Singapore Management UniversityInstitutional Knowledge at Singapore Management University

Case Collection Case Writing Initiative

8-2013

Brewing the Perfect Blend: Starbucks Enters IndiaPhillip Charles ZerrilloSingapore Management University, pzerrillo@smu.edu.sg

Sarita MathurSingapore Management University, saritam@smu.edu.sg

Havovi JoshiSingapore Management University, havovijoshi@smu.edu.sg

Follow this and additional works at: http://ink.library.smu.edu.sg/cases_coll_allPart of the Business Administration, Management, and Operations Commons, International

Business Commons, Marketing Commons, and the Strategic Management Policy Commons

This Case is brought to you for free and open access by the Case Writing Initiative at Institutional Knowledge at Singapore Management University. Ithas been accepted for inclusion in Case Collection by an authorized administrator of Institutional Knowledge at Singapore Management University. Formore information, please email libIR@smu.edu.sg.

CitationZerrillo, Phillip Charles; Mathur, Sarita; and Joshi, Havovi. Brewing the Perfect Blend: Starbucks Enters India. (2013). CaseCollection.Available at: http://ink.library.smu.edu.sg/cases_coll_all/52

SMU-13-0005

This case was written by Professor Philip Charles Zerrillo, Sarita Mathur and Havovi Joshi at the Singapore Management University. The case was prepared solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Copyright © 2013, Singapore Management University Version: 2013-08-26

BREWING THE PERFECT BLEND: STARBUCKS ENTERS INDIA

I’m confident India will evolve into one of Starbucks’ five largest markets over time.... We’ve got to earn the respect of the Indian consumer.

- Howard Schultz, Chairman and CEO, Starbucks Corporation1

It was October 22, 2012 and Howard Schultz, Chairman and Chief Executive Officer of Starbucks Corporation, would have smiled as he scanned the newspaper. The big news story of the day was the continuing snaking queues outside Starbucks’s newly launched flagship store in Mumbai, the financial and business capital of India. It was reported that the queue was almost a mile long and the average waiting time to get a cup of coffee was about 30 minutes. The news must have been exceptionally sweet, as entry into the Indian market had not been easy for Starbucks. With its 300 million strong middle class, the country held a huge opportunity for Starbucks, and had been on the company’s business plan since 2005. It had however taken Schultz almost seven years to find the right partner and get permission from the Indian government to start operations.2 It was only in January 2012, following successful negotiations with the Tata Group, that this became possible. Starbucks had entered into a 50:50 joint venture with Tata Global Beverages Limited (TGBL) called Tata Starbucks Ltd., which would own and operate outlets under the brand name Starbucks Coffee: A Tata Alliance. The joint venture was a first for Starbucks, where the company relied on a single partner for sourcing its coffee beans and even shared its iconic logo with the partner. Schultz had come to Mumbai for the grand opening of the first outlet on October 19, 2012. The euphoria had already continued for three days, and initial estimates by experts predicted daily revenues to be US$16,110, more than eight times that earned by the nearest competitor, Cafe Coffee Day (US$1,895).3 The queues in front of Starbucks clearly signified a new, more modern trend in India - one of affluent professionals and youngsters, a rapidly growing demographic, embracing Western tastes and habits of socialising over a cup of coffee. Yet Schultz would have recognised that the challenge was just starting. Starbucks’ partner, TGBL, had helped navigate its entry into the Indian market, and also had a presence through the entire production chain - growing, roasting and trading. But was this partnership sustainable? If not, could Starbucks overcome the political, economic, social and cultural challenges unique to the Indian market and establish its stamp on the Indian coffee market? Would it be able to do so without a local partner?

                                                                                                                         1 “Starbucks India Isn’t Celebrating Yet”, Forbes India, November 12, 2012, http://forbesindia.com/printcontent/34105, accessed April 2013. 2 Megha Bahree, “Starbucks Opens First Café in India”, The Wall Street Journal, September 13, 2012, http://online.wsj.com/article/...html, Accessed April 2013. 3 US$ 1 = INR 52.76 as at October 2012, www.oanda.com.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

2/21  

 

