketing President Ramakrishnan K. said.
Asked if CCD will revise its price now in view of the entry of Starbucks, Ramakrishnan
replied in the negative saying, Our pricing is not determined by competition but by
customers. We have no intention of changing that on the basis of somebody elses pricing.
A hot coffee at Starbucks will range from 80 to 165, while a cold coffee will cost
anywhere between 120 and 200. The CCD sells hot coffee at about 80 and cold coffee at
about 150.
Italian chain Lavazza-run Barista Lavazza declined to comment on Starbucks pricing.
However, its director for South Asia R. Shivashankar said, Our pricing varies across
formats and does not depend on rentals. We dont open outlets in five-star hotels. Barista is
the No. 2 player with over 300 outlets in India.
Costa Coffee said it welcomes Starbucks to the country, but believes the England-based
company has an edge as it entered the market earlier. While we welcome the entry of
Starbucks here, I believe we have a good understanding of the cafe consumer here which has
been detailed into our business strategy including pricing. So, we will continue with what we
are doing. Yes, our prices vary with rentals and demographics, Costa Coffee India chief
executive Santosh Unni said.vi

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Chapter 5: Conclusion
Conclusion to be added in the final draft.

Policy Suggestions:
1. Study your customer personas. Starbucks understands that the majority of their customer
base is fairly insensitive to price, and uses small price increases that everyday consumers
barely notice to boost margins. Quantify your personas and the demand for your product or
service will help you choose a price that captures the maximum amount your customers are
willing to pay.
2. Justify the exchange rate for your product. Communicating price increases effectively is
crucial to a successful price hike, and managing customer perception is a key part of the
Starbucks strategy. Support your price increases using changes in the market such as higher

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commodity costs and ease the pain on the consumer by finding an attractive way to publicize
the new prices. Starbucks said their beverage prices were increasing by an average of 1%, but
that low average probably stemmed from including all of their beverages in the equation,
including ones that remained at the same prices.
3. Use product differentiation to put your company in the lead. You can justify
maximizing your profits using the fairest of reasons, but if the customers dont value your
service the way they value a delicious cup of coffee, then a decrease in demand is inevitable.
Build a service or product that consumers cant live without, and youll be able to implement
price hikes without turning off your customers.
4. Dont increase the prices of the products with the highest margins. Raise the prices of
the products surrounding them. As mentioned earlier, Starbucks raised the price of the tall
size brew exclusively in order to persuade customers to purchase larger sizes (with slightly
higher margins). Price hikes for your lower margin products can entice customers to upgrade
to more expensive options, especially with respect to products and services that
are tiered based on time usage and features. The goal is to use the price increases to guide the
customer towards your most profitable product.

References

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i Thomas Maria. Et al. The hipster coffee revolution has finally come to India. http://qz.com/758043/gourmet-coffeecompanies-are-teaching-indians-how-to-upgrade-the-humble-morning-cuppa/. qz.com. 25.08.2016

ii Joshi Manoj. CCD: a case

analysis.https://www.researchgate.net/publication/228147155_Cafe_Coffee_Day_CCD_A_Case_Analysis.
www.researchgate.net.24.08.2016.

iii Pinto Viveat Susan. Coffee chains wake up to new reality. http://www.businessstandard.com/article/companies/coffee-chains-wake-up-to-new-reality-114102300611_1.html. business-standard.com.
26.08.2016

ivBusiness Dictionary-pricing strategy http://www.businessdictionary.com/definition/pricing-strategy.html

v Dawson Tucker. How Starbucks Uses Pricing Strategy for Profit Maximization.
http://www.priceintelligently.com/blog/bid/184451/How-Starbucks-Uses-Pricing-Strategy-for-ProfitMaximization. www.priceintelligently.com. 9.9.2016
vi Caf Coffee Day, Barista to continue differentiated pricing strategy The HINDU, Mumbai, Oct21,2012,
http://www.thehindubusinessline.com/