Business & Finance / Accounting

In-Depth Integrative Case 3.1 How Starbucks Convinced Indians to Embrace Coffee Through superior product offerings, dependable customer service, and an emphasis on progression, Starbucks has quickly become one of the world's most recognizable coffeehouse chains. Aiding Starbucks' success is a focus on global development, which has served as a fundamental pillar of the firm's strategy since the opening of its first international location in Tokyo two decades ago.1 This devotion to global expansion was further solidified in January of 2012 when Starbucks announced that it would be finally entering India, the fastest growing market in the world, through a 50/50 joint venture with Tata Global Beverages.2 After almost five years of unsuccessful entry attempts, Starbucks and Tata's groundbreaking partnership would mark the beginning of a period of taste transitions within the nation.3 This partnership also ignited the blending of American and Indian preferences and styles within the coffee industry. The westernized Starbucks image, mixed with the cultural knowledge and products of Tata, created a unique consumer experience, one that has become particularly appealing to the rapidly growing Indian middle class. With a 2012 population of over 1.24 billion people, and an average of 66 percent and 54 percent of these citizens regularly drinking tea and coffee, respectively, the potential for a reliable coffeehouse chain in India was tremendous.4 Although the Indian coffee market had been attractive for some time, Starbucks' delayed entrance can be mainly attributed to the nation's hefty foreign restrictions. Even today, a nationalistic sentiment still lingers in the previously socialist India, and many blockades are put in place to protect domestic firms. Nonetheless, there have been groundbreaking strides in liberalization within the past few decades, and only recently have partnerships such as Tata Starbucks been made possible.5 In one of the first public announcements made by the Tata Group on the joint venture, R. K. Krishna Kumar, Vice Chairman of Tata Global Beverages, spoke highly of the synergies present between the two companies. He noted that, “It (the joint venture) 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 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.”6 Although India may still be [a] tea drinking nation, coffee culture is progressing. Guided by young millennials and a westernized push, coffeehouse experiences have flourished, which in turn have enabled entrepreneurial partnerships like Tata Starbucks to blossom.7 With such massive potential within India, and Tata serving as a liaison to these markets, Starbucks is now primed for rapid growth within the previously locked off nation. As it stands, Starbucks is positioned to change the mentality and culture of Indian's coffee industry.

The Starbucks Experience The Starbucks Corporation has transformed immensely since its opening in 1971, and the famed café was originally a distributor of roasted coffee beans. Being entirely operated by three former University of San Francisco classmates, Starbucks' original location in Seattle's Pike Place market did not actually sell beverages but was solely a roastery. In fact, much of Starbucks' early influence came from a close friend of the founders, Alfred Peet, creator of Peet's Coffee. Starbucks originally received both supplies and techniques from Peet himself, and as the company progressed, the founders discovered their own signature roasting styles and blends. The superiority of these original practices, and an early commitment to an excellent product and experience, would come to serve as the foundation for the firm's renowned brand.8 Although Starbucks quickly gained popularity, location and product line expansion were never a focus for the original founders. This would change when Howard Schultz joined the growing Starbucks team as Director of Retail Operations and Marketing in 1982. Schultz pushed the founders to transform Starbucks from a roastery to a café, and he even spent time in Europe observing Italian coffee houses that he hoped the company would mimic. Shultz would bring these concepts back to Seattle, and in 1984, the first Starbucks café latte was sold, marking the beginning of Starbucks' modern menu.9 In 1985, Schultz left Starbucks in order to open his own coffee shop, Il Giornale, where he had hoped to offer a more formal dining experience with a wider menu selection. Shultz's quick success at Il Giornale inspired him to acquire Starbucks just two years later, and through this acquisition, he gained access to the company's name, network, and reputation.10 Following this acquisition, Starbucks' values were modified to emphasize rapid development, expansion, and customizability, and within a decade, hundreds of new locations and products were being offered. Today, there are over 29,000 Starbucks Page 414cafés in 76 countries and the number of international locations has surpassed domestic ones as of 2018.11 Starbucks was listed on the New York Stock Exchange in 1992 with an initial public offering of 17 dollars a share. Starbucks has climbed since and revenue reached US$24.7 billion in 2018, up 10 percent from the previous year. With a market capital of over US$81 billion, Starbucks is the world's largest global coffee chain.12 Measured by outlet numbers, Starbucks is the third largest global food chain and is only outmatched by [McDonald's] and Subway.13 Starbucks has also grown rapidly in areas outside of its core café operations, and its volumes rank third in coffee bean distribution and top ten in domestic tea distribution.14 With operations that encompass over 277,000 employees, each member of the Starbucks team is guided by the mission “to inspire and nurture the human spirit—one person, one cup and one neighborhood at a time.”15 Starbucks' success can be attributed to more than just its product offerings, and as CEO Howard Schultz explains, “Starbucks represents something beyond a cup of coffee.”16 While Starbucks is known for its high quality coffee, the company's real competitive advantage stems from the experience associated with its products. Every Starbucks café welcomes its customers with

