MUMBAI: India's vibrant coffeehouse industry is confronting a challenging financial landscape as increased customs duties on essential equipment threaten to escalate operational expenses. The recent adjustment in duty structure, which has already taken effect, imposes higher costs on companies importing roasting, brewing, and vending machines, potentially eroding their profit margins.
Perfect Storm of Cost Pressures
When combined with the ongoing depreciation of the Indian rupee and unpredictable fluctuations in coffee prices, this duty hike creates a volatile mix that could disrupt cafe operations nationwide. Rajat Agrawal, CEO at Barista Coffee Company, highlighted the direct impact, stating, "This change in duty structure will inflate our sourcing cost," with projections indicating a cost inflation of 3% to 4% for his company.
Immediate Consumer Implications
For coffee enthusiasts, this development raises the specter of potential price increases on their favorite beverages. However, industry players have indicated they do not intend to immediately adjust menu prices, aiming instead to absorb the additional costs through operational efficiencies.
Detailed Breakdown of Duty Changes
Companies must now pay a 10% customs duty on coffee machines, which are predominantly imported from specific global regions. Roasting and brewing equipment typically comes from European countries including Italy, Spain, and Romania, while vending machines are primarily sourced from China. The previous duty rate stood at 7.5%, but government concessions on certain goods expired on February 2, as confirmed by budget documents.
Cascading Tax Implications
Tarun Jain, CEO at Tim Hortons India, explained the compounding effect: "When customs duty increases, the taxable value for GST also rises. This comes at a time when we're already facing constant pressure at the input cost level due to rupee depreciation and coffee price fluctuations." The Indian currency's current valuation around 90 against the US dollar further exacerbates the situation by making imported goods more expensive.
Strategic Responses from Industry Leaders
Despite these challenges, coffee chains are adopting cautious approaches to pricing in a competitive market. Since equipment costs fall under capital expenditure (capex), companies are hesitant to immediately pass increased expenses to consumers. Jain elaborated on this strategy: "We will avoid passing the burden to consumers to the extent possible by leveraging volumes and economies of scale."
Equipment Specifics and Market Dynamics
The affected machinery serves distinct purposes within coffee operations:
- Roasting machines: Essential for processing coffee beans
- Brewing equipment: Used for preparing coffee beverages
- Vending machines: Found in offices, canteens, and commercial centers
While roasting is fundamental to both brewing and vending processes, not all coffee brands operate in the vending machine segment, creating varied impacts across the industry.
Industry Concerns and Manufacturing Limitations
Abhijeet Anand, founder and CEO at abCoffee, expressed surprise at the timing of these changes: "This is not something we had expected considering that India does not have manufacturing capabilities in the coffee machine space yet. Our capex costs will increase by 10%, significantly impacting our operational cost dynamics."
Market Growth Amid Challenges
The coffeehouse sector continues to expand in India, driven by rising disposable incomes and changing consumer preferences. Major players like Starbucks declined to comment on the situation, while attempts to reach Blue Tokai Coffee Roasters co-founder and CEO Matt Chitharanjan went unanswered, indicating the sensitive nature of these financial developments.
As India's coffee culture matures, industry stakeholders must navigate this complex landscape of increased import costs, currency volatility, and competitive pressures while maintaining service quality and customer satisfaction.
