Trouble brewing in machines for coffee chains?

MUMBAI: India’s coffeehouse chains are staring at a troubling brew. A higher customs duty on roasting, brewing and vending machines which is already in place now, will raise costs for companies, hitting their margins.

Factor in the rupee depreciation and a wobbly coffee inflation and you have a perfect mix for stirring up a storm in cafe kitchens. “This (changes in duty structure) will inflate our sourcing cost,” said Rajat Agrawal, CEO at Barista Coffee Company, projecting a cost inflation of 3%-4%. For consumers, it could mean a spectre of price hikes although firms do not plan to increase rates on their menus immediately.

Companies will now have to pay a 10% customs duty on machines which are largely imported from parts of Europe (primarily Italy, Spain and Romania for roasting and brewing machines) and China (for vending machines), industry executives said. The cost of machines vary depending on the model and the region of sourcing and therefore firms tend to have varied cost structures.

Earlier, the rate on machines stood at 7.5% but the govt removed concessions that were being given to certain goods. The benefits lapsed on Feb 2, the budget documents showed. “When customs duty goes up, the taxable value for GST also goes up. As it is, with the depreciation of rupee and fluctuation in prices of coffee, there has been a constant pressure at the input cost level,” said Tarun Jain, CEO at Tim Hortons India. A depreciating rupee pushes up the cost of imported goods. The rupee is currently hovering in the range of about 90 against the US dollar.

A competitive market coupled with the fact that the cost of equipment is categorised under capex, companies do not plan to pass on the price rise to consumers immediately. “We will avoid passing the burden to consumers to the extent possible by leveraging on volumes and economies of scale,” said Jain.

The roasting, brewing and vending machines are separate and serve different purposes although roasting is required for both brewing and vending. Vending machines are what you see at offices, canteens and other commercial centres and all brands do not operate in the vending space.

“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 go up by 10% and it definitely impacts the cost dynamics of our operations,” said Abhijeet Anand, founder and CEO at abCoffee.

Starbucks declined to comment while a message sent to co-founder and CEO of Blue Tokai Coffee Roasters Matt Chitharanjan did not elicit any response. Rising disposable incomes are fueling growth of coffeehouse chains in India.