consistent quality, vast customizability, and a friendly and engaging workforce. The culmination of these ideas has been termed the “Starbucks experience” and has made Starbucks the “third place,” a place that describes a consumer's third most frequented location outside of home and work, for many.17 This unique experience has resulted in passionate customer loyalty, positive brand perception, and a recognizable image.18 Although Starbucks' growth has been mainly organic, acquisitions have often been a tactic used to spur the development of lesser established segments. To expand its product offerings, Starbucks has acquired companies such as Ethos Water and Evolution Fresh, and the purchases of these premium water and juice distributors has allowed the firm to gain entry into markets that present strong synergies and opportunities.19 Similarly, in 2012 Starbucks purchased Teavana for US$620 million. Despite closing all 379 Teavana outlets in 2018, Starbucks has still managed to successfully funnel former Teavana customers into Starbucks' cafés by leveraging the acquired firm's expertise.20 Starbucks is equally focused on environmental protection. This emphasis has resulted in organizational practices, including the development of fully recyclable packaging and the creation of an initiative that would lower in-store water consumption by over 25 percent within the next ten years. Starbucks is also a founding member of the Business for Innovative Climate and Energy Policy (BICEP) and a signatory of the RE100, a corporate commitment program focused on purchasing 100 percent renewable energy.21 Starbucks is committed to improving the quality of life of the communities it operates in, and each year over 50,000 Starbucks partners participate in more than 2,800 projects during Starbucks' Global Month of Service. Starbucks transmits this commitment onto the communities it sources from, and through a partnership with the Conservation International, Starbucks has promised to buy 100 percent ethically sourced coffee. Starbucks also focuses on improving the education, health, and employability of fledgling farmer populations, and its Global Farmer Fund Program has invested over US$50 million in financing projects for farming communities.22 Starbucks' emphasis on charitable giving has resulted in the company consecutively ranking among the top ten of the world's most admired companies.23 Starbucks' International Outreach Starbucks has been sourcing coffee beans from African, Latin American, and Asian Pacific regions since its founding, but it was not until the 1990s that cafés begun to open outside of North America. Since then, international expansion has been rapid, and Starbucks now has locations in every country it sources from.24 Starbucks' success stems from its ability to transform the tastes and preferences of the nation it enters. In Mexico, for instance, coffee consumption has increased an estimated 100–150 percent since Starbucks' first appearance in 2002.25 Emphasizing localization has been critical to Starbucks' expansive success. Starbucks has adapted and rearranged its offerings and strives to cater to the unique history and culture of each country in which it operates. To appeal to French taste preferences, the firm offers unique

