Saturated market? Not in India. International coffee brands wake up and smell the money

With the emergence of a young middle-class, caf culture is taking root on the streets of the sub-continent and the big players are brewing up

For an Englishman in India, Costa Coffee's first branch in Mumbai is a pleasant reminder of home. But for the students and young professionals sheltering from the blaring traffic in one of the busiest areas in the affluent beach suburb of Juhu, it's just another caf.

Caf culture has taken a firm grip on India's cities, and coffee shops spring up almost daily. Technopak, a consultancy specialising in Indian consumer businesses, argues that 40 per cent-a-year growth is "conservative". And foreign chains have begun to scent the profits.

Costa Coffee was the pioneer, launching its first coffee shop in Delhi two years ago. John Derkach, UK managing director, says: "The growth in the young Indian middle classes is driving massive growth in the coffee shop market at the moment."

Costa now has 32 outlets in Delhi and is close to opening its second in Mumbai. It plans to have 300 cafs in India within five years, half as many as it has in the UK. But its UK rival Caf Nero is also planning an entry. Last year it held talks with Dubai's Landmark Group on a franchise agreement, but Landmark wanted a partner with international experience. This September it was back for a second try, holding discussions with a new potential partner.

Another UK brand, Caf Ritazza, part of travel food services group SSP, has an outlet in Mumbai airport and wants to set up shop across Indian airports and rail stations as they are updated and overhauled.

America's Starbucks, meanwhile, is struggling. Its entry, planned for this autumn, was postponed in July after the Indian government rejected its application for a second time.

Other countries' chains are also getting in on the act. Italy's Lavazza took the most decisive step in March, buying out Barista, India's second-largest chain. Landmark will choose one of two US chains as a partner by mid-December and Gloria Jean's Coffees is expected to arrive by the end of the year,

But no foreign entrant comes close to matching the growth rate of Caf Coffee Day, India's largest chain, which is backed by Asia's largest coffee-growing business. It is churning out 20 new cafs a month and plans to grow from 480 today to 750 by the end of 2008, and to hit 1,400 in five years.

Mr Derkach thinks the chains are thriving in India because they are meeting a previously untapped need: "Despite India's reputation as a tea-drinking nation, there is no real heritage of tea shops as places for people to sit. Coffee shops are filling a complete gap in the market."

Simrin Sablok, head of marketing at Caf Coffee Day, agrees, adding that the parental tight reins on Indian teens makes cafs their only option. "In India, there's really no place for the youth to hang out, and a caf is a place where there's no alcohol served, so the parents are happy."

But can foreign chains offer Indian consumers anything new? Ravi Sexana, managing director of Landmark's Indian leisure business, argues they can: "Even after 10 years, Caf Coffee Day and Barista still struggle with service and quality. They have done a good job educating the market. Now the time is right for an international brand to come in and offer a higher quality of coffee and higher-quality service."

Mr Derkach believes supping lattes in an international chain still holds an allure for affluent Indians: "Consumers in overseas markets are telling us that a brand's status gives them the confidence that they are receiving a better-quality product. We know that Costa's identity as a European brand operating in 20 countries actually gives us an edge against domestic coffee shops."

But Arvind Singhal, chairman of Technopak, plays this down: "When you look at the 70 to 80 million people you are targeting, I don't think they'll know about brands. The perception is that everyone knows Starbucks that might not be true."

Mr Singhal is convinced the Indian market is so huge that it can easily accommodate the 10 or more international chains looking to take the plunge. "While the premium locations have been taken up, India is expanding in every direction. If I was them, I'd feel there's no urgency or hurry."

India will build around 800 shopping malls in the next six years, each needing several cafs. And so far chains have only touched the top 40 cities in a country that is soon to have more than 60 cities populated by more than a million people.

In a twist, Caf Coffee Day is launching a chain of 50 outlets across Eastern Europe. Perhaps, before long, Indians in London will be able to sit with the comfortably familiarity of their own home-grown cha.