I’m compelled to write this article, as a committed entrepreneur it’s hard for me to digest despite entrepreneurial failure of VG Siddhartha media and political class are portraying him as a successful entrepreneur. In fact he was also awarded “entrepreneur of the year award” for CCD venture back in 2002-03 despite never having a profitable business model in place, this makes me wonder do enterprising people of India really understand what entrepreneurship is all about? And to prove my point, here I list out three pitfall which VG Siddhartha failed to address, and how CCD’s future leaders should fix them.
According to a study published by HBR Press, “Many executives thrash about with mission statements and vision statements. Unfortunately, most of those statements turn out to be a muddled stew of values, goals, purposes, philosophies, beliefs, aspirations, norms, strategies, practices, and descriptions. They are usually a boring, confusing, structurally unsound stream of words that evoke the response ‘True but who cares?’ CCD’s vision is no different, when we read their vision statement in annual report we can conclude promoters of CCD are confused between two ends, weather to define future of coffee (inside-out thinking) or let coffee define their company’s future (outside-in thinking).
On listening to Siddhartha’s speech at IIT-Kanpur, were he envisions to build a globally recognized Indian brand and wanting to be one among the top 15 retail brands of India. What this means is, Siddhartha want to build a company based on comparison to other top companies rather than build a business based on “understanding”, so it’s just a goal but not a vision because true vision comes with a unique insight, like identifying gaps in the market which can be filled with product or services.
How to fix
Successful entrepreneurs build companies based on understanding not bravado as in the case of Siddhartha. How? By asking the right questions and without asking right question it is impossible to generate an insightful vision. So new layer of CCD’s leadership must ask right question and to do that they first need to confront brutal facts with honesty such as,
- India is one of the largest producer of coffee yet remains a least coffee consuming nation not even listed among top 100 coffee consuming nation, so how can we increase coffee consumption per capita among Indian?
- There is a taboo associated among Indians, drinking too much of coffee will make skin darker, so how can we transform these cultural belief system to increase demand for coffee based products?
- Should we position coffee as life style drink or a staple drink?
- And the list goes on…
The essence of profound insight is simplicity, entrepreneurship at its core is all about problem solving, and if our solution to problem is not simple then we don’t understand the problem well enough, so CCD leaders must keep asking right questions, until, be able to see which other competitors fails to see.
Misplaced “Business Model”
CCD’s current business model is misplaced because it’s designed around the metrics of growth (1.7k cafes across India) while scaling towards adjacent markets- from coffee to (competing) non-coffee based beverages and varied confectionaries to fast food. And in case of any losses in core coffee business VGS plan was to counterbalance from his investment portfolio.
Most entrepreneurs I meet are unaware about the fact, it’s not the product, a sophisticated technology or even a brand which makes the money but it’s the business model, a classic entrepreneurial mistake from Siddhartha due to which losses were inevitable. Second evidence which justifies absence of cohesive business model is,CDEL group is profitable but the core coffee business is accumulating severe losses.This misalignment is due to extremely low return on assets ROA for group companies which stands at paltry 0.5% and for core coffee business ROA is around mere 2%, which are far below the industry average. And what could be worst?, the issue of low ROA is not highlighted in the CDEL’s annual report which raises doubts over lack of financial intelligence of Siddhartha and his team because ROA is an important measure of money making (along with growth & cash generation), and by keeping track on this particular metric entrepreneurs can get a holistic grip on their business.
A great business is defined by its ability to generate cash flows in future. Contrasting with technology companies, restaurants or cafés are old economy business: successful ones might collect healthy amounts today, but their cash flows will probably dwindle over the next few years when customers move on to newer and trendier alternatives. Technology companies’ follows opposite trajectory they often lose money for the first few years.
How to fix
While designing business model entrepreneurs must understand relationship between profit and cash. Profitability is not the right indicator of a healthy business but cash-flow is, successful business needs both but profit is not equal to cash, a company can be profitable yet go belly up. In case of CCD, issue of profitability and cash-flow should be addressed by focusing on 1. Identifying most impactful economic denominator (profit per ‘X’) 2. By optimizing supply chain and 3. Redesigning business operations
- It is unclear from CDEL’s annual report, what their “economic engine”for driving profitable growth is. Is it profit per cup of coffee, or profit per café branch or profit per region? It takes profound economic insight as part of the vision highlighted above to identify economic denominator for driving engine of growth profitably.
- ROA must be boosted with new methods for improving efficiency, effectiveness and flexibility of company’s supply chain because a staggering 80% of all costs are typically embedded here.
- From the interest of making Café Coffee Day attractive to future investors and hopefully merger with international brand, cash-flow of the business must be optimized by designing its operations in sync with the metrics “Free Cash-Flow = Operation Cash-flow – Net Capital expenditure”, so no wonder CCD’s merger deal with Coca-Cola failed to materialize.
Missing Strength in “Character”
Successful entrepreneurs are those with appetite for risk, who show resilience, exercise self-awareness while being pro-active, these are traits of a character, and character means who we are, personality is what we know. In VG Siddhartha’s character lack of self-awareness and complacency seems be the issue.
Siddhartha’s relentless obsession for growth by raising debt against equity at a very high cost, in a hope of offsetting losses, if any, from success of his investment portfolio shows his complacent attitude towards building a business, growth could have been restricted until innovative business model was found, and failing to learn, then pivot accordingly is indeed failing as an entrepreneur. Another sign of complacency in him is, to open up a new coffee chain in India similar to an existing cafés back in Europe or America all the way down to their business model, pricing, target customers and product may be attractive economic investment, but it is not a startup because it’s success depends on “execution” only, while goal of every startup is to experiment for discovering how to build sustainable business around a vision, unfortunately the core coffee business was never built with a typical startup approach. What this also mean is anyone who is willing to splurge cash can build CCD like café chain and related businesses, but entrepreneurs with “pro-active” approach will make sure they are profitable with healthy cash-flows.
Looking at the nature of unrelated diversified portfolio of businesses under one roof CDEL one can conclude VG Siddhartha never exercised self-awareness by asking questions like “What I’m I deeply passionate about?” “What can I be the best In the world at?” had he answered such questions he would have built unique core and ‘created opportunities of growth’, instead he ended up ‘selecting growth opportunities’ across unrelated business ventures, and according to research most great companies die due to indigestion from too many opportunities than starvation from too little.
How to Fix
Any character related issue can only be fixed by selecting the right leaders. A leader with a paradoxical combination of personal humility combined with professional will be an ideal candidate to lead CCD.
There is no trace of entrepreneurial creativity and imagination around core coffee business. CCD is just a success theater, a powerful brand, using the appearance of growth to make it seem that they are successful, in reality it’s just a false startup without true innovation in business model or operations. According to research it took four years on average for great companies to clarify their profitable position based on unique insights, and in case of CDEL it’s been two decades andpromoters are yet to find their success formula. VG Siddhartha created such momentum that he failed to realize CDEL’s problem was not how to grow fast, but how not to grow.
In his letter to board of directors by accepting failure on behalf of his employees and team VG Siddhartha displayed character of a great leader, but by committing suicide in response to debt burden he didn’t show character of an entrepreneur. To me he is a great enterprising individual, successful investor but a failed entrepreneur who started good and gave up in the process of becoming great. My respect to him and condolence to his entire family.
(About Author: Mohammed Raziq, Entrepreneur, Working on Institutional Policies for Indian Political Reforms)