Why is India an attractive market for Starbucks?? What is Starbucks international strategy? Is it more of adaptation or standardization?? 3. Why did Starbucks enter I
Question:
1. Why is India an attractive market for Starbucks?
2. What is Starbucks’ international strategy? Is it more of adaptation or standardization?
3. Why did Starbucks enter India with a joint venture?
Please use your own words. No references allow. You must thoroughly answer all the questions (min. 300 words). You need to draw from theories and concepts rather than using common sense. Chapter materials are on the PowerPoint.
C!!" CASE !# :: TATA STARBUCKS: A BREW FOR INDIA?
CASES
foreign direct investment (FDI) restrictions.b The company had withdrawn its application then, but when India’s es- teemed Tata Group knocked on its door with a partnership opportunity, Starbucks eagerly responded. A 50-50 joint venture was formed, and Starbucks coffee was introduced to the Indian market in October 2012 with a generous initial investment of $80 million.5 The Tata Global Beverages board of directors expressed excitement about the potential of the newly formed joint venture between the company and Starbucks.c “Through Tata Starbucks, your company offers the legendary Starbucks coffee experience, backed by the trust of the Tata name, to the Indian consumer,” announced Cyrus P. Mistry, chairman of Tata Global Beverages.6
The Indian cafe market certainly seemed to offer a lot of potential for the new Tata Starbucks alliance. While India was a nation known for tea drinkers, sipping coffee and so- cializing at coffee shops was becoming increasingly popu- lar. Domestic consumption of coffee had risen 80 percent in the past decade. Given these encouraging trends, Star- bucks CEO Howard Schultz believed that India could one day rival the company’s successful venture in China.
In 2019, the Tata Starbucks joint venture had clearly come a long way since it was kicked off in 2012, but it was much too early to celebrate, since the company was just recovering from losses. Success in the Indian café market would require over- coming the usual two key challenges of competition and prof- itability. In July 2018, Starbucks recorded its first year of positive EBITDA. Its latest annual report said Tata Starbucks, improved sales by 28 percent in FY 2018 with robust in-store performance and new stores added during the year.
The market in India is intensely competitive, with multi- ple domestic and foreign players. The most formidable com- petitor of the Tata Starbucks venture is domestic giant Cafe Coffee Day (CCD), with its strategy of flooding the market with its cafés, closely mimicking what Starbucks has done in the United States. At the same time, high real estate costs and rental rates, along with competitive pricing pres- sures and India-specific cultural preferences, make it ex- tremely difficult for new coffee companies in India to recover their initial investments.
Former Tata Starbucks CEO Avani Davda admits that the initial consumer experience was a humbling one. Tata Starbucks opened its first store with a lot of fanfare in the trendy Horniman Circle area of Mumbai. Despite having a high-profile local partner, Starbucks was unable to use its
In January 2019, Tata Starbucks appointed new CEO, Navin Gurnaney, who replaced Sumitro Ghosh who had been CEO for the previous three years. Speaking on the an- nouncement, Ajoy Misra, Managing Director and CEO, Tata Global Beverages Limited praised Ghosh for establishing a strong foundation. Misra then shifted focus to the future saying, “We are pleased to bring on a seasoned leader like Navin, who is focused on operations excellence, relevant innovation and developing high-performing teams, and look forward to continued brand and business growth for Tata Starbucks in India.”1
Ghosh replaced the menu-as-usual approach with his India-specific strategic vision.2 As a result, Tata Starbucks narrowed its ongoing losses from above $7.51 million to $6.01 million, increasing sales by 39 percent. Ghosh said, “we are focused on a long-term, disciplined, and focused approach to building our brand in this dynamic market, earning the trust and respect of Indian consumers.”3
Tata Starbucks Pvt. Ltd in India is a joint venture of U.S. beverage company, Starbucks, and Tata Global Beverages. Begun in October 2012, at first Tata Starbucks, under founding CEO Avani Davda, offered the usual Starbucks coffee menu in India, which was not successful. By early 2019, Tata Starbucks had refined the India-specific strategy, as a more promising path for future growth and success among Indian customers. One of the first things they did was to introduce Starbucks Teavana with 18 diverse varieties of tea to serve the Indian market.
Although the start of the venture had been disastrous, Tata Starbucks became EBITDA (earnings before interest, tax, depreciation, and amortization) positive this year after its sales doubled in fiscal year 2018. In the annual report of Tata Global Beverages, it said Tata Starbucks had boosted sales by 28 percent in FY18 and posted Rs. 272 croresa in sales during FY17.4 Due to recent success, the company an- nounced to open more than 25 stores across India in 2019.