Global Coffee Industry Coffee was the second most widely traded commodity in the world; approximately 25 million people globally depended on coffee production for their livelihoods. 4 In 2011, global consumption of hot drinks as a whole was estimated to be US$125.9 billion, of which coffee accounted for 56% or US$70.8 billion (refer to Exhibit 1 for further details on top markets and players in the global coffee market). India: Cultivating a Coffee Culture Traditionally, India had been a nation of tea drinkers, and the passion for tea was evident in the wide range of fine teas available in the country. Although India was known for its superior quality of teas, many of which were exported, the all-time favourite among Indians was the traditional chai, the milky, sugary tea concoction available at street stalls throughout the country. This was the beverage of choice for most Indians. Coffee was popular in some of parts of Southern India, where filter coffee or Kapi was consumed throughout the day. It also enjoyed a small, yet loyal, following among the older urban elite throughout the country. Independent cafes such as India Coffee House and Airlines catered to this niche audience. Even though the passion for tea by the bulk of the population clearly outstripped that for coffee, the outlook for the Indian coffee sector was much more attractive than the matured tea market, given the lower levels of market saturation and continual industry dynamism. Furthermore, as the young demographic and the 300 million strong middle class embraced the cafe coffee culture, it was predicted that coffee consumption in India would grow at the rate of 9% between 2009 and 2016, with sales touching US$1.5 billion in 20165 (refer to Exhibit 2 for sale of coffee and tea in India). In volume terms, coffee sales in India rose by 6% in 2011 to reach 50,000 tonnes6 (refer to Exhibit 3 and 4 for details on key players and their market share). The cafe market was expected to grow over 70% between 2011 and 2016. Annual sales in March 2011 touched US$190 million and were forecasted to rise to US$680 million by 2016.7 The trend was clear - coffee culture was gaining permanent wide interest among Indians. Cafes and Coffee Chains in India Cafes and coffee chains had become a global phenomenon, ranging from the culturally embedded cafe culture in Italy to the fast growing specialist coffee shop industry in many Asian countries. In India too, the popularity of the cafe culture had increased since the early 2000s, as its affluent class and youngsters began to embrace Western habits and tastes. The spurt in number of coffee chains dramatically altered the outlook of the coffee industry in India. Urban consumers, including professionals and youngsters, increasingly preferred cafés as places to hang out and as the choice venue for casual business meetings. Specialist coffee shops grew at a phenomenal rate of nearly 25% in current value terms in 2011.8 Revenues grew from US$6059 million in 2007 to US$8059 million in 2011.9 By 2011, India had a total of 41,205 cafes and 236 specialist coffee shops (refer to Exhibit 5 for details on café outlets in India).                                                                                                                          4 Reinecke, Manning and von Hagen, “The Emergence of a Standards Market: Multiplicity of Sustainability Standards in the Global Coffee Industry”, Journal of Organisation Studies, May-June 2012, http://ehis.ebscohost.com/eds/viewarticle, accessed April 2013. 5 “India Business Forecast Report - April 2012”, Business Monitor International Ltd. 6 “Coffee in India”, Euromonitor International, July 2012, SMU Library, accessed June 2013. 7 “Starbucks Delays India Entry”, The Wall Street Journal, September 13, 2012, retrieved from http://blogs.wsj.com/indiarealtime/2012/09/13/starbucks-delays-india-entry/tab, accessed April 2013. 8 “Cafes/Bars in India”, Euromonitor International, October 2012, SMU Library, accessed May 2013. 9 Ibid. US$ 1 = INR 46.74, annual average for 2011, www.oanda.com.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

3/21  

 

Coffee shops continued to have drinks as their major offering, accounting for nearly 60% of the value sales in 2011. But this was changing. Bolstered by the emerging popularity of specialist coffee shops worldwide, Indian consumers were increasingly looking for coffee shops and cafes that offered a complete social experience, rather than just a good beverage. In response, coffee shop operators were expanding their menus in order to attract a wider customer base and to increase average spending. In 2011, the cafe industry was highly fragmented. Independent cafes accounted for nearly 96% of the total value sales of cafés/bars in 2011. However, despite their formidable market share, independent cafés continued to lose share to chained cafés, which were rapidly expanding their presence in the Indian metros. In 1996, Amalgamated Bean Coffee Trading Company Ltd. established one of India’s first coffee chains, Cafe Coffee Day. By 2012, there were 10-15 coffee chains operating in a market estimated at US$230 million a year. On average, these outlets were earning between US$175,200 and US$244,550 annually.10 The market was dominated by Cafe Coffee Day, which had over 1,300 stores across India and commanded a third of market share. Barista Coffee Company and Coffee Day Express followed far behind with 11.3% and 4.5% of market share, respectively (refer to Exhibit 6 for market share of top coffee chains in India). In 2011, the international chain Dunkin’ Donuts entered India through a joint venture with Jubilant FoodWorks Limited, a large franchiser of global brands in India that also had the rights for Domino’s Pizza. With more international coffee chains looking at India as a prospective market, domestic brands were clearly not going to rest on their laurels. For example, Café Coffee Day had taken 14 years to set up 1,000 stores in India but was planning to double its outlet count within the next four years by 2017. Costa Coffee, Coffee Bean & Tea Leaf and Gloria Jean's Coffee were also planning to double their number of stores in India over the next 12 months, extending their reach outside the metros and offering wider food menus (refer to Exhibit 7 for competition in the café market in India). India was clearly a challenging, yet promising market. As Avani Davda, chief executive of Tata Starbucks commented, “We see a lot of potential...It's a country of over a billion people. You cannot gauge how much demand there is and will be, as data on India's retail coffee industry is still in the nascent stage”.11 Starbucks Corporation Starbucks Corporation, a premier roaster, marketer and retailer of specialty coffee, owned the largest coffee chain in the world. Headquartered in Seattle, Washington, Starbucks opened its first coffee shop in Seattle’s Pike Marketplace in 1971. Howard Schultz joined the company as director of marketing and operations in 1982 and, after a brief hiatus away from the company, became the CEO of Starbucks in 2008. As at September 2012, Starbucks was a US$19 billion company employing 149,000 people worldwide. It had 18,066 stores in 62 countries across the globe12 The United States, Canada, Japan, China and the United Kingdom were the top five markets for Starbucks. The company                                                                                                                          10 “Koramangala: Coffee shops opening in large numbers”, The Economic Times, March 27, 2012, http://articles.economictimes.indiatimes.com/2012-03-27/news/31245032_1_cafe-coffee-day-ccd-costa-coffee, accessed May 2013. 11 “Starbucks to open outlets in more Indian cities”, The Times of India, April 7, 2013, http://timesofindia.indiatimes.com/business/india-business/Starbucks-to-open-outlets-in-more-Indian-cities/articleshow/19431213.cms, accessed April 2013. 12 Starbucks company website, www.starbuck.com/about-us, accessed April 2013 and “Global Cafe Market: Emerging Popularity of Specialist Coffee Shops”, Euromonitor International, 2012.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

