By means of PEST analysis, evaluate the opportunities and challenges of the Indian market. Discuss why Starbucks’ expansion to that market is justified?

CASES STUDY

STARBUCKS COFFEE: EXPANSION TO INDIA

COMPANY BACKGROUD

Starbucks Coffee Company was founded in 1971 by three coffee entrepreneurs Jerry Baldwin, Zev. Seigel, and Gordon Bowker. With their personal savings, a small bank loan and their love for coffee, they opened the first store in Seattle’s Pike Place Public Market. Starbucks’ concept of selling fresh-roasted whole beans in a speciality store was a revolutionary idea at that time. The company has been committee to ethically sourcing and roasting the highest quality Arabica coffee in the world. Success followed soon after and in 1982 the company has appointed Howard Schultz as a marketing executive.

Before joining Starbucks Coffee Company, Howard Schultz had worked as the general manager for Swedish drip coffee maker manufacturer, Hammarplast, one of Starbucks’ suppliers. It was during Schultz’s visit to Starbucks in 1981 that he was impressed by the care the Starbucks owners put into choosing and roasting the beans and their dedication to educate the public about coffee. As a result, he joined the company a year later. Schultz’s visit to Milan’s famous coffee shops in 1983 opened his eyes to the rich tradition of espresso beverage. Schultz recalls, “What I saw was the unique relationship that the Italian people had with the ubiquitous coffee bar around Italy. People used the local coffee bar as the third place from home and work. Coffee shops are in general deeply rooted in Western European culture, not only in Italy. What I wanted to try and do was re-create that in North America”. Then, in 1987, Howard Shultz acquired the company and Starbucks went public in 1992. Since that date Starbucks has done extremely well, turning an everyday beverage into a premium product. The green and white mermaid logo is widely recognised and the average customer visits a Starbucks eighteen times in a month, and about 10% of all customers visit twice a day. An affinity with customers was created that is almost cult-like.

However, in the aftermath of the Great Recession of 2008, Starbucks’s fast and aggressive growth of the prior years has come to a halt. Starbucks found itself in an economic climate that had most people reassessing their daily spending habits on luxury items. The company’s revenues and profit tumbled as a result. Starbucks was hurt by rising costs, the cannibalizing effects of years of overexpansion, and stiff competition in espresso drinks from the likes of McDonald’s and Dunkin’ Donuts. In the summer of 2007, its customer traffic declined for the first time since the company went public, sending the stock tumbling. By the end of its fiscal 2008, Starbucks stock, once seemingly invincible, had declined from a high of $ 38by to a little of $8 nearly 80% decline. In January 2008, Starbucks ousted its chief executive, James L. Donald, and brought back Mr Schultz to try to invigorate the company. Now, after 13 years as chairman, removed from Starbucks` day-to-day management, Mr Schultz has returned to his former role as chief executive with another impassioned mission: reinvigorating what he calls the "romance and theatre" of coffee-making that he says have been damaged in the retailer`s meteoric global expansion. Mr Schultz laid off 12,000 employees and closed 600 underperforming locations in the United States,while scaling back the rate of store openings domestically. At the same time, Starbucks moved aggressively to open stores overseas, where business remained robust.

Starbucks has successfully navigated around the global crisis and renewed with its good fortunes. As a result, for the quarter that ended Jan. 1, 2012, Starbucks reported earnings of $382.1 million, or 50 cents per share. That’s up from $346.6 million, or 45 cents per share, in the same quarter the previous year. The company’s total revenue increased 16% to $3.44 billion.

STARBUCKS’ MISSION AND PRODUCT RANGE

Starbucks’ corporate mission is to: “Establish Starbucks as the premier purveyor of the finest coffee in the world, while maintaining our uncompromising principles as we grew.” In keeping with its corporate mission, Starbucks is expanding its retail outlets at an incredible rate soon after its inception. Starbuck stores has been serving about 70 million customers a week and employing over 200,000 people. The brand equity of Starbucks around the world is one of the most recognised and respected of any consumer brand. The company has developed multiple channels of distribution primarily in grocery stores, mostly in North America. In general, Starbucks Corp. does not move to new channels of distribution until the brand is fully established within its retail stores.

