Why Third Wave Coffee’s ₹50 Cr Loss was Inevitable?
The recent news of Third Wave Coffee posting a whopping ₹50 crore loss in FY24 despite generating ₹120 crore in revenue has sent shockwaves throughout the Indian coffee industry. As growth specialist Unnati Bagga pointed out, the chain’s aggressive expansion strategy has led to a deepening of losses instead of fixing the core business model. But was this loss inevitable? Let’s dive into the reasons behind it and explore what this means for the future of Third Wave Coffee.
Premium Rents: A Heavy Burden
One of the significant factors contributing to Third Wave Coffee’s losses is the high rent it pays for its stores. As Bagga noted, “The premium rents they are paying are not sustainable and are putting a strain on their unit economics.” With many of its stores located in upscale areas, the chain is paying a premium for the privilege of operating in these locations. While this may have helped attract a loyal customer base initially, it has also led to increased operational costs that are difficult to recoup.
High Customer Acquisition Costs (CAC)
Another major issue plaguing Third Wave Coffee is its high customer acquisition costs (CAC). To attract and retain customers, the chain has had to invest heavily in marketing and promotions, which has added to its expenses. As Bagga explained, “Their CAC is very high, and they are not able to recover that cost quickly enough.” This has put pressure on the chain’s profitability, making it challenging to maintain a stable financial position.
Underutilized Stores
A recent report by Ascendants highlighted that Third Wave Coffee’s stores are underutilized, with many operating at less than 50% capacity. This is a significant issue, as it means the chain is not maximizing its revenue potential. With high rents and CAC, underutilized stores only add to the financial strain. To make matters worse, this also means that the chain is not able to leverage its existing infrastructure to its full potential.
Limited Repeat Business
Another challenge facing Third Wave Coffee is its limited repeat business. As Bagga noted, “They have only 15-20% core coffee loyalists, which is a very low percentage.” This means that the chain is heavily reliant on new customers, which is a costly and challenging way to operate. With high CAC and underutilized stores, it’s clear that the chain needs to focus on increasing repeat business and customer loyalty to improve its financial performance.
The Aggressive Expansion Strategy
Third Wave Coffee’s aggressive expansion strategy has also contributed to its financial woes. The chain has been rapidly opening new stores across the country, which has put pressure on its resources and finances. As Bagga explained, “Their expansion strategy has been very aggressive, but they haven’t done enough to fix the core business model. They need to focus on improving their unit economics and customer loyalty before expanding further.”
Conclusion
In conclusion, Third Wave Coffee’s ₹50 crore loss was inevitable due to a combination of factors, including premium rents, high CAC, underutilized stores, and limited repeat business. The chain’s aggressive expansion strategy has only deepened its losses, and it’s clear that it needs to focus on improving its core business model before expanding further. By addressing these issues and prioritizing customer loyalty and unit economics, Third Wave Coffee can potentially turn its fortunes around and become a more sustainable and profitable business.
Source:
https://ascendants.in/business-stories/third-wave-coffee-losses-2024/