4/21  

 

recorded revenues of US$11.7 billion during the financial year 2010-11, an increase of 9.3% over the previous year. Net profit over the same period rose by 31.7% to US$1.2 billion13 (refer to Exhibit 8 for Starbucks Corporation financial highlights). Over the years, Starbucks had built a robust distribution model using a multi-channel approach - it reached its customers through company operated retail stores, licensed stores, consumer packaged goods and foodservice operations. By 2010, Starbucks had 6,707 retail stores in the US and 2,126 stores worldwide. Revenues from these company-operated retail stores accounted for 84% of total net revenues in 2009-10. Starbucks also had 4,424 licensed stores in the US market, and 3,601 licensed stores in the international markets (refer to Exhibit 9 for number of Starbucks stores).14 The company’s mission was: “to inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time”.15 Starbucks aimed to bring to its customers a unique coffee experience, as stated on its company website: “It happens millions of times each week – a customer receives a drink from a Starbucks barista – but each interaction is unique.”16 Keeping this goal in mind, it incessantly adapted to the changing and expanding demands of its consumers by modifying the value-added services it offered. In addition to selling its world-renowned coffee blends, Starbucks experimented with a range of foods and beverages. It adapted its store plan, seating arrangements and decor to suit the diverse needs of its customers in different countries. In the US, Starbucks progressively improved its services by offering magazines, Wi-Fi connectivity and, most recently, a news and entertainment portal. It also sold merchandise including music, movies, apparel, books and accessories. Starbucks prided itself on being a socially responsible company, practicing ethical sourcing, environmental stewardship and community development17 (refer to Exhibit 10 for Starbucks’ corporate social responsibility). It firmly believed that profitability and social consciousness went hand in hand. Its growing presence in key Asian markets offered opportunities to expand and grow its business outside its mainstay market, the US. Starbucks opened its first store outside the US in Japan in 1996. Since then, the company has rapidly expanded its presence to 62 countries. By 2012, it had a presence in ten countries in Asia: Japan, China, South Korea, Taiwan, Philippines, Thailand, Malaysia, Indonesia, Hong Kong and Singapore (refer to Exhibit 11 for Starbucks’ operations in Asia). India was one of the last untapped major markets for the iconic coffee chain. The Challenges of the Indian Market In 2012, India’s per capita coffee consumption was a mere 82 grams per annum, compared to 6.8 kg for Germany, 5.9 kg for Brazil and 4.5 kg for the United States18. Although awareness and interest in coffee chains was growing, India’s love of tea was in no way abating, and it was not unusual to find urban consumers grabbing a cup from the roadside chaiwala (tea stall serving traditional chai) during the day and hanging out in specialty coffee shops in the evening.

                                                                                                                         13 Starbucks Corporation, Company Profile, Marketline, June 2012 and Starbucks Corporation, Company Profile, Datamonitor, September 2011 14 Ibid. 15 Starbucks company website, http://www.starbucks.com/about-us/company-information/mission-statement, accessed August 2013. 16 Starbucks company website, retrieved from www.starbuck.com/about-us, accessed April 2013. 17 Ibid. 18 “Starbucks is Finally Coming to India, Cautiously”, Forbes, September 7, 2012, http://www.forbes.com/sites/greatspeculations/2012/09/07/starbucks-is-finally-coming-to-india-cautiously/, accessed August 2013.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

5/21  

 

Furthermore, the economic challenges of establishing and operating a business in India were daunting, even for veteran companies with extensive global reach. The availability of reliable supply chain infrastructure posed a serious constraint. There were many problems, including the lack of efficient transportation networks and warehousing facilities to support procurement and distribution, and erratic power and water supply disrupting day-to-day operations. The real estate crunch was yet another challenge in urban cities. The prime real estate market in the cities, especially the metros, was fiercely competitive and expensive. Unfortunately, food and beverage businesses could not avoid the impact of this market. It was all about location, and many foreign investors found themselves in the fray searching for the best real estate options in India’s overcrowded cities. Also, while the cities had burgeoning wealthy middle- and upper-middle classes, the situation was vastly different in the towns and rural areas. Foreign businesses offering premium products and services struggled with pricing issues in an effort to deepen market access. In fact, even in the cities, affordability sometimes did not keep pace with the brand savvy-ness of the Indian consumer. Finally, another key challenge was the political landscape in India. Since its independence in 1947, India had followed a relatively closed policy with regard to foreign investment. Policy reforms and trade liberalisation measures undertaken by the Indian government from the early 1990s opened doors for foreign investment into India, albeit cautiously. The retail sector was one of the last sectors to be liberalised, and even after an open policy was declared, businesses suffered as a result of the unevenness in implementation of policy. The government continued to face opposition to economic reforms from several stakeholders and social groups. Sometimes backed by political parties, these social groups resisted all attempts by foreign investors to set up shop in India – and high-end retail consumer goods were a principal target. Starbucks’ Entry into India - the Journey Begins Starbucks’ began to study the Indian market in 2005, and from the start, Schultz was sure that it would need a local partner and should not attempt to break into the market on its own. According to John Culver, President of Starbucks, China and Asia Pacific,

We never considered 51%. When we looked at the opportunity to enter India, understanding the complexities of the market and the uniqueness that is India, we wanted to find a local business partner.19

By 2006, Starbucks was actively looking for a local company to partner with. The company initiated talks with six potential partners, including the Rahejas, Future Group and Planet Sports. Conversations with Kishore Biyani, managing director of the retail giant Future Group, progressed well and by 2006, Starbucks approached the Government of India’s Foreign Investment Promotion Board (FIPB) for permission to establish operations in India through a joint venture between Starbucks, Kishore Biyani and V P Sharma, Starbucks’ Indonesian franchisee partner. The application was rejected due to concerns about the venture’s proposed ownership structure, stating that it violated the foreign direct investment limits set by the FIPB. According to the