Starbucks has a product range of more than 30 blends and single origin coffees, handcrafted beverages, bottles Frappuccino coffee drinks coffee beans, coffee liqueurs, line of ice creams, music, books, films, home espresso machines, premium chocolate, coffee mugs, coffee accessories, Starbucks card, a stored value card, and gift items (Starbucks, 2007). Its product portfolio also includes books, music, and film. Many of the company`s products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores. In 2009, as part of its product and menu development strategy the company was successful in launching its Via line of instant coffee, salads and baked goods without high- fructose corn syrup or artificial ingredients. The latter is expected to attract health- and cost- conscious consumers.

STARBUCKS ENTRY TO INDIA’S MARKET

Following a six-year market research of the Indian market, Starbucks Coffee International Inc. had entered into an agreement with Tata Coffee to create Tata Starbucks Ltd, a 50/50 venture between Tata Global Beverages Ltd and Starbucks Coffee International, for roasting coffee produced in the company`s estates using the global coffee major’s knowhow and technology. The coffee is to be distributed to Starbucks cafes, to be set up by Tata Starbucks in India, as well as to Starbucks’ operations overseas. The joint venture, Tata Starbucks Ltd, inaugurated its India’s flagship coffee shop in October 2012, which makes India the 61st foreign market. The store, a 4,000-square-foot and two-level extravaganza is located in the elegant and historic Elphinstone Building in the Horniman Circle neighbourhood of South Mumbai.

Tata`s position in India is very unique. It is a company that has unique capabilities in terms of infrastructure. But mostly their values were so consistent with those of Starbucks, building a company with a conscience, treating people well, taking care of the communities. Starbucks’ executives recognised that the company’s entry to India was an opportunity their company could not have achieved without Tata’s partnership. Starbucks and its Indian partner, the Tata Group, announced ambitious plans to open 50 stores in the country by the end of the year and speculated that they could one day have many outlets. At a press briefing, on the inauguration day, Mr John Culver, President, Starbucks China and Asia-Pacific, said, "We have worked very hard in creating this partnership with the Tata and will leverage the credibility and trust of the Tata with our global brand."

Avani Saglani Davda, the new CEO of Tata Starbucks, said: "A lot of Tata companies own real estate and we will leverage that in terms of getting sites that are iconic and at the heart of the city in the commercial capital of Mumbai and Delhi.’’ However, shortly after, in a sign that India started to prove to be a tougher market to crack than they had originally thought, executives from both companies seemed to revise their ambitious forecast from 10 months earlier, saying that they would now open just two more locations in Mumbai this year and their first stores in New Delhi wouldn’t be ready until early 2013. Even Howard Schultz, who initially recognised India as a tremendous opportunity, declined to speculate on how many stores the company planned to open in India or how much money it would invest.

As part of the joint venture agreement, Starbucks is expected to sell Tata-owned Himalayan water brand both in India and in the overseas markets through its stores. Starbucks has entered into a sourcing and roasting arrangement with Tata Coffee and expects to leverage this association in other markets with the view to taking branded coffee from India to other parts of the world in the future. The coffee Starbucks plans to sell in India, unlike in other countries where it operates, will be from beans grown and roasted in the country, by Tata Coffee, a subsidiary of Tata Group.

Mr Schultz considered the opening of the Horniman Circle store to be a major milestone for the company, which is more important than other openings in Starbucks’s history because it had been a long time in the making. The company has been looking to set up shop in India since 2005 and had several false starts. At first, it was unable to find the right partner. Later, it put India on the back burner to focus on the growth of its business in China and consolidate its global operations due to the global economic recession. It again put its India plans on hold in 2007 and 2008 because of the global financial crisis. Unlike any of the existing competitors, the stores that Starbucks will open and design will create a destination because of the elegance and the style of the store and its size. Everyone who has seen the store was impressed. Starbucks has had a long history of broadening and expanding its presence in its overseas markets and plans to do the same in India. Mr Schultz said:

“We want to create a coffee experience that is a stunning experience in terms of quality. We want to create a physical environment that does not exist and when people see it, it will become the third place (third most popular place after home and work). From a reputation standpoint, we also want to create the kind of company that is steeped in humanity and gives back to the community.”

Since their meeting with Tata’s executives Starbucks realised how its assets were so complementary with those of Tata and together they could create a very unique strategy and over a time build a very substantial significant business together. What Tata brings is a unique perspective in terms of real estate acquisition capabilities, the opportunity to integrate Starbucks into Taj Hotels, the ability to bring food from the Taj into Starbucks stores and the capability that Starbucks just could not do on its own in terms of infrastructure and distribution. In India, Starbucks plans to create a value proposition and as much accessibility as possible. The company is sourcing and roasting coffee in India. This is the first time it has ever done that anywhere outside of North America for store opening. This gives Starbucks a competitive advantage and the company wants to win by setting a pricing strategy that will be very competitive.

