Third Wave Coffee’s ₹1300 Crore Gamble | Why Is It Launching a Separate Dessert Brand?

0:00 Do you know Third Wave Coffee has recently launched a new dessert brand called Third Rush? And to do that, they've actually gone and hired the former head chef of a New York-based dessert brand called Magnolia Bakery. Now, surface level, this might look like yet another brand just trying to grow its business. But I'll tell you what is extremely strange about this. See, Third Wave Coffee already sells desserts. If you walk into any of their outlets right now, or if you actually check them up on Swiggy or Zomato, you will find cakes and other sweets on the store right there. And it gets even more strange. If you look up Third Rush and the Third Wave outlet in the same area, you will realize that both of them have the same address, the same phone number, and they even have the same kitchen, and probably even the same set of staff members.

0:47 >> >> So, basically, this new brand is just a new identity running out of the same old kitchen. So, the obvious question then is, why? Why does a coffee chain even need a dessert brand with a different name that literally runs out of its own same kitchen? And does all of this tell us something about the business of coffee that we have probably not realized? That is what I want to talk about in this episode today. And by the end of it, I'm sure you will have a very, very different view of looking at the same cafe business that you probably either order from or you go and visit very regularly. My name is Anurag Bansal, and let's decode.

1:24 All right. So, now to understand all of this, let's first very quickly understand a very big problem that every single cafe in India faces. Now, let's understand this by assuming that you want to open a cafe of your own. Now, for this, let's imagine that you take up a nice 1,000 sq ft space in a premium area in a city like Bangalore. In that case, your rent would come out to approximately 2 lakh rupees per month.

1:45 Your store would most likely open up at 8:00 in the morning, and it would close somewhere around midnight, which basically means your cafe runs for approximately 16 hours per day. Now, Now if you break down this 2 lakh rupees, you are approximately spending 400 rupees every single hour that your cafe actually remains open. Now, I'll tell you why this matters so much in the context of what we are discussing here. See, you can broadly divide a cafe's day into three kind of customers who actually walk in. The first is the morning rush, roughly between 8:00 and 11:00 in the morning. Now, these customers usually buy a coffee, they probably take something small to eat along with it, and they usually rush out in 15 to 20 minutes because they have to reach their office. Now, this is the best case scenario for a cafe because a customer spends money, but they do not occupy the table or the seat for too long.

2:33 The second category is the laptop crowd, which roughly sits in the cafe between 11:00 in the morning and 6:00 in the evening. Now, this customer buys one coffee and then occupies a table for the next 3 to 4 hours. So, the cafe looks full, but the customer is not really spending enough for how long they are actually sitting in the cafe. And the third category is the evening customer who actually comes into the cafe after 6:00 or 7:00. Now, this particular category is the most interesting one because for most cafes, this category does not even exist. Why?

3:05 Because a very few people actually want caffeine at night because it spoils their sleep cycle. Now, I don't know if you know this, but caffeine actually stays in your body for roughly 4 to 6 hours after you have it, which basically means for people who want to sleep at, let's say, 12 midnight, the last coffee they would want to have will mostly be around 6:00 or 7:00 in the evening. So, usually after 7:00 p.m., people prefer dinner or desserts and not really coffee. Now, with that context in mind, let's take a look at what this problem does to a cafe chain like Third Wave Coffee. See, like we discussed, you are paying rent for approximately 16 hours per day. Out of that, coffee is filling maybe nine or 10 of those hours. The remaining 6-7 hours, even though the lights are on, the staff is available, and the store is open, you just essentially have an empty room because people do not want to have coffee at night. And naturally speaking, that is really bad for you as a business, correct? So, as a cafe owner then, what do you really do? The obvious thing, of course, is to find something else that you can sell during those hours after 6:00 or 7:00, right? And that's exactly what most cafes do, which is why you will see a lot of cafes pushing you to buy sandwiches, burgers, and basically other things which are not really coffee. But, let me tell you something very, very interesting. See, if you take a look at the margins of different items that a cafe sells, you will be very, very surprised. According to a report by The Ken, food, which includes stuff like sandwiches, wraps, burgers, etc., earns the least margin for a cafe, somewhere around 15 to 25%. Coffee, which is the main product in some sense, is somewhere in the middle at roughly 25 to 35%. And believe it or not, desserts earn more than 50% margin, and sometimes even higher if the cafe is actually able to bake all of that in-house. You see where this is going, right? Most cafes in India are sitting on a beautiful business opportunity where the best margin product on their menu is wanted by people in exactly those hours when the cafe is empty because people do not want to have coffee at night. And by the way, this way of looking at things is not just limited to cafes. See, once the cost is already paid, the real question is almost always how much are you getting out of it, right? Let's take something as simple as a meeting at your work. See, that 1 hour or half an hour that you do a meeting for is usually gone entirely from your day whether the meeting was useful or not. But, here's the thing, what you keep from that half an hour or 1 hour is exactly what you remember of it. I mean, think about it, a week later most of it is completely gone. Even important stuff like what was agreed upon, who said they would do what, what the client actually asked for, etc., all that basically starts getting really, really blurry because you just completely forgot about it. And that is exactly why so many people nowadays have started to record their meetings and they're using AI to go through all of them later. But, there is a catch in this. See, most of these AI tools usually get names wrong, terms wrong, speakers wrong, and all of that stuff. So, you usually end up with a recording that you anyway cannot fully trust. So, it basically becomes useless.

