Case Study- Entry of Starbucks in Indian Market

Abstract

Starbucks generally preferred a strategy of premium prices, using a menu and store layout somewhat modified for local tastes. This strategy had been working well in India. However, local and foreign specialty coffee retailers were proving increasingly formida-ble competitors. India’s larger cities were becoming saturated. Many competitors had now turned their attention to expanding into smaller cities. India was a large, but complex market, fragmented along age, geographic, income, and demographic lines. Continued success was not certain. It was not yet clear how Starbucks should best adapt.

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Entry of Starbucks in Indian Market
This case was written by Ms Shalini Gautam and Dr Kokil Jain Amity
International Business School, Amity University and is intended to be used
as a basis for class discussion rather than to illustrate either effective or
ineffective handling of a management situation.
 2016, Amity University Noida
No part of this publication may be copied, stored, transmitted, reproduced or distributed
in any form or medium whatsoever without the permission of the copyright owner.
Amity International Business School (AIBS),
Amity University,
Sector-125,
Noida-201301,
Uttar Pradesh, India
sgautam@amity.edu

ENTRY OF STARBUCKS IN INDIAN MARKET
Introduction
Starbucks generally preferred a strategy of premium prices, using a menu and store
layout somewhat modified for local tastes. This strategy had been working well in India.
However, local and foreign specialty coffee retailers were proving increasingly
formidable competitors. India’s larger cities were becoming saturated. Many competitors
had now turned their attention to expanding into smaller cities. India was a large, but
complex market, fragmented along age, geographic, income, and demographic lines.
Continued success was not certain. It was not yet clear how Starbucks should best adapt.
Starbuck’s History
In 1971, English teacher Jerry Baldwin, history teacher Zev Siegel, and writer Gordon
Bowker, opened the original Starbucks Coffee, Tea and Spice, in Pike Place Market in
Seattle. The store began by selling scoops of freshly roasted coffee beans. The founders
named their store after Starbuck, a ship captain in Herman Melville’s novel who drank a
lot of coffee. A logo was designed that featured a two-tailed mermaid, to reflect the
sailing traditions of the first coffee merchants. The company slowly grew to include a
roaster and 4 retail stores by the early 1980s.
Meanwhile, Howard Schultz was working for a Swedish houseware company. He
discovered that Starbucks ordered more drip coffee makers than Macys, and decided to
visit Seattle to find out why. Schultz was impressed with the specialty coffees for sale, as
well as the customer experience the store created. He decided he wanted to join the team.
After some initial hesitation, Starbucks hired Schultz as the director of operations and
marketing in 1982. In 1983, Starbucks sent Schultz to a housewares fare in Italy. While
there, Shultz learned about the local coffee bar culture, which provided a social
experience along with mixed coffee drinks. Schultz realized the potential for introducing
this concept to American consumers as a way to differentiate Starbucks from its
competitors.
Starbucks agreed to experiment with Schultz’s ideas in a single store. Although it was
successful, the founders were leery of expanding the store’s original scope to more
locations. Thus, in 1985, Schultz opened his own coffee bar, Il Giornale’s, which quickly
expanded.
Schultz was very successful. In 1987, Baldwin and Bowker decided to sell Starbucks to
him. Il Giornale bought Starbucks’ assets and trademark, and renamed the combined
business Starbucks Corporation. From only 11 stores in 1987, Starbucks grew to 19,657
stores in 62 countries by 2013.

The Starbuck’s Experience
Starbucks’ success involved continuous quality improvement for both its menu and the
customer experience. Starbucks offered high quality coffee, an assortment of other
beverages, sandwiches, and desserts. The customer experience was enhanced through a
warm and inviting store atmosphere with excellent customer service, along with fast and
free Wi-Fi Internet.
Brewing Trouble
In 2000, Jim Donald took over as CEO, and Schultz became chairman. Growth remained
impressive until 2007. At that time, worsening economic conditions in the US made
many consumers reluctant to spend a lot of money on premium coffee. This downturn in
demand came after Starbucks’ rapid expansion throughout the US with company-
operated stores. In July 2008, Starbucks reported a third quarter net loss of $6.7 million,
compared to a profit of $158.3 million in the third quarter of 2007. Starbucks was
stunned by its first loss since 1992, and realized it had no choice but to retrench.
Starbucks decided to close 600 US stores, which resulted in an additional loss of $168
million.
Adding to the economic issues was a perceived dilution of the Starbucks experience.
Stores began to offer musical entertainment and Wi-Fi Internet. Starbucks sought to
expand further into grab-and-go market segments. The Express store format was
launched, which prioritized faster service times over social interaction with the baristas.
Rapid growth led to market cannibalization and declining employee morale.
The menu was expanded to include tea, juice, baked goods, and food. However, the more
complicated menu fostered a mass-production environment that diluted Starbucks’ warm
and cozy, premium brand positioning. A large number of drinks had to be customized and
sandwiches had to be heated in ovens several steps away from the registers. This slowed
down service times, which resulted in crowded stores, less time for socialization with the
baristas, rushed orders, mistakes, and compensation for poor service. Angry coffee
enthusiasts increasingly went to other exclusive brands. Grab-and-go customers
decamped for faster service, and improved, cheaper coffee, from McDonald’s and
Dunkin Donuts.
Changes in Strategic Direction
Schultz returned as CEO in 2008. He retrained all employees in the fundamentals of
Starbucks customer service, even going so far as to close all US locations to do so.
Schultz cut $581 million in non-customer facing areas. He personally spoke to stores
nationwide, brought in consultants, started a new advertising initiative, hired a chief
technology officer to revamp the Starbucks website, switched its coffee to whole-bean,
ground-on-site Pike Place Roast, improved the breakfast sandwiches, replaced old
computers and registers, closed underperforming stores, optimized the supply chain,
introduced a rewards card, reduced store book and CD collections, replaced several
upper-level managers, re-designed store layouts, introduced merit pay for executives,

