The Coffee House Economics

After a long gap of time I have recently visited an Indian Coffee House (ICH) outlet in Kerala. Obviously one expects from the ICH excellent coffee and food items served by extremely courteous staff. Yes, I experienced all this in my latest exposure just as what I had experienced every time during my college days decades ago. Those days, I took it for granted and thought this is what to expect from any coffee shop or restaurant. Over the years, in many cities of India and abroad, I found that it is too much to expect such basics at a reasonable price. In fact, such places are fast disappearing without leaving a trace in history.

Here is a list of basics that I have experienced at the Indian Coffee House.

1. Excellent cup of hot coffee served on the table for Rs.10
2. Food and snack items are healthy and taste good
3. The waiters and staff are well groomed and in a traditional but elegant white uniform. Service is quick and with a smile.
4. Coffee and food are served in white porcelain and not in steel or paper cups or disposable plates.  
5. Clean ambience, located conveniently and with car parking space
6. The place has a brand appeal; but not meant for any particular social class. Unlike some other similar places the ICH does not detract ordinary folks with high prices and the well heeled with a dirty ambience.
7. Tipping is not a norm. No direct tipping to the waiter; tips if any can be dropped in a common box near the cashier’s desk that will be shared among the staff.

I am not suggesting here that there is no other such place n India. Sure, there will be such exceptions in different parts of the country. But this is an institution with over half a century of tradition and consistent service to the public. Even that is not probably the real differentiator. To appreciate the difference one has to look back a bit into the history of the Indian Coffee House. The ICH in its current form took shape in 1958 as a workmen’s cooperative with the immediate objective of protecting the livelihoods of workers who were fired from an earlier coffee establishment that has roots in colonial India. The leadership for such an initiative was given by the legendary communist leader A.K. Gopalan (popularly known as AKG). Yes, those were still early days of independent India when we had political leaders with integrity and social commitment across the spectrum.

Today ICH runs about 60 coffee houses from Thrissur to Thiruvananthapuram and a few in other cities like New Delhi, Bangalore and Mumbai. One can expect the same quality of coffee and service from every outlet of ICH. We need to appreciate this in the context of many cooperative societies patronized by government or by private parties in India. Most of such cooperatives are citadels of corruption, nepotism, inefficiency and vested interests. Here is a cooperative that is not supported by the Government and is capable of retaining efficiency and quality of service for decades. There is something special perpetuating an organization culture across generations.

There are many modern coffee retail chains in India and abroad that provide good ambience and a certain consistent quality of product and service. Café Coffee Day is an example in India and Starbucks is an example globally. They are run by private entrepreneurs and not comparable with the Indian Coffee House. They are run like any other businesses, build brands and serve expensive yet ‘ready-mix’ coffee or frozen snacks. They position more as meeting places than coffee shops. You need to go to the cashier to place your order and pick up your stuff when ready. In other words, you do much of the service and you pay more.

The Indian Coffee House is a place where you will be served. And you will get genuine coffee and food made instantly or without losing the freshness. Now, that is not a scalable business like Café Coffee Day. Or maybe no Venture Capitalists looked at them. And that is a good thing for now, for many people like me and for all those folks who own and serve at the Indian Coffee House.

Let’s look at the economics. Pure capitalist economics would suggest that McDonaldization adds value to stake holders. This familiar model would scale up fast, standardize fast and make the customer share the costs and efforts of running the business, run adjacent or even unrelated revenue streams, advertize to create artificial value perception and hike prices, innovate, automate and appify everything possible. And eventually, go for an IPO or sell to any buyer and move on. With the advent of stock markets businesses in a sense have became tradable products. Yet, many millions of retail participants who buy and sell company shares do not really buy and sell the companies. Only the big guys or investment houses can really force ownership control of businesses. 

Once upon a time businesses were built with the purpose of meeting one or many of the needs of a society or a community and in that process the entrepreneurs and shareholders earn some profits. That is really old and un-fascinating story for the start-uppers and VCs. For them a business is a means to make money; an asset that can be traded partly or fully anytime- the sooner the better.

In the evolution of business economics, one can’t easily make a judgment as to which model is right. In some sense, it may be wiser to leave that with the market, assuming that a free market reflects the will of the people. The only problem is the assumption of free market. Free market is more a concept than reality. So, the government comes in with regulations and lobbyists come in to protect the interests of pressure groups. And we are back in an un-free market.

In the midst of all these, where does a cooperative institution like the Indian Coffee House fit in? In the local community! There is still some space for such institutions and businesses to co-exist. Such businesses are profit sharing organizations. They share their profits not only among the shareholders but also among the larger group of daily patrons who are also called customers. When I go to the Indian Coffee House with three of my friends, buy four cups of coffee for Rs. 40 and spend 40 minutes discussing technology, literature, business or anything (using the space as a private meeting place) my friends and I are instantly sharing the unmade profits. Shall I call it the ‘opportunity profit’ to mean the ‘opportunity cost’ of say Rs. 500 that I haven’t spent at another Coffee Chain Shop?

Lot of people think good economics creates more billionaires. A few people think good economics makes life better and affordable for more people.  Time for a coffee break!

‘In economics the majority is always wrong.’ – John Kenneth Galbraith