6:01 That is exactly a problem our partner for today, Whisper Note Taker, solves for. See, the power of Whisper is that the tool already knows the names of the people on your calendar invite, the kind of terms that your team frequently uses, etc. So, the transcript of the meeting that eventually comes out usually comes with the correct words and the correct names against every single line. It, by the way, also runs on your own device, so there is no bot joining your call, and it also works on any meeting platform. In fact, you can also connect it to Claude or ChatGPT, and you can ask questions about any of your older meetings without really having the hassle to copy-paste everything. Whisper Note Taker, by the way, is free to use if you have a Mac. And if you use the link in my description or the pinned comment or scan the QR code, you also get 2 months of Whisper Pro for free.

6:45 So, do make sure you check it out. Now, anyway, let's come back to the cafe situation that we were talking about. We were talking about how desserts have the best margins, and people want them exactly in those hours when a cafe is sitting empty. So, the obvious question is whether any cafe has actually managed to build a real business out of this or not, right? Now, you only tell me, can you name even one single cafe chain in India that is very popular for desserts?

7:09 I can almost certainly bet that you will not be able to name even a single one. And that is exactly why Third Wave Coffee's new bet with a new brand called Third Rush is so, so interesting. See, if you think about it, the reason why cafes are not able to make money from desserts has very little to do with desserts itself. Because, like we saw, Third Wave Coffee already was selling desserts. And in fact, it's not even just Third Wave Coffee. If you look at Starbucks or Blue Tokai or any other coffee chain as well, all of them essentially have some of the other desserts on their menu card already. So, the problem clearly has to be something else, correct? Let me explain this problem to you with a very very simple example. Now, imagine it is the weekend, you've just finished your dinner with your family, and somebody at home suddenly wants something sweet. I'm sure we've all been in that situation sometime or the other, right? Now, think about it. What are your options realistically in this scenario? You probably could go to a dessert-focused brand like Theobroma, Magnolia Bakery, or you could maybe go to an ice cream shop near your house. That's pretty much it, right? A cafe like Third Wave or Blue Tokai at that time, or even Starbucks, shows nowhere in that mind space, even though they actually sell desserts on their menu card. Why is that so, you might ask? There are mainly two reasons for it. The first one is the platform itself. See, for a restaurant aggregator like Swiggy or Zomato, there is very little reason to push a coffee chain into a dessert search category.

8:30 And even more so when exclusive dessert brands with great ratings and good reviews are already right there. I mean, think about it yourself. Even if Third Wave Coffee somehow did show up on that list, the word coffee is literally in the name. So, somebody who wants a brownie or something at 9:00 in the night will simply not consider it as much as they would consider a dessert-focused or a bakery brand, right? And if you think this is a small problem, let me tell you it is not. Even today, no big coffee chain in India really makes money. In fact, even Starbucks, which has the Tata Group's backing and has been in India for more than a decade now, is still in losses in India right now. And I'm sure you have all heard about Cafe Coffee Day, which once had close to 2,000 stores, is today down to a small fraction of that number.

9:14 In fact, even new-age coffee brands like Third Wave Coffee and Blue Tokai are not really profitable right now. And that is exactly why Third Wave Coffee's Third Rush is so interesting, because Third Wave has built Third Rush as a proper, serious, dessert-focused brand. And that almost entirely solves the two problems that we had discussed before. Because all of a sudden now, people can relate to the brand for the right reasons. So, instead of just being a coffee brand that happens to sell desserts, Third Wave suddenly gets to be a dessert brand that literally sells desserts and can compete against, let's say, a Theobroma or a Magnolia Bakery. In fact, to really understand how interesting this opportunity is, let's take a look at the actual numbers. See, in the financial year of 2024, Third Wave Coffee made approximately 240 crore rupees in revenue. And in that same year, their rent bill alone was approximately 80 crore rupees, which basically means that for every three rupees the company was earning, one rupee was going straight into rent. Now, think about it this way. If rent is anyway getting paid, the staff is anyway present, and the shop is anyway open, does it not just make complete amount of sense for the cafe to squeeze more money out of the rent that they are already paying and increase the revenue?

10:25 That is precisely what Third Wave Coffee's bet with Third Rush is all about. But all that said and done, to be very fair, there is still a very, very big question mark around whether or not this will actually end up working. I mean, a lot of people around us are now getting very, very conscious about the food that they eat and the kind of sugar that they take into their body. And there is also massive competition out there. You have your local ice cream stores, you have Theobroma, you have Magnolia Bakery, and you have so many other players out there. But yeah, at least from the point of view of Third Wave Coffee, I think this bet makes complete amount of sense because, technically speaking, that is the only option they have in the space that they operate in. And the way things are going right now, especially considering no cafe chain in India really makes a profit, it looks like whichever company will be the first one to hit profitability will do that not on the basis of selling the best coffee, but on the basis of utilizing their space the best after 6:00 or 7:00 in the evening.

11:20 That's it from my side in today's video. I hope you enjoyed this. If you did, please do consider subscribing to my channel because it keeps me motivated to make more such videos for you. I'll see you in the next one. Bye.