Starbucks had had its eye on the large Indian market for some time before the joint venture was initiated. An at- tempt to enter the market several years earlier had failed due to complications with the Indian government and
CASE 17 TATA STARBUCKS: A BREW FOR INDIA?*
* This case was developed by graduate students Dev Das and Saad Nazir, Sushmitha Mudda and Professor Alan B. Eisner, Pace University. Material has been drawn from published sources to be used for class discussion. Copyright © 2019 Alan B. Eisner. a1 crore = 10 million Rs, Exchange Rate: $1 USD = Rs.69.85 as of April, 2019. So, 1 crore Rs = $143,165 USD. bThe Government of India at the time permitted foreign retailers a maximum ownership stake of only 51 percent.
cTata Global Beverages is the Tata Group subsidiary that manages coffee and tea sales.
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CASE !" :: TATA STARBUCKS: A BREW FOR INDIA? C115
used successfully in other Asian countries, like Japan and China. The premium offering would cater to an older business elite with higher spending power. This would result in less rapid growth, with a cherry-picked list of high- profile, business-friendly locations, allowing the venture to build a premium brand with premium pricing.
Would Starbucks and Tata under Gurnaney’s leadership be able to crack the code for sustained success in the com- petitive and complex Indian market? Though at first Star- bucks appeared optimistic about the success of Teavana as the company focused on offering products exclusively ac- cording to the taste of the Indian customer, some critical strategic choices would need to be made to ensure the long- term success of Starbucks in India.
Schultz and Starbucks—Cultivating a Company from an Idea Starbucks started out in 1971 with a single coffee roaster and retail store in the Pike Place Market in Seattle. Since then the company had expanded its global footprint might- ily, with over 17,000 coffee stores in more than 50 coun- tries.10 The visionary behind this international success story was CEO Howard Schultz.
Schultz joined the company in 1981 and quickly assessed its growth potential after visiting coffeehouses in Italy. He envisioned his coffeehouses offering much more than just a cup of coffee. They were to become a third place, in addition to home and work, for people to meet and socialize. In addi- tion to serving coffee, the coffeehouses would help people connect with other people and their local communities. Employees would be trained on coffee, company products, and customer service to deliver a positive “Starbucks Experi- ence” to each and every customer.
name to secure any discounted rates in renting real estate. The first store was located in a Tata Group-owned 4,000-square-foot site that had been vacant for a while.
As of February 2019, Tata Starbucks had expanded to over 145 locations across the country in major metropolises such as Mumbai, Delhi, Pune, and Bengaluru.7 Yet this was still well short of initial expectations. Clearly, something had changed in management’s expectations of the size and pace of the venture’s growth. Quarterly earnings presenta- tions boasted of robust store profitability, but with no num- bers provided, possibly pointing to a slower and more selective approach to expansion.8 In its first full year in the Indian market (12 months ending March 2014), Tata Star- bucks reported losses of $7.8 million more than half its to- tal sales of $14.34 million during the same period.9
The joint venture appeared to be at the crossroads of an important strategic decision. It could revert to a plan to grow its store count aggressively, much like Starbucks did in the United States. It is possible that this was the original intent. After all, the initial launch pricing had been set to be com- petitive with CCD’s pricing (coffee drinks available for as low as Rs 100). This approach would have put it in direct price competition with CCD, the domestic café market leader.
Gaining market share among the youth of the country was critical for Tata Starbucks to tap into a large demo- graphic segment. India’s population showed a pronounced skew to younger age brackets (see Exhibit 1) and lower in- comes when compared to countries like Japan and the United States. Building a presence within these segments as CCD had done was critical for success in the long term.
Alternatively, instead of trying to saturate the country with stores at once, the venture could choose a premium- priced, niche approach similar to the one Starbucks had
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EXHIBIT 1 Age Distribution by Country, 2018
Source: CIA World Factbook.
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C!!" CASE !# :: TATA STARBUCKS: A BREW FOR INDIA?
the strong performance, the stock of Starbucks Coffee Japan Ltd. made its debut on the NASDAQ Japan exchange and performed strongly. “Any way you measure it, we’ve exceeded our wildest expectations,” CEO Howard Schultz announced jubilantly at the initial public offering in Tokyo, October 2001.
Tea-drinking Japan was not a total stranger to coffee. Dutch traders first brought coffee to Japan in the 17th cen- tury, but the shogun prohibited them from traveling freely in Japan, so very few Japanese were exposed to coffee and those who were lived mainly in port cities like Nagasaki. Coffee penetrated Japan further in the 1850s with the ar- rival of American ships. Soon after, Japanese started to travel overseas and brought back elements of the European coffee culture.