                                                                                                                         19 “Starbucks India: Coffee Chain to Open First India Outpost with Tata Global Beverages”, Huffington Post, January 30, 2012, http://www.huffingtonpost.com/2012/01/30/starbucks-india_n_1241553.html, accessed April 2013.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

6/21  

 

Government of India’s foreign investment policy in 2007, foreign investment in single-brand retail outlets could not exceed 51%. Starbucks submitted a revised application in April 2007 on the basis of a franchisee model. This was the model that had been adopted by other global food chains entering India, such as Pizza Hut, Costa Coffee and Domino’s. New Horizons Retail was chosen as the licensee. Although the second application was not formally rejected, it was put on hold and Starbucks was encouraged to submit a revised business proposal based on foreign direct investment instead of the franchise model. 20 In July 2007, the company withdrew its application. According to a Starbucks’ spokesperson at that time, the company remained excited about “the great opportunities that India presents,” but found it premature to announce any new dates.21 Despite the false start in 2007, Starbucks continued to engage in discussions with potential partners such as the Bharti Group and PepsiCo in the years that followed.22 However, despite many dialogues with potential local companies, plans did not bear fruit. In November 2011, the Indian government relaxed foreign investment rules by allowing retailers to enter the Indian market without a local partner.23 Even though the policy change allowed 100% foreign ownership of single brand retail stores, Starbucks stuck to its strategy of entering with a partner. Its interaction with the Indian bureaucracy had affirmed the need for a strong, local partner familiar with the system. Tie-up with Tata Global Beverages Limited and Tata Coffee In the second half of 2010, Starbucks initiated conversations with R. K. Krishnakumar, Vice Chairman of Tata Global Beverages Ltd. (TGBL) and Chairman of Tata Coffee. TGBL, formerly known as Tata Tea, was part of the Indian conglomerate, the Tata Group (refer to Exhibit 12 for details on TBGL). On January 13, 2011, Starbucks signed a non-binding Memorandum of Understanding (MoU) with TGBL in a move to create avenues of collaboration between the two companies. A year later, in January 2012, Starbucks and Tata Global Beverages Ltd. announced a 50:50 joint venture called Tata Starbucks Ltd., which would own and operate outlets under the brand name Starbucks Coffee: A Tata Alliance. The partners initially invested US$80 million in the venture. Under the new arrangement, Starbucks would source and roast coffee beans at Tata Coffee’s Kodagu facility. TBGL would also supply coffee to Starbucks’ markets in Southeast Asia and China. Essentially, TBGL had presence through the entire production chain - growing, roasting and trading. This enhanced its appeal as a potential partner. Krishnakumar stated:

The joint venture with Starbucks is in line with Tata Global Beverages’ strategy of growing through strategic alliances in addition to organic and inorganic growth. It opens up exciting business opportunities and new formats for Tata Global Beverages. Starbucks brings unique retail expertise as well as a shared sense of business values. We are excited about the opportunities the alliance presents to innovate in the retail space and bring new

                                                                                                                         20 “Unsure Starbucks Defers India Entry”, The Economic Times, July 21, 2007, http://infoweb.newsbank.com, accessed April 2013. 21 “Starbucks Puts India on Back Burner”, Agence France-Presse, July 21, 2007, http://infoweb.newsbank.com/iw-search/we/InfoWeb?p_product=AWNB&p_theme=aggregated5&p_action=doc&p_docid=11A8C775E0468708&p_docnum=9&p_queryname=3, accessed April 2013. 22 “Starbucks Brews India Entry Bid”, The Times of India, December 7, 2010, http://infoweb.newsbank.com, accessed April 2013. 23 “Starbucks Plans $80 million Indian Joint Venture”, Financial Times, January 10, 2012, http://www.ft.com/intl/cms/s/0/901708e0-4b55-11el-88a3-00144feabdc0.html, accessed April 2013.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

7/21  

 

beverage experiences to more consumers in India, leveraging the global in-home expertise of Tata Global Beverages and the global out-of-home expertise of Starbucks.24

The partnership was thus perceived to be a blend of individual capabilities, with the synergies derived benefitting both parties. As the companies shared a commitment to responsible business values and giving back to the community, the joint venture included agreements for the promotion of responsible agronomy practices. Reaffirming this, Culver stated:

We’re very pleased to have found the best partner for Starbucks in Tata – a company that shares so many of the same values for conducting business in a way that earns the trust and respect of our customers and partners (employees). We look forward to bringing the Starbucks Experience to customers in India by offering high quality arabica coffee, handcrafted beverages, locally relevant food, and legendary service.25

Starbucks’ Unique Indian Blend: Sticking to the Script, but with a Twist Schultz commented:

The size of this market is one of the largest in the world for Starbucks, so we’re coming here with a very large appetite in terms of overall growth and investment… The wind is at our back in India, the awareness of Starbucks is higher here than any other market that we’ve never entered.26

