cnbc  |  DECEMBER 01, 2015  |  By: Nyshka Chandran

CHAI AS IT MIGHT, COFFEE CAN'T TOPPLE TEA IN INDIA

Earlier this month, Coffee Day Enterprises—the operator of homegrown chain Cafe Coffee Day (CCD)—raised $175 million in an initial public offering that was more than 1.8 times subscribed. With a pre-IPO valuation of around $1...

Earlier this month, Coffee Day Enterprises—the operator of homegrown chain Cafe Coffee Day (CCD)—raised $175 million in an initial public offering that was more than 1.8 times subscribed. With a pre-IPO valuation of around $1 billion, the company's institutional investors included the likes of BlackRock India and Merrill Lynch Capital. Despite shares falling on the first day of trade, the hype was a reflection of CCD's hugely popular brand. With more than 1,000 cafes country-wide, it's now a household name in Asia's third largest economy. While coffee has traditionally been dominant in India's south, where it is known as filter coffee, the drink gained nation-wide popularity in the early 2000s amid a cafe culture boom that some say mirrored the growth of India's tech sectors. .

Aside from CCD, other popular coffee joints include domestic firm Barista and global giants Costa Coffee and Starbucks. The latter entered the Indian market in 2012 and has 75 stores to date. The explosive growth of well-known chains is indicative of an increasingly wealthy Indian middle class that is looking to embrace Western trends. New Delhi hopes to top 8 percent economic growth next year and multinationals of all stripes are eyeing the opportunities offered by a newly monied group of consumers. Still, coffee has yet to eat into tea's market share. On an annual per capita basis, Indians drank 15.6 cups of coffee in 2014 and 16.6 cups so far this year, Sanjeev Raikar, research analyst at Euromonitor International, told CNBC. That pales in comparison to 163.7 cups of tea in 2014 and 176.6 cups this year, he said. "Though there has definitely been an increase in the number of cafes and coffee specialist retailers such as CCD, such cafés are frequented by young consumers mainly. So, coffee is definitely gaining popularity, however only amongst a small set of consumers." He doesn't expect coffee to overcome tea as India's most popular drink anytime soon. While the country may be the world's sixth-biggest coffee producer, with production for the 2015-16 year expected to hit a record high, domestic demand isn't fuelling growth. At least three-quarters of output goes to exports, with Italy, Germany and Belgium among the top buyers, according to Reuters. Even with the increase in output, exports siphon large amounts of coffee away from the domestic market so consumption estimates have remained largely unchanged in recent years, according to the U.S. Department of Agriculture (USDA). Moreover, the type of coffee being consumed is important. While there is a growing cafe culture, nearly all Indian coffee is consumed at home or in traditional street stalls as instant coffee, said Dhruv Sood, agricultural specialist at the USDA. However, many popular instant coffee brands contain a lower count of naked coffee beans, an international measurement called green bean equivalent (GBE), compared to ground coffee. Over the longer term, Indian coffee consumption will only increase significantly once the use of ground coffee becomes more common since it contains a higher percentage of GBE, Sood explained. News this month that the government allowed 100 percent foreign direct investment (FDI) in several plantation crops, including coffee, from only tea previously, could have an impact on the java market but for now, it's too early to speculate, Raikar said. Going forward, the rise of tea-related businesses could see consumption of the drink explode even further and cap coffee's growth. .

Indians presently consume the lowest-grade quality of crush-tear-curl (CTC) tea—one of the most common production methods—for their chai, explained Kaushal Dugar, founder of e-commerce venture Teabox. One of the main goals of his Bangalore-headquartered business, which sells premier tea from the Assam, Darjeeling and Kangra regions of northern India to customers across the globe, is to upgrade the type of brew customers sip. "We are consciously trying to change this tea drinking culture from lowest quality to better quality of tea. India is one of our fastest growing markets and we think it will soon be in our top 5 regarding revenue contribution," he told CNBC.