Why Costa Coffee is upbeat on India while its local franchisee is not

What are the prospects of India as a market? This seems to be central to the differences of opinion between Costa Coffee and its Indian franchisee, Devyani International.

Costa Coffee is a US-based caf chain which entered India in 2005 through an exclusive franchisee arrangement with Ravi Jaipuria group’s Devyani International.

According to a report in The Economic Times today, the US parent is planning to end the exclusive arrangement with Devyani and start looking for such tie-ups with other companies. The reason, the report says, is that the Indian company is not ready to invest more here, while the US company wants to expand.

With about 100 outlets, the caf’s visibility has been poor in the country. So, what is behind the US company’s new found enthusiasm for India?

The quick service restaurant space in India is one of the most happening sectors in the country now. Many global majors, like Costa Coffee’s rival Starbucks, have made their grand entry recently.

For them, the key attraction is the aspirationally strong middle class. According to this article , India’s middle class is the fastest growing among the BRIC countries, and has expanded by 35 percent in the past decade. It expects Indian middle class to outnumber the US population by 2025.

However, tapping into this market is proving to be difficult for the companies because of the ongoing slowdown. Households are cutting down discretionary spending on fears of job loss in uncertain economic situation.

Credit Suisse in a recent research report on the Indian discretionary sector said urban middle income consumer discretionary spending has been in a cyclical downturn over the past two years in India. “Consumer durables, which are a good indicator of urban consumer discretionary demand, saw a double-digit volume decline in IIP data in FY13 and 1H FY14. This is unprecedented in the past 25 years,” it noted.

It doesn’t expect a reversal in the trend in the near term. “Wage growth in the formal economy is likely to remain muted as the private sector is unlikely to accelerate hiring given the slowing GDP growth. On the other hand, consumer inflation is proving to be very sticky and will likely remain elevated driven by food inflation. Thus, real wage growth in urban areas will remain under severe pressure,” it said.

The brokerage has a underperform rating for Jubilant Foodwroks, which is the franchisee of Domino’s and Dinkin Donuts.

Devyani International’s lack of interest in investing more in Costa Coffee franchisee has to be read in this context. The company, as the ET report notes, is not interested in pushing a franchisee which has not returned any profits yet.

This is in stark contrast to the US parent’s views, which sees long-term potential. It is looking for other partners to expand its presence, the ET report says.

The bottomline is what ever the world thinks of the Indian market, local businesses are suffering from a deficit of confidence. A reversal of this sentiment is possible only once the elections throw up a decisive government at the Centre.