Starbucks leadership would no doubt have been keenly aware that its success in India was dependent on the company’s adaptability. Thus, without losing the integrity of its global brand, the company went a long way to connect with the Indian community. The mantra echoed almost all of Starbucks activities – branding, sourcing, roasting processes, store design and decor, menu options and community development – and entry into the Indian market was highlighted by many “firsts” for the company. Training centres were set up in Mumbai and Delhi where staff were taught to make the perfect cup of coffee, in line with Starbucks’ uncompromising global standards. Store managers were sent to Singapore, Malaysia and Thailand for shop floor training. Branding For the first time in its 41-year history, Starbucks shared its iconic green and white logo with another brand - Starbucks: A Tata Alliance. This must have been sobering reminder that despite its high brand value, the company might not have been able to make its foray into one of the world's fastest growing retail market without a local partner. Sourcing For each of its 62 markets, Starbucks imported coffee from any of its 30 source countries. India was the first country where the coffee chain would sell coffee that was completely locally sourced and roasted. Local sourcing was an economic necessity for Starbucks, as there was a 100% import duty on coffee imports into India, which would have made importing coffee an expensive proposition. The partnership with TBGL meant that Starbucks was assured of high quality beans and could control the coffee bean roasting process that was critical to producing the quality blend it was known for. Together with Tata Coffee, Starbucks co-developed a new

                                                                                                                         24 “Tata Global Beverages and Starbucks Form Joint Venture to Open Starbucks Cafes across India”, Starbucks Press Release, January 30, 2012, http://news.starbucks.com/article_display.cfm?article_id=616, accessed April 2013. 25 Ibid. 26 “Starbucks in India: Full of Beans”, Financial Times, October 20, 2012, http://blogs.ft.com/beyond-brics/2012/10/20/starbucks-in-india-full-of-beans/, accessed April 2013.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

8/21  

 

blend of espresso roast for the Indian market. A new plant was set up in conjunction with Tata Coffee at a cost of US$543,000 to roast premium coffee beans to supply Starbucks’ stores in India and other Asian countries. The facility started operating in August 2012.27 Food Catering to a passion for eating that Indians were proud of, Starbucks meticulously went about developing a menu that was much wider than that offered in the US or Western Europe, and one that catered to the local palette. Research showed that in the US, food formed no more than 15% of revenue for Starbucks. In India, such revenues were estimated to be as high as 35%.28 Leveraging on their partnership, the company worked closely with the Tata Group’s Taj chain of hotels and TajSATS, the airline catering services’ company, to craft a menu which was described by Davda as: “an elaborate menu in recognition of the Indian palette.”29 The menu consisted of a combination of standard food items offered in Starbucks outlets worldwide, along with a range of items with an Indian twist, pandering to the taste of Indian consumers. For example, the “murg tikka panini” was a fusion of the Italian focaccia bread and spiced chicken cooked in a tandoor, or clay oven, the latter being a North Indian delicacy (refer to Exhibit 13 for Starbucks’ menu in India). There was also one item local to the city where the stores were located. Moreover, the menu had no trace of beef or pork, and there were plenty of vegetarian options. The beverages menu, though, remained unaltered. Pricing The Starbucks pricing strategy had to take into account the price sensitivity of the Indian consumer, and was designed to be accessible, without compromising on the premium experience. Thus, the prices in India were set much lower than those in other parts of the world – for instance, Starbucks charged UD$4.34 for a 12-ounce cappuccino in its cafe in Beijing, compared to US$2.14 in Mumbai for the same cup.30 As Schultz commented, “We want to be accessible to everyone… We are coming in to be the winner.”31 Starbucks had also opted for uniform pricing in all its outlets in India, including those housed in five-star hotels. Interestingly, competitors such as Cafe Coffee Day and Costa Coffee were following differential pricing models, depending on store location and consumer demographics. Said cafe Coffee Day marketing president, K. Ramakrishnan, “Our pricing is not determined by competition, but by customers. We have no intention of changing that on the basis of somebody else’s pricing.”32 Real estate / location The importance of real estate could not be overestimated. Starbucks was keen that its flagship store should be in a location that could be identified with India’s heritage and community, and it had to be a hot spot for attracting customers. Commercial leases in Mumbai were exorbitant to begin with, and many landlords asked for revenue sharing deals. After studying a range of options in conjunction with TBGL, Starbucks settled for Elphinstone Building, owned by the

                                                                                                                         27 “Starbucks Delays India Entry”, The Wall Street Journal, September 13, 2012, http://blogs.wsj.com/indiarealtime/2012/09/13/starbucks-delays-india-entry/tab, Accessed April 2013. 28 “Starbucks India Isn’t Celebrating Yet”, Forbes India, November 12, 2012, retrieved from http://forbesindia.com/printcontent/34105, accessed April 2013. 29 “Delhi will have to wait for Starbucks”, The Wall Street Journal, September 28, 2012, http://blogs.wsj.com/indiarealtiem/2012/09/28/delhi-will-have-to-wait-for-starbucks/, accessed April 2013. 30 “Starbucks Aware of its Reputation for High Prices, is Attempting of Offer Value in India”, The Seattle Times, January 26, 2013, http://seattletimes.com/html/specialreportpages/2020216020_starbucks_coffee_in_india, accessed April 2013. 31 Megha Bahree, “Starbucks Opens First Café in India”, The Wall Street Journal, September 13, 2012, http://online.wsj.com/article/SB10000872396390444734804578066323962597316.html, Accessed April 2013. 32 “Barista, Cafe Coffee Day Unlikely to take on Starbucks’ Killer Pricing”, NDTV Profit, October 23, 2012, http://profit.ndtv.com/news/corporates/article, accessed April 2013.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

9/21  

 

