Indian cafe chains are struggling with a 30-75% rise in import costs for premium ingredients like matcha. While demand for high-end beverages remains strong, many brands are absorbing the price hikes, leading to lower profit margins. Larger chains are better positioned to manage these costs than smaller operators.
Indian cafe chains are navigating a difficult period as the cost of premium imported ingredients experiences a sharp increase. While these items, such as matcha, hojicha, and yuzu, have become central to the growth strategy of modern cafes, the rising expenses are now testing company profitability.
Impact of Rising Import Costs
Wholesale prices for ceremonial-grade matcha have increased by as much as 75% over the past year, with lower grades rising by 30-50%. These price hikes are linked to poor harvests in Japan, labor shortages, and rising freight expenses. Additionally, other essential cafe inputs such as coffee and whey have seen price increases of approximately 20%. The combination of supply-chain disruptions and a weaker rupee has made these imports significantly more expensive for Indian operators.
Pressure on Profitability
Currently, most major cafe chains are choosing to absorb these higher costs rather than raising menu prices for customers. This decision is aimed at keeping footfall high in a competitive market, but it has resulted in a gross margin reduction of about two percentage points for drinks that rely on these imported ingredients. Since premium beverages like matcha lattes and bubble teas are often priced between ₹250 and ₹450, companies are balancing the need for higher average order values against the risk of thinning margins.
Scaling and Competitive Dynamics
The ability to manage these costs varies by company size. Larger, well-capitalized chains often possess the scale to negotiate better procurement terms or delay the impact of inflation. Conversely, smaller cafe operators often lack the financial cushion to absorb such significant cost increases and are more likely to pass them on to consumers, which could affect their competitiveness.
Long-term Strategy and Alternatives
The Indian speciality tea and bubble tea markets have seen rapid growth, with the bubble tea segment alone valued at approximately ₹3,800 crore. To mitigate future risks, some domestic brands are exploring the possibility of sourcing matcha and hojicha grown within India. While there is limited experimental production in regions like Darjeeling and the Nilgiris, commercial-scale production of high-quality matcha is not yet fully established in the country. Moving forward, investors may track whether companies can successfully switch to domestic ingredients without compromising product quality, or if they will be forced to raise prices to protect their profit margins as these import pressures persist.