Startups, corporates, and other offices across India have one thing in common: the chai break. Come 4 pm, and employees make a beeline for the neighbourhood tea stall or the office vending machine. Or else, they wait for the “chaiwala” who delivers their evening cuppa.
It is to standardise the local chai offering that Raghav Arora and Lalit Aggarwal, both IIM-Lucknow graduates, registered Kaivalya Foods and Beverages in Delhi last year and launched F5, which aims to serve fresh beverages and refreshments to offices every day.
“We are into hyperlocal production and supplies of daily refreshments for the working population with the long-term objective of building a consumer and service brand, and funnelling more products into the supply chain,” says Raghav, who earlier worked for Avendus Capital.
Brewing up a change
Raghav says most of India’s working population - close to 90 percent – work in the unorganised segment, and still rely on unhygienic and substandard options for their daily refreshments.
“They procure from local vendors who operate in unhygienic conditions, deliver them in unhealthy ways, and lack variety and professionalism. The semi-organised and organised segments generally have vending machines or their own pantry. Vending machines do not offer the taste that people want,” Raghav says.
While Chai Point and Chaayos are cracking the chai time segment, with tie-ups and vending machines, Raghav points out that these are expensive for everyday needs. He adds that F5 aims to change status quo by providing beverages and snacks, made according to local tastes and preferences, to suit the working population’s everyday needs.
“We chose refreshments as a thread to bring our customers on one platform and create a supply chain that interacts with the consumer very frequently, is profitable, and has a large consumer base. It is similar to Dailyninja, Doodhwala or Milkbasket; they have chosen milk as a connecting thread. However, in our case, the underlying product has sufficient margins to be sustainable even without any upselling/cross-selling,” Raghav says.
One of the major challenges was breaking the customer’s inertia of procuring refreshments from local vendors (with whom they had established relationships), pantry systems, or vending machines.
To overcome this, Raghav says they worked to be competitive with their pricing, offerings, and services, and backed it all up with a well-articulated marketing campaign.
“We have our own marketing/sales team that directly pitches to our customers and brings in new clients. Mostly our current practices involve push marketing where our marketing executives make a cold visit to new customers and bring them to our platform. We also get new customers by references from our already subscribed customers,” says Raghav.
The team is currently working on their app and website.
The working model
For subscription-based demand, the delivery partners deliver refreshments at a scheduled time as specified by a customer. The team currently charges on per litre basis . Currently it is Rs 120 per litre, which is equivalent to Rs 8 per cup of Tea/Coffee. There is no additional cost for subscription.
The team intends to soon cater for variable demand. For this, F5 plans to get on-demand refreshments delivered to the customer within 10-15 minutes from the time the order is placed. Raghav says these will be delivered by their delivery staff, who are present in the market with refreshments or can procure them from kiosks the team intends to set up.
F5 has partnered with online food delivery platforms at present. “We have 14 delivery partners who are handling product deliveries in Lucknow and in Delhi,” adds Raghav.
The team follows a hub-and-spoke model where F5 sets up cloud kitchens that serve a 7-8 km radius. A single kitchen is able to serve 500 litres per day, ensuring exposure to 800-1000 shops each day.
All overhead costs and delivery costs are structured so that the per-cup cost to the customer is lower than current offerings on the market. This ensures that business is profitable with an immense potential to upsell and cross-sell.
“Our current gross margin stands at 62 percent and net profit margin is about 40 percent at the model level. Our delivery costs are about 10 percent of our total costs, and employee costs are 12 percent,” Raghav says.
F5 is currently operating in Delhi and Lucknow.
“Kiosks will cater to demand where customers prefer to go out of their workplace to take a quick bite. The variable demand has another aspect: corporate meetings. For this, orders are taken in advance. We will soon be integrating the entire system through technology, and our app is in the development stage. It will make the entire process seamless as a customer will be able to subscribe and order from the app itself,” he adds.
Revenue and setting up operations
For the subscribed customers the average basket size would be around Rs 3,000 per month. Bootstrapped at present, the team initially invested a total of Rs 30 lakh of the founders’ personal savings. Setting up the cloud kitchen cost between Rs 10 and Rs 15 lakh.
The team has divided the market into three segments - unorganised, semi-organised, and organised segment. The unorganised segment includes the likes of Karol Bagh, Delhi, and Aminabad in Lucknow.
The semi-organised segment includes offices or showrooms in Connaught Place, Delhi, and in Hazratganj, Lucknow. “In the organised sector, some of our clients are Tata AIA, Master Capital, and BSES to name a few,” Raghav says.
Storm in a teacup?
The market for readymade tea is believed to be Rs 33,000 crore, and has been growing at a pace of 15 percent annually. As Raghav mentions, F5 sees competition from the likes of Chai Point, and Chaayos.
In 2015, Chaayos had raised $5 million from Tiger Global. In the same year, Chai Point secured $10 million in a round led by Fidelity’s proprietary investment arm and Eight Roads Ventures (formerly Fidelity Growth Partners India), with participation from Saama Capital and DSG Consumer Partners.
However, F5 is hoping to stand apart by focusing on the mass market. “We started with one kitchen in Lucknow and have now expanded to Delhi because of greater market size and better scope for visibility. We have sold more than one million cups of refreshments till date with around five lakh cups being sold in the last quarter. We have crossed Rs 1 crore in annual revenue, and are selling around 5,000+ cups daily with 95 percent retention rate,” Raghav says.
The team claims to have an annual recurring revenue (ARR) of Rs 1 crore and have already broken even in Lucknow.
The team currently is looking to raise funds. Raghav adds that their goal for the next one year is to establish a presence in every sphere of the refreshment ecosystem in Delhi.
“We are planning to launch an app to make the entire experience effortless and bring in efficiency. We are planning to set up 15 more kitchens in Delhi in next one year along with drawing up a strategy for national expansion,” Raghav says.