The first coffee shop opened in the 1880s in Tokyo’s Ueno district, and drinking the brew became associated with the wealthy classes. Over the next few decades, coffee increased in popularity within Japan, and a number of cof- fee chains entered the market. As business flourished be- tween the United States and Japan, many Japanese traveled to the United States. West Coast cities like Seattle were popular destinations. So when Starbucks finally entered Japan in 1996, many Japanese were already familiar with the brand. Starbucks soon cultivated a loyal clientele of wealthy Japanese, who considered it to be the original gourmet cof- fee shop and aspired to emulate the Western lifestyle.
Starbucks Coffee Japan turned its first profit in 2000, nearly four years after its initial launch. Clearly, Starbucks entered markets with a commitment to win them over the long haul. Starbucks grew to over 1,000 stores in the coun- try. For a while, sales volume per store in Japan was twice as high as that in the United States.13
Between 1996 and 1999, Starbucks expanded to addi- tional markets in other countries that had a high number of international travelers and a growing segment of western- ized and wealthy locals. These were countries with high or growing per capita incomes (see Exhibit 2).
• Starbucks Singapore opened its first store in December 1996 at Liat Towers, strategically located along the nation’s renowned Orchard Road shopping belt.
• Starbucks then entered the Philippines (1997), Taiwan, Thailand, and Malaysia (1998), and South Korea (1999), once again selecting premium locations frequented by the country’s growing westernized, affluent classes and international travelers.14
Happy with its initial successes, Starbucks began planning expansions into countries with more entrenched cultures and large, diverse populations.
Next Expansion Wave—Cracking the Cultural Codes Unlike Japan, tea-drinking China had little prior experience with coffee. In addition, the emerging superpower had
Starbucks quickly acquired a reputation for being an employer of choice and a socially responsible player:
• When the company went public in 1992, all employ- ees were made “partners” in the company and given a share of Starbucks equity (commonly known as “bean stock”). Comprehensive health care coverage was also provided to both full-time and part-time employees.
• Efforts were made to ethically source products and establish strong relationships with coffee-producing farmers all over the world. In later years, the company began to utilize reusable and recyclable cups in its stores. Its employee partners contributed many hours of volunteer work to help with community causes.
• After the 2008–2009 recession and the introduction of the Affordable Care Act in 2010, several companies began to cut employee benefits to manage costs. Schultz refused to reduce benefits for his partners, arguing that this was a short-term reaction and not in the interests of a company in the long term.
• In 2019, to help provide employment opportunities for refugees and military veterans in the United States, Starbucks announced a goal to hire 10,000 refugees by 2022, and 25,000 military veterans by 2025.
The company’s mission was to inspire and nurture the human spirit, one person, one cup, and one neighborhood at a time. The company planned on doing this not just in the United States but across the globe. The Starbucks name had been taken from a character in Herman Melville’s clas- sic adventure novel Moby Dick. It was felt that the history of the coffee trade and Seattle had a strong association with the sea. In keeping with the sea theme, the image of a Norse twin-tailed siren was adopted as the company logo.11
The company under Schultz’s leadership performed re- markably well financially over time. Performance in 2016 showed total revenues of $21.3 billion, and $2.8 billion in net earnings. On April 3, 2017, former Chief Operating Of- ficer and member of Starbucks board of directors Kevin Johnson became the successor of Howard Schultz as the new CEO, with a vision similar to Schultz’s. Under Johnson, performance in 2018 rose to $24.7 billion in revenues and net earnings of $4.5 billion.12
Initial Expansion into Asia—Targeting the Westernized and the Wealthy The first Starbucks store outside North America opened in the fashionable Ginza district in Japan in 1996. Within the next few years, Starbucks became a well-known brand name in Japan. Like Starbucks shops in the United States, those in Japan featured comfy sofas with American music playing in the background. Unlike most Japanese kisaten, or local cof- fee shops, Starbucks did not allow smoking. The policy proved popular with women, who did not smoke as much as men in Japan. Men eventually followed the women to Starbucks locations, and business started humming. Given
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CASE !# :: TATA STARBUCKS: A BREW FOR INDIA? C117
prices. Clearly, the Shanghai elite were not price-sensitive. Much like Starbucks, the café then began to focus primarily on achieving the highest level of quality and service.