Viennese coffee and foie gras sandwiches. In the Netherlands, Starbucks has constructed stages inside its cafés as this promotion of performance is particularly common throughout the nation. Even within the UK, Starbucks has adapted by allowing over 60 percent of all locations to be operated as franchises. With an abnormally high number of franchises in this region, Starbucks hopes to align itself with the UK's cultural preference for independent, local, and self-sufficient cafés.26 A strategic focus on café location and a careful adjustment of product offerings has allowed for smooth market penetration by Starbucks throughout the world. “Starbucks remains highly respectful of the culture and traditions of the countries in which it does business,” explained Howard Shultz. “We recognize that our success is not an entitlement, and we must continue to earn the trust and respect of customers every day.” Localizing offerings has allowed the company to gain this trust, and in turn, has changed foreign perspectives of Starbucks.27 Starbucks Milestones 1971 •Starbucks opens its first location in Seattle's Pike Place Market. 1982 •Howard Schultz joins Starbucks as director of retail operations and marketing. 1984 •Sells first Caffe Latte. 1985 •Schultz leaves Starbucks to open Il Giornale, where all coffee and espresso beverages were made from Starbucks coffee beans. Page 4151987 •Il Giornale acquires all Starbucks assets and changes its name to Starbucks. •Opens its first international location in Canada. 1988 •Offers full health benefits to all eligible full- and part-time employees, including coverage for domestic partnerships. 1989 •Opens its 50th store. 1990 •Expands its Seattle headquarters. 1991

•Becomes the first privately owned U.S. company to offer a stock option program that includes part-time employees. •Opens its first airport store at Seattle's Sea-Tac International Airport. •Opens its 100th store. 1992 •Announces initial public offering (IPO). •Partners with Nordstrom and Barnes & Noble to open cafés near their locations. 1993 •Opens its second roasting plant in Kent, Washington. •Opens its first location on the East Coast in Washington, D.C. •Opens its 250th store. 1994 •Opens first drive-thru location. 1995 •Through a coalition with Pepsi-Cola, Starbucks begins serving Frappuccino beverages. •Opens its 500th store. 1996 •Begins selling bottled Frappuccino coffee drinks through North American Coffee Partnership. •Opens its first overseas locations in Japan and Singapore. •Opens its 1,000th store. 1997 •The Starbucks Foundation is established. •Opens stores in the Philippines. 1998 •The Starbucks brand begins selling in grocery stores across the U.S. •Launches Starbucks.com.

•Opens stores in England, Malaysia, New Zealand, Taiwan, and Thailand. 1999 •Acquires TazoTea. •Partners with Conservation International to promote sustainable coffee-growing practices. •Opens stores in China, Kuwait, Lebanon, and South Korea. •Opens its 2,000th store. 2000 •Establishes licensing agreement with TransFair USA to sell Fairtrade certified coffee across North America. •Opens stores in Australia, Bahrain, Hong Kong, Qatar, Saudi Arabia, and United Arab Emirates. 2001 •Introduces ethical coffee-sourcing guidelines developed in partnership with Conservation International. •Introduces the Starbucks Card. •Opens stores in Austria, Scotland, Switzerland, and Wales. 2002 •Opens stores in Germany, Greece, Indonesia, Mexico, Oman, Puerto Rico, and Spain. •Opens its 5,000th store. 2003 •Opens two new roasting facilities in Carson Valley, Nevada and Amsterdam, Netherlands. •Opens stores in Chile, Cyprus, Peru, and Turkey. 2004 •Begins sourcing coffee from India through Tata Coffee. •Introduces Starbucks Coffee Master Program. •Opens stores in France and Northern Ireland. 2005 •Acquires Ethos Water.

•Opens stores in Bahamas, Ireland, and Jordan. •Opens its 10,000th store. 2006 •Announces interest in expanding into Indian. •Launches industry's first paper cup containing postconsumer recycled fiber. •Opens stores in Brazil and Egypt. 2007 •Indian expansion is delayed due to governmental obstacles. •Opens stores in Denmark, the Netherlands, Romania, and Russia. •Open its 15,000th store. 2008 •Howard Schultz returns as chief executive officer. •Acquires Coffee Equipment Company and Clover brewing systems. •Establishes social media presence through Twitter, Facebook, and independent online community called My Starbucks Idea. •Opens stores in Argentina, Belgium, Bulgaria, Czech Republic, and Portugal. 2009 •Introduces first iPhone app with Starbucks card mobile payment option. •Opens roasting plant in Sandy Run, South Carolina. •Opens stores in Aruba and Poland. 2010 •Opens stores in El Salvador, Hungary, and Sweden. 2011 •Starbucks and Tata Global Beverages sign a non-binding Memorandum of Understanding. •Launches first annual Global Month of Service to celebrate the company's 40th anniversary.

