2/8/12 Starbucks bets on brand as it enters India - MarketWatch
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Reuters
Starbucks Corp unveiled a deal that sets the stage for the w orld's largest
coffee company to bring its iconic cafes to India, hoping to replicate its
success in China, w here Western-style coffee shops are increasingly
popular. Photo: Reuters
Feb. 8, 2012, 2:22 a.m. EST
Starbucks bets on brand as it enters IndiaBy Nick Godt, MarketWatch
MUMBAI (MarketWatch) — Starbucks Corp., which this past week signed a deal to open retail
stores with India’s Tata Global Beverages Ltd., is banking on its brand’s attraction within a
young and increasingly affluent middle class to face domestic competition and command
higher prices.
“The middle and upper middle class in India is growing very fast in size and income,” said DK Joshi, an
economist at Mumbai-based CRISIL Research. “It will be expensive coffee, but a growing number of
people can afford it and people who want to drink Starbucks will drink Starbucks.”
Brand appeal has already worked in China for Starbucks (NASDAQ:SBUX) , which has opened up more
than 500 stores there and just implemented its first price hike in five years.
With an initial investment of about $80
million, the world’s largest coffee chain
and the Tata Group, one of India’s largest
conglomerates, plan to open as many as
50 stores within 12 months on the
subcontinent, starting with New Delhi and
Mumbai this summer.
Tata Global Beverages (BOM:IN:500800) ,
whose shares jumped 22.5% on the
Bombay Stock Exchange last week, will
provide domestic coffee supplies for the
stores of the joint venture, which will be
called “Starbucks Coffee, A Tata Alliance”.
“It’s a benefit for [Starbucks] to have Tata
source the coffee for them, bringing a
good understanding of the local market
and with a manufacturing base here,” says
Sageraj Bariya, managing partner at
Equitorials.
India is the world’s fifth-largest coffee producer and importing coffee beans from abroad is highly taxed.
Domestic sourcing is also part of the requirements in India’s foreign investment reform legislation
passed late last year to allow foreign ownership of single-brand retailers.
A similar reform for multi-brand retail, which would have allowed the likes of Wal-Mart Stores Inc.
(NYSE:WMT) to own their operations in India, met with fierce resistance amid claims it would destroy
local jobs and was eventually withdrawn.
Starbucks, which had already reached a preliminary agreement with Tata Global Beverages nearly a
year ago, still plans its Indian operations as a 50-50 joint venture.
Now the coffee chain hopes to replicate the same success it has found in China, where sales jumped
20% last year.
2/8/12 Starbucks bets on brand as it enters India - MarketWatch
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Asia's week ahead: China inflation
Investors look to China for a possible easing in the
country's inf lation numbers, and corporate earnings are
expected from Japan's auto giants, reports
MarketWatch’s Sarah Turner.
Nick Godt/MarketWatch
A rickshaw passes by a local coffee shop in Mumbai
In a traditionally tea-drinking nation, India’s overall
annual coffee consumption of about 85 grams per
capita is far below that of the 4.1 kilograms in the
United States or even the 3.6 kilograms in Japan,
according to data from the International Coffee
Organization.
But in a mostly poor population of 1.2 billion, it’s the
growing middle class, estimated at between 300 to 400
million people, which represents the sweet spot for
many multinationals.
And coffee consumption has already doubled since the
1990s, along with the growing incomes and demands
of young urbanites and the spread of coffee chains.
Therefore, India’s legendary Chai wallahs who provide tea anywhere from train corridors to street
corners, won’t be threatened by the arrival of Starbucks, according to CRISIL’s Joshi.
“There is only a certain segment of the population which will enjoy this and has the money to afford it,”
he said.
The venture is likely to open stores within Taj Hotels, which are also owned by the Tata Group.
As for facing the established competition,
analysts say Starbucks can bank on its
brand appeal to charge higher prices,
even in India’s inflation-prone economy.
Currently leading the market is Café
Coffee Day, India’s largest coffee chain
with about 1,200 stores, and Barista,
which is owned by Italy’s Lavazza, with
about 200 stores. The U.S.’ Coffee Bean &
Tea Leaf and Costa Coffee, owned by the
U.K.’s Whitbread PLC (LSS:UK:WTB)
, also already have an established
presence in India.
Testing the grounds
In Bandstand, which faces the Arabian
Sea in a trendy suburb of Mumbai, the adjoining terraces of Café Coffee Day and Barista are often filled
with groups of twenty-something middle-class Indians chatting and sipping beverages for hours, even
on weekdays.
Sitting at the terrace of Café Coffee Day, one young couple confessed they had never heard of
Starbucks.
But right across at the Barista, both Neerav Aggarwal, 20, and Noinika Marwaha, 20, who’ve tasted
Starbucks abroad, said they’d happily pay extra money for “the quality, the space, the scenery”.
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