In 2018, Starbucks generated an annual revenue of $4.5 billion from its business in China. Starbucks’ Chinese outlets had become more profitable than those in the U.S. market. Although Starbucks’ Americas revenue grew by 7 percent, its China/Asia Pacific revenue grew by 38 per- cent in 2018. To capitalize further on the Chinese market, Starbucks announced 1,400 additional stores in China to be built by 2019, bringing the total store count in China to 3,400.15
While Nestlé and Starbucks had radically different methods for getting the Chinese to drink coffee, both suc- ceeded. This success in part can be attributed to segment- ing the market and recognizing the Chinese as unique consumers with different tastes and habits than those of American consumers. For instance, Chinese consumers do not like the bitter taste associated with black coffee or espresso, so both players tailored their beverages accord- ingly. Nestlé’s Nescafé packets included sugar and pow- dered milk, while Starbucks emphasized milk-based drinks like Frappuccinos, lattes, and mochas in its stores. Star- bucks’ Chinese menus also added some local flavor, with customized choices like green tea tiramisu and Chinese moon cakes.
In addition, Starbucks localized its outlets by offering large seating areas, since Chinese tend not to like to take their drinks off-site. Local Chinese customers began to
deeply entrenched cultural traditions with regard to food and drink. Succeeding in China would be a critical chal- lenge and opportunity for Starbucks. Cracking the cultural code there could facilitate conquering other emerging markets— like India.
Starbucks opened its first store in Beijing in 1999. The company recognized there was a universal need among indi- viduals to be respected for their differences and to feel con- nected with others. Starbucks catered to this need by applying its own culture and values in a way that was yet conducive to local values and tastes.
In China, instant coffee accounted for upward of 80 per- cent of all coffee consumption. Given the average Chinese consumer’s limited prior exposure to coffee, instant coffee had proved to be a highly effective and affordable way of expanding consumption. Starbucks took a different ap- proach and targeted affluent Chinese consumers with bev- erages priced up to 50 percent higher than the prices at its U.S. stores. Most Starbucks beverages in China cost upward of 30 renminbi (RMB), or about US$5. In contrast, Nestlé’s Nescafé instant coffee could cost as little as RMB1.5 (US$0.10) per packet.
Fueled by Starbucks, the wealthy commercial capital Shanghai quickly became the coffee culture capital of China. The owner of Shanghai-based Café del Volcan, one of Shanghai’s popular coffee retail outlets, had noticed an interesting phenomenon in the initial days after opening his café. The prices had not yet been displayed, yet most cus- tomers ordered their beverages without inquiring about
EXHIBIT 2 2019 Annual per Capita Income (in $USD)
GDP per capita, current prices (U.S. dollars per capita) !","""
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Hong Kong SAR Japan Korea, Republic of Malaysia China, Peoples’s Republic of
Philippines Vietnam IndiaIndonesiaThailand
Source: IMF World Economic Outlook, 2019
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C!!$ CASE !# :: TATA STARBUCKS: A BREW FOR INDIA?
was very different from that of the east. Consumer spending power inland was not on par with that in coastal cities. To address this complexity of the Chinese market, Starbucks collaborated with three regional partners as part of its expansion plans.
• In the north, Starbucks entered a joint venture with Beijing Mei Da coffee company. In the east, Starbucks collaborated with the Taiwan-based Uni-President. In the south, Starbucks worked with Hong Kong-based Maxim’s Caterers. Each partner brought different strengths and local expertise that helped Starbucks gain insights into the tastes and preferences of local Chinese consumers.
3. Make a long-term commitment: • Long-term commitment required patience. It took
Starbucks time to educate the market and gain customer loyalty. Starbucks also did an excellent job in recruiting and training its employees. This turned out to be a win-win strategy because em- ployees were, after all, the face of the Starbucks brand and were at the heart of delivering the “ Starbucks Experience” to customers.
This knowledge armed Starbucks as it prepared to pene- trate an even more complex and competitive market of India.
Passage to India—Tata Group a Worthy%Partner Founded by Jamsetji Tata in 1868, Tata’s early years were inspired by the spirit of nationalism. Tata pioneered several industries of national importance in India: steel, power, hospitality, and airlines. In more recent times, its pioneer- ing spirit was showcased by companies such as TCS, India’s first software company, and Tata Motors, which made India’s first indigenously developed car, the Tata Indica, and the world’s most affordable car, the Tata Nano.
The Tata Group comprised over 100 operating compa- nies in seven business sectors—communications and infor- mation technology, engineering, materials, services, energy, consumer products, and chemicals. The group had operations in more than 100 countries across six conti- nents, and its companies exported products and services to 150 countries.
Along with the increasing global footprint of Tata companies, the Tata brand was also gaining international recognition. Tata ranked 131st among Forbes’ list of the Top Regarded companies, as of 2018.21 Brand Finance, a UK-based consultancy firm, valued the Tata brand at $19.5 billion and ranked it 86th among the top 500 most valuable global brands in its Brand Finance Global 500 2019 report.