In general, customers in India were found to be excited about the food at all the tastings that Starbuck has offered. The food is very different than anything offered anywhere else because it is cue to the Indian palette. It will be hot, cold, savoury and sweet. It will be vegetarian as well as meat. Food was forecasted to be a higher percentage of sales than in other markets. Retail analysts are optimistic and forecast that the Indian coffee market could double in the next five years, reaching more than $500 million and Indian consumers, who are hungry for clean, safe places to get together with friends, may view Starbucks more as a hangout spot than a purveyor of coffee. According to retail analyst Arvind Singghal, “In India, you could be selling lemonade in Starbucks and people would still come."

Starbucks plans to set reasonable and same prices across all outlets despite Starbucks having the reputation of being a high-end premium brand. The pricing strategy is driven by the company’s value proposition of all kinds equal to society, especially, when Starbucks opens in mid-market, Starbucks, with Tata as partner, has opted for competitive pricing that is nearly half the coffee chain’s charges elsewhere in the world. For example a cup of coffee will cost about Rs. 80 for a small offering and Rs. 165 for a large one. The company will sell its beverages at lower prices than it does elsewhere and lower than many of its competitors do in India. A “short” black coffee, for instance, will sell for 85 rupees ($1.57), more expensive than local chains like Café Coffee Day, but cheaper than comparable beverages at other foreign chains like Coffee Bean & Tea Leaf. The company will also offer food items like a cardamom-flavoured croissant and chicken Tikka Panini meant to appeal to Indian palates. The whole offer will be enhanced with a free wireless Internet service.

INDIA’S COFFEE MARKET

India is the 9th largest economy in the world accounting for 1.5 % of the world trade in 2007 (WTO statistics, 2006). India`s total merchandise trade (counting exports and imports) is valued at $294 billion and its services trade at $143 billion. On a per capita income basis, India ranked 140th by nominal GDP and 129th by GDP (PPP) in 2011, according to the IMF . The growth was led primarily by a huge increase in the size of the middle class consumer, a large labour force, growth in the manufacturing sector, rising education levels, engineering skills and considerable foreign investments. The per capita income at is estimated at Rs 53,331 in 2011, as against Rs 46,117 for the previous year, depicting a growth of 15.6 per cent (the Quick Estimates of National

Income released by the Central Statistical Office, 2012.). Despite this growth per capita income, in India, is still low compared to many other emerging markets.

From 1991 onwards, the government announced its primary trade reforms which included the removal of most licensing and other non-tariff barriers on all imports of intermediate and capital goods and significant reductions in tariffs on imports. However, a survey, carried out by the Political and Economic Risk Consultancy (PERC), found that India was ranked as having the worst bureaucracy in Asia. India’s bureaucracy is based on complicated and antiquated rules, which many inspectors and government officials have a vested interest in leaving as they are. Old laws are rarely repealed, so if the government wants to, anything can be shut down.

The retail sector in India is growing at a phenomenal pace. According to the Global Retail Development Index 2012, with its retail market estimated at US$ 450 billion, India ranks 5th among the top 30 emerging markets for retail. One of the factors that triggered this remarkable growth in the retail sector is the recent government allowing 100% Foreign Direct Investment in single brands and multi-brand FDI.

The Indian café market is estimated at $230 million in September 2012 and it is set to grow at a compounded annual growth rate of 13-14 per cent, according to a recent study by Technopak Advisors, a retail consultancy. The study predicts that by 2017, the market will grow to $410 million. Today, there are about 2,000 coffee outlets in India and there is potential for the number to go up to 3,000. India is an expensive and very complex market to enter. One of the major challenges of the Indian market is securing the acquisition of real estate. The Indian coffee market is ferociously competitive given the large number of players trying to do the same thing and many of them are doing pretty well which is, in itself, a positive sign. Market research showed that there is a tremendous demand for coffee in India and the consumers are to some extent well- informed and largely aware of global brands.

Before the arrival of Starbucks in India, one major local company, Café Coffee Day (CCD), and about a few foreign firms were competing for market share. While Café Coffee Day is the market leader with 1,350 stores, Barista Lavazza is a distant second with 315 outlets, followed by Costa Coffee with 100, Mocha with 18, Coffee Beans & Tea Leaf and Gloria Jeans with 17, Bru World Cafe with 7 and Dunkin’ with 5 stores. The 3 key players (Café Coffee Day, Barista Lavazza and Costa Coffee) have stated that they were not alarmed by Starbucks’s entry at competitive prices and they are unlikely to start price war. They plan to continue with their differentiated pricing strategy. Café Coffee Day pricing strategy is to continue to follow a different pricing which includes the rental. “We would have different pricing across different retail points, “Our pricing is not determined by competition but by customers and we have no intention of changing that on the basis of somebody else’s pricing.” CCD Marketing President Ramakrishnan K. said.

