Starbucks, the world’s largest coffee chain, is targeting the spot between home and office for urban young professionals
The dialogue may have been brewing for over a year, but it was a trip to the coffee plantations of Tata Coffee in Coorg that did it for Starbucks big boss Howard Schultz. So the frappe folks from Seattle are finally in India — the last of the key untapped markets after they successfully crossed the Great Wall.
The partnership with the Tatas will initially focus on supply arrangements but that will just be the beginning of an aggressive retail rollout plan. At the outset, a non-binding arrangement may seem a damp squib but make no mistake. Like most Tata group alliances, this too will be scaled up in a calibrated fashion, say group officials who are working closely with Starbucks.
Backend may not seem sexy, but it’s strategic. “All these global chains are very particular about international best practices and quality. McDonald’s contracted McCain to grow a special kind of potato for them in India. Likewise for Starbucks. And once you control supply chain and sourcing, you also control pricing, which Starbucks is always sensitive to,” says Asitava Sen, Director Corporate Advisory, APCO Worldwide, a consultancy firm specializing in entry strategy for Fortune 500 companies.
Moreover, importing coffee beans would have added to costs. There is a 100 per cent import duty on green and roasted coffee and 30 per cent on instant coffee.
“Front-end is always unforgiving. So the best way to get to know each other is always through supply chain arrangements. Front end can easily follow after that,” says Shripad Nandkarni, founder director of marketing consulting firm Market Gate.
The terms of engagement will evolve as the alliance moves ahead, but the Tatas do not want to restrict themselves as just a franchise player for Starbucks. Starbucks will explore the Tata group eco system – the retail properties of Croma, Star Bazaar, Trent and Indian Hotels — to open stores but plans to also rope in another franchisee for standalone cafes. “Starbucks in the US has a store within store model, so that’s an area where we may possibly explore joint opportunities. Like Starbucks kiosks, for example. The front-end stores will have the Starbucks name,” says RK Krishna Kumar, chairman Tata Coffee, the brain behind the alliance.
In retrospect, the Tatas have had limited success of running a café format. They sold their coffee bar chain Barista as early as 2004. Both Tata Coffee and Tata Tea re-experimented with a café model even as late as last year, but didn’t do it right. But even then, there are other tangible benefits of working closely with them. “Contrary to perception, we still haven’t forgotten the lessons of running a café chain in India. Also the baristas who will man the Starbucks cafes can also be trained in the Taj hospitality schools. Tata Global Beverages with Tetley and 8’oclock coffee understand the dynamics of the beverage market and finally, the Tatas are still probably the only profitable retailer in India. So we have a hang of doing business in a competitive landscape. You don’t need to reinvent the wheel,” quips a senior official of Tata Tea who did not want to be identified.
It’s not too late for Starbucks. India is still effectively a one player market with Café Coffee Day being the dominant incumbent having left behind Barista and Costa Coffee or Gloria Jeans. With only 1500 cafes and a market that’s worth Rs 2000 crore, there is enough room for growth. And what everybody is banking on is the 40 per cent CAGR figure. “The entry of more players means the market will grow. India can absorb up to 5,400 outlets,” says Harish Bijoor, chief executive officer, Harish Bijoor Consults. And that’s where Starbucks’ premium positioning of being “the third place” – between home and office – for urban young professionals will be tested.
“Starbucks has been successful in providing the emotional needs around the world. It’s more than just a coffee hangout, but all that needs to be grounded in the Indian cultural reality for its success. Have a global DNA but F&B and retail typically is very close to local culture and taste,” points Nandkarni.
After McDonald’s runaway success, adaptability is easily the recipe for making it big. As Schultz himself points out, there are still big gaps that exist in the market where Starbucks is keen to introduce locally relevant food and beverage products.
Tatas have already initiated work on a 50:50 JV with Pepsi. Starbucks is a new ally. Globally the two giants also have a joint venture. At a time when all of them are repositioning themselves as more of a beverage player, is there room for a grander scheme of things? “The Pepsi JV will look at beverages in a bottle that can be sold through different retail formats. With Starbucks, we would look at beverages that can be sold within a store,” Kumar sets the record straight.
It’s still six months away from the first Starbucks store launch, but already the mocha mania has begun.
(with inputs from Viveat Susan Pinto & Raghuvir Badrinath)
| CAFENOMICS # Total number of outlets in India: 1,500 # Key players: Cafe Coffee Day: 1,040 outlets # Barista: 200 outlets # Costa Coffee: 70 outlets # Per capita coffee consumption in India : 82-85 grams # Per capita coffee consumption in US: 6 kgs |