Tata Group in Mumbai’s prestigious Horniman Circle. Starbucks neighbour was none other than the shop of the luxury label, Hermes. Store design Mumbai’s 4,500 square foot coffee outlet was much larger than the average size of most Starbucks stores around the world. This size difference was due to the fact that the grab-and-go coffee culture was not popular in India. Indians preferred to extend their coffee experience by socialising and, more often than not, ordering food along with their favourite beverage. Thus, the store was open and spacious, designed to accommodate ample seating. The global design team worked with local craftsmen for the design of furniture and fittings. With high ceilings, ample seating, free WiFi – all with an ethnic touch - Starbucks was able to effectively create the “third place - the place between office and home where people could come and spend time.”33 Ethical global and local responsibility Commenting on the Starbucks-Tata joint venture, Culver commented on finding a partner in Tata that, “...shares so many of the same values for conducting business in a way that earns the trust of and respect of our customers and partners (employees).”34 Both companies shared common values of responsible business ethics and a commitment to the community. Collaboration on these fronts was spelt out right from the start, with agreement to explore developing social projects that would positively impact communities in coffee growing regions where Tata operated. The companies also collaborated on the promotion of responsible agronomy practices and training of local farmers, technicians and agronomists which would help to improve their coffee-growing and milling skills. In conjunction with the Tata Group, Starbucks planned to support Swastha, a school for children with special needs (in partnership with the Coorg Foundation) by increasing its capacity and reach into the rural coffee growing communities of Karnataka. Local craftsmen were employed in the design of the flagship store, as part of the employment generation initiatives to help the community. Starbucks even supported the local community near its store in Mumbai, developing a cultural hub in Horniman Circle, where local artists could come together35. Commenting on these initiatives, Anand Sharma, the Indian Minister for Commerce and Industry said, “It is a matter of happiness that a global investor is sensitive towards the need of the local growers and recognises local talent.”36 Efforts Pay off… Next comes Growth and Sustainability On October 19, 2012, Starbucks opened its doors to enthusiastic crowds in the city of Mumbai. The lines stretched so long that security guards had to implement a one-in, one-out policy. Schultz commented,

Our first flagship store in Mumbai is an amazing celebration of great coffee, rich Indian heritage and community. Together, our two companies are bringing unparalleled

                                                                                                                         33 Starbucks company website, retrieved from www.starbucks.com/about-us, accessed April 2013 34 “Tata Global Beverages and Starbucks Form Joint Venture to Open Starbucks Cafes Across India”, Starbucks Press Release, January 30, 2012, http://news.starbucks.com/article_display.cfm?article_id=616, accessed April 2013. 35 “Starbucks Opens Spectacular Flagship Store in Mumbai, Honoring the Dynamic Culture of India”, Starbucks Press Release, October 19, 2012, http://news.starbucks.com/article_print.cfm?artcile_id=707, accessed April 2013. 36 “Tata Starbucks Assures India if Local Coffee Sourcing, Job Creation”, Indiamart SME News, February 7, 2013, retrieved from http://news.indiamart.com/story/tata-starbucks-assures-india-local-coffee-sourcing-job-creation-174835.html, accessed April 2013.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

10/21  

experience to Indian customers. We are investing for the long-term and see great potential for accelerated growth in India.37

It was evident that Starbucks had made a triumphant entry into the Indian market, and was there to stay. As Culver commented,

We are committed to India for the long-term. We see that India, over time, can become one of the top five markets Starbucks operates in… We are going to continue to thoughtfully grow into other cities, and then eventually into smaller cities. We have plans to move quickly and aggressively, and do it in a disciplined way.38

But Schultz would have known better than to get carried away with the initial euphoria. There were many challenges ahead – market segments to cover; sourcing and pricing issues; tackling the competition – just to name a few. Furthermore, would the partnership between Starbucks and the Tata group survive the test of time? Would Starbucks be able to navigate the complexity of the Indian coffee market on its own, or was the presence of a local partner an outright necessity?

                                                                                                                         37 Ibid. 38 Mihir Dalal, Starbucks Coffee Sourcing Plans, Live Mint, February 10, 2013, http://www.livemint.com/Companies/TQE0tDzVNlGhvBhzJcKJyL/....html, accessed April 2013.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

11/21  

EXHIBIT 1: GLOBAL TOP MARKETS FOR COFFEE AND MARKET SHARE OF MAJOR COFFEE COMPANIES IN CORE MARKETS IN 2011, IN PERCENT

In 2011, the world’s top markets for coffee (by value) were the United States, Germany, Brazil and Japan. Regionally, Western Europe continued to lead both value and volume sales of coffee. Asia Pacific followed in second place in value but trailed behind North America, Eastern Europe and Latin America in terms of retail volume. Fast-growing economies of Latin America provided a further fillip for global coffee consumption. Product innovations such as coffee pods gained in popularity in mature markets such as the United States, Germany and France39. Nestlé was the clear market leader in global coffee, commanding almost a quarter (22.8%) of market share in 2011, well ahead of the nearest competitors - Kraft Foods (12.9%) and Sara Lee (6%)40. The global coffee industry was also marked by strategic acquisitions, a critical growth strategy for major manufacturers to expand and consolidate geographic market share. Nestlé and Kraft were less active in acquisitions compared to some of their competitors.

  World US Germany Brazil Japan Russia France Italy Nestle 22.8 2.2 6.2 9.7 35.8 27.0 27.4 10.0 Kraft 12.9 9.9 17.7 18.4 18.7 29.7 7.1 Sara Lee 6.0 0.2 1.7 20.3 - 1.1 20.8 - Strauss 3.2 - - 19.1 - 4.7 - - Tchibo 3.1 - 12.9 - - 8.9 - -

Source: "Passport: Global Coffee Corporate Strategy", Euromonitor International, October 2012

Coffee manufacturing companies also faced competition from the retail coffee chains, supported by the popularity of specialist coffee shops. For example, the impressive growth of Starbucks’ Via instant coffee compelled Nestle to look into its own premium brands. In a market driven by value, premium coffee was the new battleground for competition that would determine the market differentiators.