Barista Lavazza, entered the Indian market in India in 2000. This Italian company is reputed for being the pioneer of the café culture in India. Today, Barista Lavazza has a pricing policy which varies across store formats and not dependent on rentals. Barista Coffee Company is planning to increase its outlets to 300 by 2012, and unlike its competitor Cafe Coffee Day which is targeting small towns; Barista Lavazza focuses on larger rather than smaller towns. Currently, all their outlets are company-owned. However, for future expansion the company is considering to expand through franchising as well. Within days of Starbucks entering India, although Barista Lavazza played down the American-Italian competition, Barista started to review its look and feel by revamping its menus and menu-cards, uniforms and store interiors. On being asked whether Starbucks’s entry was a challenge, Barista Lavazza CEO (India-Saarc) Nilanjan Bhattacharya told Business Standard: “I don’t think so.” Rather, Starbucks would benefit Barista, as it is expected to help grow the category and make consumers shift from tea to coffee. The British coffee retail chain Costa Coffee, as part of its international expansion, launched its outlet in New Delhi, India in September 2005, through an exclusive master franchisee tie-up with Devyani International Ltd. Costa Coffee India chief executive Santosh Unni said “it welcomes Starbucks to the country, but believes that Costa Coffee has an edge over Starbucks as they entered the market earlier and added that our prices vary with rentals and demographics”.

Finally, the Australian Gloria Jean`s Coffees was launched by franchisee Citymax Hospitality in India in 2008. The chain now has 15 outlets in the country with sales growing by eight to 10 per cent annually. The number of stores is expected to reach 40 by the end of 2012 and expect to reach a total number of 250 outlets in the next four years. Due to high rental cost eating into its profit margin, Gloria Jean`s Coffees has just reached its breakeven between cost and revenues after four years of operations in India. According to Mr Vishal Sawhney, President Citymax Hospitality “Café chains do not have high margins and to get the right rentals at malls and high streets will always be a challenge. While there is demand for coffee, there is not enough supply of properties due to which most of the players are suffering”. He also added “there will be healthy competition with Starbucks.

Since its first entrance to Indian market in 2012 under 50:50 joint venture with Tata, Starbucks has managed to open more outlets each year and the total number of outlets in India is about 146 in financial year 2019 (See Figure 1). The latest store was opened in Lucknow on 2rd August 2020. This was surprising given that Indian market is under significant uncertainty due to the impact of Covid-19. Starbucks India also keen to innovate their products to meet with Indian customers’ taste and culture with drinks and food that can only be found in India. For example, Starbucks` tea brand Teavana which offers18 different types of tea across its outlets in India was introduced to the market in 2017. Especially, the India Spice Majesty Blend (a blend of full leaf Assam black tea with various herbs and spices) is only available in India.

Sources:

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-Café Coffee Day, Barista to continue differentiated pricing strategy, The Business Line, October 2012, (http://www.thehindubusinessline.com/industry-and-economy/marketing/caf-coffee-day- barista-to-continue-differentiated-pricing-strategy/article4019214.ece)

-Starbucks brews desi flavour at first Indian outlet ,The Business Line, October 2012, ( http://www.thehindubusinessline.com/industry-and-economy/marketing/starbucks-brews-desi- flavour-at-first-indian-outlet/article4013392.ece)

-  Prayag, A.,”Now, CCD launches pre-paid cards to help you tank up on coffee”, Business Line, February, 2012, (http://www.thehindubusinessline.com/industry-and-economy/marketing/now- ccd-launches-prepaid-cards-to-help-you-tank-up-on-coffee/article2900451.ece)

-  Mookerji, N. “Starbucks effect: Barista ropes in Rina Dhaka for a face-lift”, Business Standards, November 2012, (http://www.businessstandard.com/india/news/starbucks-effect-barista-ropes- in-rina-dhaka-forface lift/491342/)

-   Kinetz, E., “Starbucks to open first outlet in Mumbai next month”, The Business Line, Sept. 2012 (http://www.thehindubusinessline.com/industry-and economy/marketing/)

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