Chai Sota bar, a tea business in India, built a million dollar business by understanding the economics of tea and implementing strategies such as menu engineering and a franchise model. They achieved scale and profitability by leveraging the low cost and habit-forming nature of tea, as well as offering complementary products. Chai Sutta bar mitigated risks through thorough research, partnerships, and support for franchisees.
Start of journey
Dubey was born in a middle-class family in the Rewa District of Madhya Pradesh in 1996. His father was a real estate businessman. While growing up, Dubey went through various monetary problems. There was a shortage of basic amenities at home which made him realize the importance of money at a very early stage..
Birth of Chai Sutta Bar
After scouting around for a proper location for many days, both Dubey and Nayak zeroed in on a highly crowded place in Bhanwar Kuwa Street in Indore in July 2016. They opened the shop just opposite a girl’s hostel to target youngsters. They launched this tea shop by investing a collective sum of Rs. 300,000. The teashop was furnished with old furniture bought from a second-hand market and decorated with paintings done by the two friends. Buying second-hand furniture at a low price helped them save money..
Unit economics of Chai Sutta Bar
- Average Monthly Sales: ₹5.75 lakh
Cost of Goods Sold (COGS):
- Ingredients (Milk, Tea Leaves, etc.): ₹2.75 lakh
Gross Profit:
- ₹3 lakh (approximately $3,700 USD)
Operating Expenses:
- Rent: Variable depending on location
- Salaries & Wages: Variable depending on staff size
- Transportation Costs: ₹20,000 – ₹25,000
- Electricity: ₹12,500
- Consumables & Maintenance: ₹15,000
- Miscellaneous Expenses: ₹12,000
- Franchise Royalty (4% of Revenue): ₹23,000
Total Operating Expenses: ₹1,72,500
Net Profit:
- ₹1,27,500
Net Profit Margin:
- Approximately 19.5%
Additional Considerations:
- This is an average and individual stores may vary.
- Initial investment for a franchise can range from ₹6 lakh to ₹8 lakh
- Break-even time to recover initial investment is estimated at around 14.2 months.
Challanges
1) Risk of Labour
Most of the times labours are untrained and are prone to leave so soon. Thereby it increase training expense without getting break even point
2) Some Stores are not doing good Business
There are some of the strores that are not even at break even point. Sometimes it reduces transparency and company without knowing running it causes rental fees and royalty fees
3) Constant increase of Rent
when a store is getting good amount of footfalls the amount of rent increases and becomes difficult for store readjust their location thereby reduces profit margin
Key lessons we can learn from Chai Sutta Bar
1) Understanding unit economics of business
Anubhav Dubey know the margin from chai is very low so he includes different products and classify it into 4 categories – 1) low cost low profit ; 2) low cost high profit ; 3) high cost low profit ; 4) high cost high profit. For examples he make food combos such as – chai with pakoda, pasta with iced tea. To maintain the profit and loss
2) Try to mitigate risk
They did thorough research before buying any outlet, they partner with local vendors so that there will no shortage of raw materials, and they mainatain low margins at the time of covid with their employees.
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