                                                                                                                         39 “Passport: Global Coffee Corporate Strategy”, Euromonitor International, October 2012. 40 Ibid.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

12/21  

EXHIBIT 2: SALE OF COFFEE AND TEA IN INDIA, US$ MILLION

Source: "India Business Forecast: Q2 2012", Business Monitor International

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

13/21  

EXHIBIT 3: COFFEE SALES IN INDIA

The two leading coffee brands in India were Bru, by Hindustan Unilever and Nescafé, by Nestlé India. Bru held the market lead in 2011, with a market share of 30%, and was followed by Nescafé, which recorded a retail value share of 15%41.

IN MILLION TONNES

2006 2007 2008 2009 2010 2011

Growth CAGR 2006-11

Growth Total 2006-11

Total coffee 33403.6 35,171 36,961 38,789 40,966 43,447 5.4 30.1 Fresh coffee 26404.5 27466.8 28434.6 29315.3 30374.6 31565.3 3.6 19.5 Instant coffee 6999.1 7704.3 8526.7 9473.6 10591.1 11881.7 11.2 69.8

IN US$ MILLION

2006 2007 2008 2009 2010 2011

Growth Total 2006-11

Total coffee 232.7 279.7 300.5 302.9 395.5 444.0 90.8

Fresh coffee 119.4 138.3 141.6 138.1 176.6 189.4 58.7

Instant coffee 113.3 141.4 158.8 164.8 218.9 254.6 124.7

Source: "Passport: Coffee in India", Euromonitor International, July 2012

                                                                                                                         41 “Passport: Coffee In India”, Euromonitor International July 2012.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

14/21  

EXHIBIT 4: MARKET SHARE OF TOP BRANDS OF COFFEE IN INDIA, PERCENT VALUE Bru Roast & Ground coffee brand dominated standard fresh ground coffee sales, accounting for a retail volume share of 26% in 2011. The instant coffee segment was dominated by the Nescafé’s Classic and Sunrise brands, which owned 53% of retail value sales in 2011, and were followed by Bru at 41%42. Regional players like Narasu’s Coffee Co, Amalgamated Bean Coffee Trading Co and Cothas Coffee also had a strong presence in the fresh coffee market, but were far from a threat to Bru and Nescafé. Finally, expensive coffees like Davidoff Café Espresso and Illy Coffee were able to expand their presence in urban areas, and capture a share of pocket of the growing number of consumers opting for gourmet coffees.43

Source: "Passport: Coffee in India", Euromonitor International, July 2012

                                                                                                                         42 Ibid. 43 The use of coffee machines in India was very limited. Nespresso, a major global coffee pods player was not present in India even in 2011. As a result, interest in coffee pods had not caught on.

0  

5  

10  

15  

20  

25  

30  

35  

40  

Nescafe   Bru   Narasu's   Coffee  Day  

Mr  Bean   Others  

percen

t  value

 

2008  

2011  

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

15/21  

EXHIBIT 5: CAFÉ OUTLETS IN INDIA

REVENUES IN US$ BILLION

2007 2008 2009 2010 2011

Growth Total 2007-11

Cafes 6.85 6.74 6.22 7.17 8.04 17.4 Chained 0.11 0.11 0.10 0.12 0.13 24.4 Independent 6.74 6.63 6.12 7.05 7.91 17.3 Specialist coffee shops 0.13 0.17 0.18 0.24 0.29 121.5 Chained 0.13 0.17 0.17 0.23 0.28 124.1 Independent 0.01 0.01 0.01 0.01 0.01 76.5

NUMBER OF OUTLETS

2007 2008 2009 2010 2011

Growth CAGR 2006-11

Growth Total 2006-11

Cafes 36,380 37,680 38,915 40,080 41,205 3.4 18.3 Chained 449 467 475 502 536 4.3 23.2 Independent 35931 37213 38440 39578 40669 3.4 18.2 Specialist coffee shops 1094 1514 1698 2060 2361 24.2 195.1 Chained 1024 1436 1608 1955 2248 24.9 203.8 Independent 70 78 90 105 113 13.5 88.3

Source: "Passport: Cafes and Bars in India", Euromonitor International, October 2012

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

16/21  

EXHIBIT 6: MARKET SHARE OF TOP CAFÉ CHAINS IN INDIA, PERCENT VALUE

Source: "Passport: Cafes and Bars in India", Euromonitor International, October 2012

EXHIBIT 7: COMPETITION IN THE CAFÉ MARKET IN INDIA, AS AT SEPTEMBER 2012  

Country Number of Stores

Café Coffee day India 1,350 Barista Italy 318 Costa Coffee UK 100 Mocha India 18 Coffee Bean & Tea Leaf USA 17 Gloria Jean's Australia 17 Dunkin'Donuts USA 5

Source: "Starbucks Brews Following in India where Tea is Supreme", The Seattle Times, January 26, 2013

0  5  10  15  20  25  30  35  40  45  

percen

t  value

 

2008  

2011  

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

17/21  

EXHIBIT 8A: STARBUCKS CORPORATION FINANCIAL HIGHLIGHTS: 2008 TO 2012  

2008 2009 2010 2011 2012 Net revenues, US$ billion 10.4 9.8 10.7 11.7 13.3 Operating income, US$ million 504 562 1419 1728 1997 Operating margin, percent 4.9 5.7 13.3 14.8 15.0 Earnings per diluted share, US$ 0.43 0.52 1.24 1.62 1.79 Operating cash flow & capital exp, US$ million 1259 1389 1705 1612 1750

Source: Annual Report 2012, Starbucks Corporation, www.starbucks.com

EXHIBIT 8B: STARBUCKS CORPORATION STOCK PRICE COMPARISON: 2009 TO 2013

Source: Yahoo! Finance, retrieved from http://finance.yahoo.com/q/bc?t=5y&s=SBUX&l=on&z=l&q=l&c=&ql=1&c=%5EGSPC

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

18/21  

EXHIBIT 9A: STARBUCKS NUMBER OF COMPANY OPERATED RETAIL STORES IN 2010

Source: Company website, www.starbuck.com/about-us.

