Starbucks’ strategy for India – is it a winner?

By: Sourajit Aiyer

Starbucks’ strategy for India is not without risks. But the world’s largest coffee shop chain is building its position carefully, in a series of well-chosen steps.

Many global brands have entered India since the 1990s, attracted by its growing and aspirational consumer base. But not all have succeeded. Whether a failure of capital outlay strategy, target segment size, pricing, ability to create customer pull, etc, there has been an exodus of some brands as well.

Starbucks is a recent entrant. Interesting observations come out of its strategy on doing business in India.

Starbucks is not the first entrant into India’s organised coffee market, so does not have any first-entrant advantage. Cafe Coffee Day (CCD) is the market leader, while Barista Lavazza was the first coffee-chain to set up shop. They are priced for the middle-class. Costa Coffee, Coffee Bean and Tea Leaf (CBTL), Gloria Jean are priced for the affluent crowd.

India is traditionally a tea-drinking country, so coffee chains have focused on providing an ambience where people can relax and spend time with each other. This outlet format means higher capital outlay.

This is in slight contrast to the US, where most people have coffee on the move. The Indian consumer base has also evolved over the last decade. While the novelty of consuming global brands ruled earlier, the average consumer has now become more discerning, demanding, with minimal loyalty if expectations are not met.

So what can global brands like Starbucks do to maximise their chances of success in India? Here are some ideas:

Choose a Local Partner

Global brands face the dilemma of whether to go solo or tie up with a local partner. Starbucks’ decision to partner up with India’s TATA Global Beverages shows a focus on leveraging multiple benefits.

The TATA Group is one of India’s ethically-driven brands, a perception passed on about Starbucks India as well. The TATA companies also offer scope for backward-linkages. Its Indian partner produces the raw material (coffee beans) in Karnataka.

Given that India produces coffee beans in only a few places, the other sourcing option was importing the beans. But this would have hiked input costs significantly. TATA’s coffee plant in Karnataka has also been contracted to supply beans to Starbucks’ globally, creating mutual synergies.

Backward linkages also hold its Starbucks’ in-store menu. It has contracted catering to TATA’s TAJ SATS, which also supplies to TATA’s premium hotel chain – The TAJ. The TATAs are also invested into the retail sector – with store brands like Westside, Tanishq, Croma, Star Bazaar, etc.

Starbucks can leverage them for knowledge-sharing on Indian real estate, area-specifics, and on tackling real estate bureaucracies. This would help its own expansion blueprint. It also gives scope for store-in-store sales.

Consistency in store formats

This helps to maintain the unique selling point of consumer ‘experience’, and also to gain economies of scale on capex.

Starbucks plans to have the same store format across India, though the size can change based on economics. This is how it operates globally. Starbucks has projected itself as a place to have a likable ‘coffee-house’ experience.

Having the same format gives customers the comfort of receiving the same ‘Starbucks’ ambience wherever they go throughout the world creating customer pull, not to mention economies of scale to the company with its suppliers.

But keeping the store formats consistent means it has to choose and open new locations very stringently, such that the location can yield a throughput in line with the investment.

Its approach in store format is in contrast to CCD, which has opted for different formats in order to tap the potential demand in any area. CCD has opened few premium outlets based on the location’s client profile.

It has also gone for non-store formats like takeaway kiosks and vending machines. But Starbucks might fear that such non-store formats might dilute its brand value, given its positioning.

Measured Pace of Expansion

India is a market where a failure to monitor bottom-line has thrown many companies out of gear. In short, a top-line only approach does not work here.

Since Starbucks has to choose new locations stringently in line with its same-format approach, it has opted for a measured pace of expansion. It is focusing on the financial viability of each outlet, rather than going for an ambitious expansion plan which might have resulted in repeated calls for capital.

This is in contrast to its own strategy in USA and China where it has built scale by opening stores in almost every neighbourhood – being the first port-of-call for coffee by simply being everywhere.

CCD’s strategy behind flexible store formats was to ensure there is a CCD café at easy reach at any place. However, it would be interesting to check its average store profitability given its scale.

Opting for Realistic Pricing

This is based on market affordability and its own positioning. Globally, Starbucks is priced at a level at which it can be termed an ‘affordable luxury’.