Like Starbucks, Tata had a strong belief in social respon- sibility. The company created national institutions for science and technology, medical research, social studies, and the performing arts. Its trusts provided aid and
enjoy the “Starbucks Experience” while sitting with friends and having something to munch on along with their coffee. Further, “family forums” were introduced to explain to par- ents the merits of having their children work at Starbucks. Large lounges with couches were provided at stores to ac- commodate working customers’ need to relax for a bit dur- ing afternoons. Menus were modified to include foods that were tailored to local tastes, for example, a Hainan Chicken sandwich and a Thai-style Prawn wrap.16
By the end of 2019, Starbucks had opened about 3,521 stores in China and expected to take the total store count in China to 5,000 by 2021. In terms of Starbucks’ expansion in China, it meant opening more than one store per day.17 It was this success in China that made Schultz particularly eager to venture into India. Like China, India was another large market with culturally entrenched tastes.18
In a press interview, Howard Schultz later reminisced:
Our stores, domestically and around the world, have become the third place for customers between home and work. The environment, the store design, the free Wi-Fi – everything we’ve been able to do has created this primary destination. That is the same in Honshu (China), in Beijing, in Shanghai, in Spain, in Tokyo or in New York City. We’ve cracked the code on universal relevance.19
Conquering Unfamiliar Markets—Seeking the Magic Formula With Starbucks’ stellar performance in its initial expansion into Asia, numerous industry analysts speculated on the best practices that could be used by the company to pene- trate other markets, or that could be emulated by other companies.20 Three key themes emerged:
1. Be tactful in marketing the brand: • Once Starbucks decided to enter China, it imple-
mented a smart market-entry strategy. It did not use any advertising and promotions that could be perceived by the Chinese as an American intrusion into the local tea-drinking culture. It just quietly focused on carefully selecting premium locations to build its brand image.
• Starbucks capitalized on the tea-drinking culture of Chinese consumers by introducing beverages using popular local ingredients such as green tea. It also added more milk-based beverages, such as Frappuc- cinos, since the Chinese did not like the taste of bitter coffee.
2. Find a good local partner: • Working with the right partners could be an
effective way to reach local customers and expand quickly without going through a significant learn- ing curve.
• China was not one homogeneous market. There were many Chinas. The culture of northern China
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CASE !# :: TATA STARBUCKS: A BREW FOR INDIA? C119
With the Tata alliance, Starbucks gained access to lo- cally produced premium-quality beans from Tata-owned plantations in the Coorg region. Tata Coffee, a unit of Tata Global Beverages, produced more than 10,000 metric tons of shade-grown Arabica and Robusta coffees at its 19 es- tates in south India.24 This was a strategic asset for Starbucks as it prepared to do battle with the domestic giant, Café Coffee Day.
Indian Café Market—Dominated by Café Coffee Day The Indian coffeehouse market was strong and growing at a robust rate of above 11 percent. While the market was crowded with international and domestic players, Starbucks main competition came from a domestic giant, Café Coffee Day (CCD). The presence of international coffee chains was significant, but the combined number of their outlets was only about one-third of the 1,600 outlets operated by home-grown CCD.25
CCD had been the market leader since its beginnings as a “cyber café” in 1996. As the retailing arm of the nearly 150-year-old Amalgamated Bean Coffee Trading Company Limited (ABCTCL), it had the benefit of sourcing its coffee locally from a network of ABCTCL-owned coffee planta- tions and using ABCTCL-manufactured coffee-roasting ma- chines. This allowed CCD to insulate itself from global price fluctuations and serve coffee at lower prices than the competition. Most of the foreign competitors relied on im- ported coffee and foreign roasting machines.26
ABCTCL’s charismatic CEO, V. G. Siddhartha, had rap- idly expanded CCD stores across the country. The mission of the company was to provide a world-class coffeehouse experience at affordable prices. This made the stores ubiq- uitous, much like Starbucks stores in the United States. It also made CCD the destination of choice for the youth in the country who had limited money to spend and were looking for socially acceptable places to socialize. The ma- jority of India still disapproved of socializing at bars, and cafés offered a respectable alternative. An industry study showed that the CCD brand was synonymous with coffee for most coffee drinkers in India.27
After CCD, the next-biggest player was the Barista chain, which started in 2000. From 2001 to 2004, Tata Global Beverages explored the option of partnering with Barista to sell its coffees but eventually sold its stake. In keeping with Barista’s premium positioning, most of the company’s products were imports and its coffee was roasted in Venice, Italy. In 2007, Barista was ac
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