Starbucks To Enter India: Problems and Prospects

Since Scotsman Robert Bruce discovered tea bushes growing along the banks of the Brahmaputra river in 1823, India has gone on to become the world’s leading tea producer and consumer. So the fact that Starbucks, the globe’s leading specialty coffee retailer, is even thinking of entering the world’s largest tea−drinking nation may seem somewhat far−fetched.

It is not. Coffee demand is surging in India, and local coffee chains are already taking advantage of it. If Starbucks can adapt to the peculiarities of the Indian market, coffee may soon become many Indians’ cup of tea.

The Indian coffee market is growing at a feverish pace. Consumption has almost doubled in the last decade on the back of the large, young urban population that prefers Western cafes to traditional Indian coffeehouses. Leading coffee chains like Café Coffee Day and Costa Coffee are already registering double−digit growth rates and statistics indicate the market is far from saturated. If the Indian economy sustains its blistering growth, McKinsey predicts that India’s middle class will swell from 50 million in 2007 to 583 million by 2025. Little wonder Starbucks has woken up and smelled the coffee.

Entering the Indian market also jives well with the company’s long−term growth strategy. Most of Starbucks’ future expansion is expected to come from the pursuit of international opportunities, particularly in BRIC countries (Brazil, Russia, India and China), which are the global engines of growth. Of these, India is the only one that Starbucks has not entered, mostly because of issues with the Indian Foreign Investment Promotion Board over foreign direct investment (FDI) regulations. With the financial crisis behind it and India’s ruling Congress Party eager to liberalize its lucrative retail sector, entering the country in partnership with other established Indian companies makes sense.

While Starbucks does face stiff competition, it may be better suited to the Indian market than some of its competitors. I recently heard Costa Coffee CEO Santhosh Unni grumble about how Costa’s whole business model had to be reworked “to better accommodate socializing,” since coffeehouses in India are now “first and foremost meeting places.” He seemed to wish he ran Starbucks, a company with a competitive advantage that combines coffee quality with personalized customer service and a relaxed ambiance. The coffee giant has already had great success expanding its cafe areas and seating room in many Asian markets where most purchases are consumed in−store. This would be fairly easy to replicate in India.

The trickier issue will be “Indianizing” Starbucks to account for local tastes, which no Western brand has been able to escape. McDonald’s introduced the now famous the McAloo Tikki, a vegetable burger stuffed with potatoes, peas, spices and a vegetable−tomato mayonnaise, while Taco Bell added menu items for as low as 35 cents. Coffee outlets in India tend to combine food with coffee to draw larger crowds and offer a combination of lower prices, vegetarian options and local favorites. Starbucks will thus have to customize its products and practices somewhat, perhaps by adjusting its price and adding some Indian teas, coffees and foods.

This may seem like a tall (or grande) order. But consider Starbucks’ work in Britain, the largest per−capita tea consumer in the world and the nation of afternoon tea, tea gardens and tea dances. According to the Harvard Business School, after Starbucks first entered the country in 1998, tea sales fell even as coffee sales rose rapidly. By 2008, annual sales of coffee in Britain had exceeded sales of tea.

Need a coffee break to digest that one? I’m sure more Indians will be taking those soon if Starbucks brews the right strategy for entering the country.

This article was first published in the Tufts Daily on February 16, 2011. The original link is here.

Picture: The India Street

Brazil and China: Emerging Rivalry Among Emerging Markets?

When I asked Ambassador Fernando Mello Barreto, Brazil’s Consul General, whether he was concerned about the trajectory of his country’s trade relationship with China during his visit to the Fletcher School last week, he did not seem perturbed. “My understanding is there is not much concern about this in Brazil. We welcome trade with all countries”, he told the forum without much hesitation.

There is no doubt that trade with China has allowed Brazil to maintain a healthy bilateral trade surplus, partly insulated it from the global economic recession, and driven exports. Yet there are growing indications that Mr. Barreto and his fellow countrymen should be and are sweating about the relationship. In a recent article for World Politics Review, Sean Goforth, who also blogs on Latin America for Foreign Policy Association, cites some pretty troubling Sino-Brazilian trade trends. I’d encourage you to read the whole thing, but let me cite a few of Mr. Goforth’s observations below:

• Brazil risks being pigeonholed as another commodity supplier. The proportion of raw materials within Brazilian exports has grown from 29% in 2002 to 41% in 2009.

• Brazil’s manufacturing sector is suffering from Chinese competition. While Brazil used to run a deficit in manufacturing goods of several hundred million dollars a year, that gap grew to 23.5 billion dollars in 2010. Brazil’s imports of Chinese manufacturing goods reportedly lost 70,000 jobs in 2010, and a slower GDP growth is forecast in 2011 partly due to Chinese manufactured goods replacing Brazilian domestic goods. In sum, more than 80% of Brazilian manufactured exports are being adversely affected.

