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Starbucks To Enter India: Problems and Prospects

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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


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