Can Starbucks brew instant success in the Indian market?

India is ready for Starbucks, but is Starbucks ready for India?

A media report on Monday said that Starbucks, the world’s largest coffee chain company, and the Tata group are close to finalising an equity joint venture for opening coffee shops across the country.

The report suggests the Seattle-based company is eager to make its debut in this potentially high-growth market.

In recent years, Starbucks has been focusing on growth outside the US, especially in emerging markets to boost sagging growth in its home market. The coffee chain company, which has 17,000 stores in 55 countries, derives one-fifth of its revenues from outside the US.

The Indian debut plan is part of the company’s overall strategy to step up expansion in Asia.Currently, China is Starbucks’ biggest market in Asia; so confident is the company of its success in that country that it plans to triple the number of outlets to 1,500 by 2015 from 470 currently.

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[caption id=“attachment_104419” align=“alignleft” width=“380” caption=“Starbucks, with its more expensively- priced foods and beverages, will never be a real competitor to CCD.Reuters”]  [/caption]

“China has 5,000 years as a tea-drinking country, but we’ve created a new coffee culture,” Starbucks’ Asia-Pacific President Jinlong Wang boasted last month.

Don’t expect the company to “create a new coffee culture” in India though, because that culture has already been brewed by other companies.

In fact, Starbucks is entering the market at a time when several other coffee chains - homegrown and international - are busy expanding their presence in India.Caf Coffee Day, Barista, Caf Mocha, Gloria Jean are just some of the brands already operating in the country.

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In other words, competition is already intensifying. Young people and a booming middle class are driving coffee consumption by 5-6 percent a year in a country that predominantly consists of tea drinkers. But it’s unlikely they will all convert to the Starbucks cult overnight.

Starbucks’ rivals already have more than 1,500 coffee chain outlets in India. The organised caf market in India is growing at a compound annual growth rate of 25 percent, according to Technopak Advisors. Caf Coffee Day (CCD) is the undisputed leader in the organised market, claiming around 1,000 of these outlets. One of the reasons for the company’s success is that is beverages and products are aimed at mass-market consumers.

In that sense, Starbucks, with its more expensively- priced foods and beverages, will never be a real competitor to CCD. In fact, its appeal will be more limited. A Starbucks espresso is more likely to be bought by a high-earning business executive on the go than college students.

To give you one simple example, a small Starbucks cappuccino costs about $2.20 (Rs 107) in China, while a CCD version in India starts from Rs 70. In a price-conscious market such as India, such a price gap can make all the difference between business success and failure.

From that perspective, the company’s plans to open stores in the Taj Hotels and other retail outlets associated with the group might work well in targeting more upmarket clientele. But as noted earlier, that strategy will strictly limit its appeal.

Indeed, there are two factors that could ultimately determine the company’s success in India: location (of outlets) and costs.

On the pricing front, the idea to source locally from Tata Coffee seems sound, but there’s a slight hitch: Indian java is generally considered inferior to Indonesian and African beans. However, the sourcing deal offers the opportunity to grow very high-quality coffee beans in India, and that is a plus for sure.

Of course, it can be argued that since the US coffee chain giant will be catering to Indian consumers who like the taste of Indian beans, sourcing might not be such a problem after all.

Still, it will be important to get this aspect right because importing beans is not a viable proposition currently, given that imports attract a whopping 100 percent-plusin duties.

Clearly, there are a lot of challenges Starbucks will have to overcome before converting this market’s high-growth potential into reality.

Which means that while Starbucks may be king of coffee in other markets,it’s unlikely to become an overnight success in this one. Success will have to be brewed slowly and in small measures.