Explosive Growth Amid Rising Losses: What’s Brewing at Third Wave Coffee?
Third Wave Coffee is making headlines for all the right reasons – and a few not-so-good ones. The Bengaluru-based coffee chain has just reported an impressive surge in revenue, crossing Rs 240 crore for the fiscal year ending March 2024. But, as with many fast-growing companies, there’s a catch: its losses have ballooned more than twofold. Let’s break down how this rapid growth has come at a steep cost for the company.
A Revenue Boom in FY24
Third Wave Coffee has certainly hit the ground running, with its operations skyrocketing in the past couple of years. The company’s revenue from operations in FY24 reached Rs 241 crore, up from just Rs 32 crore in FY22. That’s an increase of over 67% compared to FY23, where the revenue stood at Rs 144.4 crore.
For a brand that started with a handful of stores, this kind of growth is nothing short of impressive. The company’s business spans everything from sourcing and roasting coffee beans to selling brewed drinks and coffee-related products like cold brews and coffee bags. In FY24, the bulk of its revenue came from these product sales.
At the core of this success is Third Wave’s aggressive expansion strategy. With 114 cafes in India as of October 2024, the company is targeting 160 by the end of FY25, and plans to continue ramping up its footprint with 80 to 100 new cafes annually from 2025 onwards.
Scaling the Operations
One of the standout figures in Third Wave’s financials is its operational scale. The company claims to roast between 10,000 and 15,000 kilograms of coffee beans per week, a clear sign of its rapidly expanding operations. Along with this, the revenue from non-operating activities, such as interest and gains on assets, added an additional Rs 6.61 crore to its top line, pushing its total revenue to Rs 247.9 crore for FY24.
Expense Breakdown
While revenue is up, so are costs. Employee benefits, the largest expense for the company, increased by nearly 69%, climbing to Rs 97.26 crore. Given the heavy labor demands of running over 100 cafes, this is not too surprising.
The cost of materials, which includes the coffee beans and other ingredients, also saw a substantial rise, doubling to Rs 87.61 crore. On top of this, rent, always a huge factor in the retail sector, amounted to Rs 81.25 crore in FY24.
But here’s where it gets interesting. Despite these high expenses, Third Wave only spent Rs 11.65 crore on selling and marketing. This comparatively low spend on advertising has fueled speculation that the company is using a lean marketing strategy, possibly relying on word-of-mouth and organic growth to drive foot traffic.
The total operational expenditure reached Rs 358 crore, up 78% from the previous year. That’s a big chunk of the pie when you consider that the company’s overall revenue for FY24 was just under Rs 250 crore.
The Cost of Expansion: Losses Soar
While Third Wave is growing rapidly, it’s burning through cash at an equally alarming rate. The company’s losses have more than doubled, jumping to Rs 110 crore in FY24, compared to Rs 44 crore in FY23. This significant increase in losses is primarily attributed to high expenses, particularly in rent and employee costs. It’s clear that scaling up operations quickly has come at a hefty price for the company.
Third Wave’s EBITDA margin and return on capital employed (ROCE) both stood at negative values in FY24, at -35.52% and -35.28%, respectively. To put this in perspective, for every rupee of revenue, the company spent Rs 1.48 just to keep the lights on.
Cash Flow Concerns
To make matters worse, operating cash outflows increased by 33%, reaching Rs 81.57 crore. The company’s overall cash and bank balances have grown significantly, however, from Rs 8.06 crore in FY23 to Rs 120.4 crore in FY24. This suggests that while Third Wave is growing rapidly, it’s also heavily reliant on fresh funding to keep the wheels turning.
At the end of FY24, Third Wave’s outstanding losses had ballooned to Rs 192 crore, a massive figure that highlights the financial challenges the company faces in turning a profit.
Investment Backing and Competitive Landscape
Despite these losses, Third Wave has managed to attract substantial investor backing. The company has raised around $65 million to date, with recent investments from WestBridge Capital, Creaegis, and Redbrook, among others. A significant chunk of this funding came in September 2023, when the company raised $35 million at a post-money valuation of $155 million.
In a crowded market where competitors like Subko Coffee, Blue Tokai, and Rage Coffee are also vying for a share of the premium coffee pie, Third Wave faces stiff competition. But it seems to be holding its own by focusing on quality and expansion, even if the path to profitability remains distant.
The Road Ahead
The coffee industry in India is booming, but as Third Wave has learned, growth doesn’t come cheap. Its strategy of expanding rapidly and keeping marketing costs low may be working for now, but can the company build enough customer loyalty to drive consistent revenue at the scale needed to offset its losses? That remains to be seen.
While Third Wave’s losses are concerning, its large cash reserves and investor backing provide a cushion for now. The company’s future will depend on whether it can manage its costs, especially rents, and turn its growing customer base into a more profitable venture.
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