EXHIBIT 9B: STARBUCKS NUMBER OF LICENSED STORES IN 2010

Source: Starbucks company website, www.starbuck.com/about-us.

6707  

799  

601  

220  142  

133   231  

US  

Canada  

UK  

China  

Germany  

Thailand  

Other  

4424  2141  

840  

274  283   63   US  

Asia-­‐Pacific  

Europe,  Middle  East,  Africa  

Canada  

Mexico  

Rest  of  Americas  

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

19/21  

EXHIBIT 10: STARBUCKS – A SOCIALLY RESPONSIBLE COMPANY

“At Starbucks, we have always believed in the importance of building a great, enduring company that strikes a balance between profitability and a social conscience. Ethical Sourcing: We take a holistic approach to ethically sourcing the highest quality coffee. This includes responsible purchasing practices, supporting farmer loans and forest conservation programs. When we buy coffee this way, it helps foster a better future for farmers and a more stable climate for the planet. It also helps create a long‐term supply of the high‐quality beans we’ve been carefully blending, roasting and packing fresh for more than 40 years. Environmental Stewardship: We share our customers' commitment to the environment. And we believe in the importance of caring for our planet and encouraging others to do the same. It is our goal that by 2015, 100% of our cups will be reusable or recyclable. We will also work to significantly reduce our environmental footprint through energy and water conservation, recycling and green construction. Community Involvement: From the neighbourhoods where our stores are located to the ones where our coffee is grown – we believe in fostering thriving communities. Bringing people together, inspiring change and making a difference in people’s lives – it’s all part of being a good neighbour. By 2015, we hope to contribute one million volunteer hours each year to our communities.” Source: Starbucks company website, www.starbucks.com.

EXHIBIT 11: STARBUCKS IN ASIA

Source: “Starbucks Brews Following in India where Tea in Supreme”, The Seattle Times, January 26, 2013.

0  

200  

400  

600  

800  

1000  

1200  

Num

ber  o

f  Stores  

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

20/21  

EXHIBIT 12: TATA GLOBAL BEVERAGES LIMITED (TGBL) Tata Global Beverages Limited (TGBL) was a multinational company engaged in the manufacturing and marketing of tea and coffee products. The company was headquartered in Kolkata, India and had operations in over 11 countries. TGBL's brands included Tetley, Tata Tea, Good Earth, etc. Tata Tea in India also had regional brands like Kannan Devan, Chakra Gold, Agni, Gemini and Tata Tea Gold. By 2012, the company employed about 3,100 people. TGBL's operations were divided into three business segments: tea, coffee and other produce, and others. Tea segment included the cultivation and production of black tea and instant tea and tea buying and blending. The coffee and other products segment was engaged in the growing of coffee, pepper and other plantation crops, and the production of roast and ground coffee and instant coffee. The final segment was responsible for the sale of natural mineral water, minor crops, curing operations of coffee, and trading of products required for coffee plantations. Tata Coffee, a subsidiary of TGBL, was Asia’s largest coffee plantation company. It produced coffee beans, tea leaves, pepper and timber. Tata Coffee was well known for its Eight O’clock Coffee brand in the US.

Source: Tata Global beverages Limited, Company Profile, MarketLine, June 2012.

SMU-13-0005 Brewing the Perfect Blend: Starbucks Enters India

   

21/21  

EXHIBIT 13: STARBUCKS INDIA MENU

Sandwiches Pastries, Muffins & Cookies Desserts

Basil Tomato & Mozzarella Cheese Sandwich Luxury Fruit Toast Blueberry Delight

Char Grilled Potato & Pepper Sandwich Chocolate Raspberry Crunch Cake Chocolate Truffle Gateaux

Cheesy Spinach Sandwich Banana Brownie Rocky Road Coffee Crunch Cake

Corn Brioche Sandwich Soya Mutter Strudel Fresh Fruit Salad

Chatpata Paratha Wrap Classic Glazed Doughnut Apple & Cherry Crumble

Tandoori Paneer Roll Oatmeal & Raisin Cookie Chocolate Chilli Éclair

Elaichi Mawa Croissant Fudgy Chocolate Chip Cookie Sumatra Coffee Chocolate Éclair

Star Club Sandwich Lemon Jazz Cheesecake Yoghurt Mousse with Fruit

Chicken & Mushroom Pie Coffee Jelly Tiramisu

Murg Kathi Wrap Blueberry Muffin

Spicy Mutton Twist Double Chocolate Muffin

Tamarind Peanut Chicken Calzone Banana Coconut Muffin

Double Barrel Roll Fig & Prune Loaf Cake

Salmon and Cream Cheese Croissant Chocolate Chip & Apricot Loaf Cake

Murg Tikka Panini French Butter Croissant

Cinnamon Roll

Cherry Danish

Chicken and Mozzarella Turnover

Lal Achari Mirch Turnover

Chicken and Vegetable Quiche Source: Starbucks company website, www.starbucks.in/menu-list/food-list.