•Opens stores in Guatemala, Curacao, and Morocco. 2012 •Announces 50/50 joint venture with Tata Global Beverages. •Opens its first Indian café within the historical Elphinstone Building of Mumbai's Horniman Circle. •Announces progressive pay and benefit structure for all Indian employees. •Opens Starbucks Soluble Plant in Augusta, Georgia. •Opens stores in Costa Rica, Finland, India, and Norway. 2013 •Starbucks and Tata Coffee open joint roasting and packaging plant in Kushalnagar, Karnataka. •Expands Indian presence by opening cafés in New Delhi. •Enters Pune and Bengaluru, India. •Expands into Gurgaon, India's epicenter for financial and industrial business. •Begin servicing in New Delhi's Indira Gandhi International Airport and Mumbai's Chhatrapati Sivaji International Airport. •Creates specialty Indian sourced coffee, named India Estates Blend, to celebrate one year in India. •Introduces most popular drink, Salted Caramel Mocha, in India. •Opens farming research and development center in Costa Rica to strengthen ethical sourcing efforts. •Opens stores in Vietnam and Monaco. •Opens its 30th store in India. 2014 •Begins selling Pour-Over Sets within India in order to expand its in home presence. •Enters Chennai, India.

•Establishes its first Indian month of community service in September.Page 416 •Launches My Starbucks Rewards loyalty program throughout India. •Reaches 1,000 partners within India. •Opens stores in Brunei and Colombia. •Opens its 20,000th store. •Opens its 50th store within India. 2015 •Announces that India has become its fastest growing market. •Begins working with the Food Safety and Standards Authority of India (FSSAI) to ensure and improve quality standards of Indian offerings. •Hosts first Coffee Championship within India. •Sumi Ghosh is elected chief executive officer of Tata-Starbucks. •Reaches 99 percent ethically sourced coffee milestone. •Announces the Sustainable Coffee Challenge at the U.N. climate negotiations in Paris, which would make coffee the world's first sustainably sourced agricultural product. •Opens stores in Azerbaijan, Cambodia, Kazakhstan, and Panama. •Opens its 75th store within India. 2016 •Makes single origin coffee from India available in Starbucks Reserve Roastery. •Introduces Tata's Himalayan water throughout all Chinese and Asian Pacific regions. •Introduces coffee aboard Vistara flights. •Begins the development of two new Indian plantations. •Announces five-day work schedule for all Indian partners. •Opens stores in Andorra, Luxembourg, Slovakia, South Africa, and Trinidad and Tobago.

•Opens its 25,000th store. 2017 •Announces commitment to becoming the “employer of choice” in India. •Introduces Teavana specialty tea across India. •Introduces Starbucks' mobile app across India. •Employees become eligible for the Tata Strive program. •Begins offering specialty Nitro Cold Brew products throughout India. •Begins offering specialty Indian Spiced Majesty Blend tea. •Expands hiring commitment to include 10,000 refugees by 2022. •Kevin Johnson becomes chief executive officer while Howard Schultz transitions to executive chairman. •Opens stores in Jamaica. •Opens its 100th store within India. 2018 •Enters Kolkata, India. •Opens Starbucks Reserve Roastery locations in Milan and New York. •Opens first Signing Store in Washington, D.C. •Howard Schultz retires from Starbucks and becomes chairman emeritus. •Opens stores in Italy. India's Changing Marketplace As a result of British colonization and a socialist mentality that lingered after independence, India remained isolated from most of the world during the majority of the 20th century. Up until the early 1990s, strict nationalistic regulations were implemented in order to protect local firms and achieve productive self-reliance. The promotion of centralized planning within India led to governmental manipulation of company initiatives and firm successes. The Indian government also strictly blocked foreign competition, and obstructive custom barriers were implemented in order to deter widespread importation and entrance by foreign firms. According to scholars on the subject matter, “In this post-colonial context, the development