• Consider the tale of two Brazilian goods: shoes and soy. While Brazil used to dominate the shoe-making market, the number of shoes exported has halved from 2004 to 2009. And since China has been buying Brazilian soy grain instead of soy oil, producers are unable to charge a refinement premium, which has led to Brazilian soybean production expanding but soy oil production stagnating.

• China’s undervaluing of the yuan, when occurring alongside the sharp appreciation of Brazil’s real, puts Brazilian goods at a massive disadvantage in terms of price.

There are signs that Brazil is waking up to reality. In December 2010, it raised tariffs against Chinese toys from 20 percent to 35 percent (the highest level the World Trade Organization permits). Brazil has also been firmer on the yuan recently, although it has finessed its comments as well so as not to stoke the dragon’s furor.

Last year, a friendly basketball match between China and Brazil ended up with kicks and punches being thrown and several wounded. One wonders whether Mr. Barreto’s cordial remarks mask deeper worries about an analogous trade brawl in the years to come.

Picture: Instablogs

Can Yemen Khat It Out?

Starting this week, The Asianist will also be featured on Wednesday in a weekly op-ed column for Tufts University’s newspaper, the Tufts Daily. Columns will be posted here once they are published. The first column is below, and the original link is here.

As protests rocked Egypt and reverberated throughout the Arab world in the past weeks, I asked my Yemeni friend at the Fletcher School of Law and Diplomacy, Hazim, why his countrymen seemed to lack the revolutionary zeal to overthrow their strongman−president Ali Abdullah Saleh. “Khat,” he replied, mimicking the softball−shaped bulge that forms in one’s cheek when chewing wads of the leafy narcotic commonly found in the Horn of Africa and the Arab world.

His response wasn’t as facetious as you might think. While khat is popular in many countries, in Yemen it is a chronic national addiction. Chewing these tender oval leaves for at least three to four hours daily is a basic form of socializing for over 80 percent of Yemenis. As the leaves gradually break down in their mouths and flow into their bloodstreams, the country’s myriad problems — which include a bloody separatist insurgency in the south, an inefficient and corrupt government and a resurgent al−Qaeda presence — are either fiercely debated or relegated to the attic of their memories in evening khat ceremonies.

In Yemen, it is said, nearly everything stops for khat. Up to 50 percent of all household income, 60 percent of the land cultivated for cash crops and nearly 30 percent of groundwater is devoted to satisfying this oral fixation. Even the fierce protests that engulfed the nation’s capital, San’a, over the past few weeks reportedly fizzled out every day before 2 p.m., when most Yemenis begin their khat−chewing sessions.

Even if the drug isn’t the main cause of Yemen’s revolutionary fatigue, its pernicious effects have been well−documented. The World Health Organization does not classify khat as a “seriously addictive drug,” but chewers can still experience physiological repercussions including persistent hallucinations, disrupted sleep cycles and high blood pressure.

Socially, khat can break down families, as men and women chew in separate groups while their children are left to run astray (or, worse, chew as well, since — shockingly — up to 20 percent of children under 12 consume the drug daily). The hours spent chewing khat and the land used for cultivating it are a severe drain on Yemen’s economic productivity and dwindling water supply. Getting high on a drug that costs around $5 per bag per day is also a costly habit in a low−income country where slightly less than half the population lives below the poverty line.

Yet rehabilitation remains a pipe dream for now. Farmers are highly dependent on cash generated from khat because while food crops take a year or longer to harvest, khat leaves sprout within just a month and generate five times as much revenue as fruit. Even if some sort of crop substitution plan were possible in theory, the country’s powerful landowners would oppose it vigorously in practice because khat sales line their pockets. A government ban on khat would also be inconceivable because the government sees the drug as a vital source of social order.

But some basic regulation is clearly necessary in the longer term. McKinsey & Company projects that Sana’a will run out of water by 2025, partly because poor water resource management results in most of groundwater wells being used for khat, which requires nearly 50 percent more water than wheat and consumes twice the amount used by the city’s citizens. Khat irrigation must therefore be made much more efficient. And while an outright ban may be too extreme, a combination of public awareness campaigns to educate vulnerable groups and limits on the drug to certain hours of the day could mitigate its social and economic effects.

In trying to khat it out, however, the government could end up biting off more than it can chew. “Ironically, one of the few things that could cause a revolution in Yemen would be trying to regulate khat, because it is viewed as such an intrinsic part of society,” Hazim said only half−jokingly.