model of import substitution consisted of four main measures: A large public sector, centralized planning in which industry and agriculture were favored, high trade barriers, and a restrictive system of administrative authorization.”28 In 1973, the Indian Parliament solidified its protectionist mentality through the passing of the Foreign Exchange Regulation Act (FERA). Under this ordinance, any foreign owned company within India was required to sell the majority share of its equity holdings to Indian shareholders. Not only did this deter entrance by foreign companies, but it also led to the withdrawal of many already established firms such as Coca-Cola and IBM. FERA effectively placed both multinational corporations and local Indian companies under the control of India's central bank and therefore made foreign entrance undesirable and nearly impossible.29 As India's policies became more protectionist, its economy faltered and annual growth stagnated at around 3 percent during the 1980s. Decades of poor policy decisions lead to an inability to pay debt, a lack of foreign investment, and ultimately, a balance of payments crisis. In an effort to generate relief funding, India began implementing economic liberalization reforms in 1991. These reforms were meant to globalize the economy and lessen the government's control over the private sector. In less than a decade following these reforms, tariffs had fallen by 120 percent and exports had more than tripled.30 Similarly, economic liberalization also led to the undoing of FERA policies and some foreign firms were now eligible to enter India through joint ventures in which the firm could retain a 51 percent majority equity stake.31 In the decades following liberalization, India's economy has flourished. The nation has consistently recorded annual GDP growth rates of over 7 percent, and India is now projected to become the world's fastest growing economy.32 While many Indians may still live below the poverty line, poverty has nonetheless seen a 10 percent reduction since 2010 and India's GDP per capita is up 6.5 times since liberalizing.33 In recent years, India has become a highly targeted market due to its expanding wealth and population of over 1.3 billion people. With one of the most rapidly growing middle classes in the world, India will be the third largest consumer market by 2025. This presents immense opportunities for consumer products such as Starbucks' coffee.34 India's increasing growth and fading regulations have led to mounting foreign interest. For instance, prior to 1991 there were less than 500 foreign-owned corporations active within India. Today however, there are closer to 4,000 foreign-owned Page 417companies and major brands such as Walmart, Dunkin' Donuts, and General Motors are all actively fighting to gain a foothold in this high potential market.35 India now ranks as one of the top ten most highly invested in countries, and the nation received over US$40 billion in 2018 investments, up from as little as US$100 million three decades ago.36 In a foreign market survey conducted by EY analysts, India was titled the world's most attractive market. According to this survey, over 60 percent of corporate partners possess a strong interest to expand into India, and 86 percent of respondents referenced that India's cheap,

skilled, and trainable labor force was their main driver of interest. However, over 50 percent of respondents noted that the nation's legislative and administrative environment was their biggest deterrent.37 While it is clear that India's business environment is making significant developmental strides, moving ahead 28 positions in the 2018 Ease of Doing Business indicator report, the nation, which ranks 77th overall, still has many hurdles to overcome.38 Starbucks' Mounting Interest Policy reform and economic liberalization allowed Starbucks to consider entering India, and the rapidly growing market that resulted from these reforms furthered the appeal of entrance. In 2006, the year Starbucks first announced its interest in India, the Indian government had relaxed regulations so that single brand retail outlets could maintain a 51 percent majority hold over their investment. In 2012, the year of Starbucks entrance, India fully opened its market to foreign investors, now allowing a 100 percent investment in this same context. By being classified as a single brand retail outlet, Starbucks was primed for Indian entrance in the early 2000s, something which would have not been possible 20 years prior.39 To Starbucks, the appeal of India was not solely based on relaxed regulations. The profitability potential of the nation was also a tremendous factor to be considered. India's average national income, which peaked at 9.6 percent growth in 2007, had averaged around 7 percent growth during the first decade of the twenty-first century. This rising rate of personal wealth, mixed with an increasingly westernized attitude, propelled Starbucks' interests in the Indian market further. Additionally, international development, expansion of product lines and experiences, and diversification of customers had always been some of Starbucks' core values. India presented the ideal mentality, opportunities, and population for Starbucks to live out these values and aid in its mission of converting consumers into coffee lovers.40 Since the 1990s, middle class wealth within India had been growing alongside a falling population age, and these demographics aligned well with Starbucks' typical consumer base. Starbucks generally attracts younger consumers, and over one third of its customers fall into the 18 to 29 age range.41 With around 40 percent of Indians being under 18 and over 65 percent being under 35, Starbucks should be able to retain, attract, and grow from the consistently young population that is expected to

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