successfully debuted an instant coffee brand, and doubled annual purchases of fair trade
coffee .
Starbucks’ financial outlook improved significantly. 2013 also saw a record $14.9 billion
in worldwide revenues. This was due to a healthy annual growth rate of 12%, and strong
international expansion, especially in Asia.
The Indian Coffee Market
Consumer Trends
Different governments in India often changed the rules pertaining to foreign ownership
and trade. The root cause of this resulting uncertain business climate was a change in
demographics. Half the population in India was under 25. These young adults benefitted
from new jobs that foreign companies created in India, after economic liberalization in
the early 1990s. Such jobs brought more money and a desire for Western brands, which
were increasingly seen as premium and aspirational. However, since the young adults
relatively recently started their careers, they had not yet reached the earning power of
their parents, and had less interest in taking the time to vote . This made it harder for the
younger generation to influence government policy.
The older generations’ greater spending power and longstanding relationships gave them
greater leverage over official policies towards foreign companies. Older adults
remembered India’s break from Britain’s empire and ensuing socialist policies that
encouraged economic self-sufficiency. They feared that foreign corporations would
create economies of scale and operational synergies that would force local companies out
of business, while sending the profits back to the parent country. Many Indian politicians
belonged to this age segment, and thus advocated protectionism.
The Indian Coffee Industry
The Indian coffee market in particular was an intriguing proposition. India was the sixth
largest coffee producer worldwide in 2013. However, Indians have historically preferred
tea to coffee. In 2011, Indian per capita coffee consumption was approximately 85 grams,
far smaller than 4.5 kilograms in France, 4.6 kilograms in Japan, and 6 kilograms in the
US. Most of that coffee consumption occurred in southern India, which grew 90% of
India’s coffee. However, coffee consumption has been increasing in northern cities as
well.
The ways in which coffee was consumed in India were different than in the West. 80% of
US coffee was purchased as take out for mobile consumption, but this was only true for
at most 20% of India’s consumption. 70% of coffee sales in India were through small
shops known as kiranas. 25% of Indian coffee sales came from regional retail players,
such as Hindustan Unilever’s BRU World Café, and Tata Coffee. An increasing number
of offices and public places offered coffee vending machines. Coffee cafés, which young
adults in urban areas viewed as a social space, have grown to an estimated $290 million
market in 2013.

The specialty coffee industry was becoming increasingly competitive in India. There
were several well-established local firms, and a growing number of foreign firms. All
were vying to expand while profitably serving price-sensitive Indian consumers. The
competitive landscape was constantly shifting, as Costa Coffee, Gloria Jeans, Barista
Lavazza, and Di Bella renegotiated master franchise agreements with their Indian
partners.
Starbucks competitor’s in India
The below data of all competitors are based on the study of market in 2014
Starbuck’s Growth In India
As with other heavily populated countries, India offered the potential to sell to a large
number of consumers. Although India was prone to populist political swings ever since it
achieved independence from Britain, there were some encouraging signs for foreign food
retailers who considered entering the market. Eating at restaurants has historically not
been popular in India. However, urbanization, smaller family sizes, higher salaries,
expanded menu selections, and the rising popularity of cooking TV shows has led to a
large increase in the number of local and multinational food establishments, from fast
food to fine dining.
Starbucks saw great promise in these opportunities. Starbucks initially expressed interest
in India as far back as 2007. Presumably, the turmoil in the US hindered Starbucks’
ability to follow through at that time. In January 2011, Starbucks made an arrangement
with Tata Global Beverages to purchase and roast premium coffee beans at a new facility

in southern India. In January 2012, this was expanded to an $80 million retail joint
venture, Tata Starbucks.
Tata proved to be a very valuable and trustworthy partner. It had a lot of real estate
experience that facilitated introducing Starbucks to Indian consumers. Tata helped
Starbucks negotiate for prime space on the heavily-trafficked ground floor of major
shopping malls. Tata added Starbucks inside its existing upscale retail outlets. Tata also
formed a partnership to offer Starbucks inside its luxury Taj hotels, and to form a product
line of Taj foods sold at Starbucks.
Tata’s expertise in local tastes and market conditions helped Starbucks learn more about
doing business in India. Tata customized Starbucks’ menu by adding pastries and ice
cream, helped modify the store layout to include locally sourced furniture and interior
decorations, helped solve logistical problems that hindered the sale of fresh food, and
helped develop an effective human resources strategy. Employees at Starbucks in India
were given highly structured classroom and practical training, followed by additional
product-specific and refresher workshops. An employee referral program was
implemented. Outreach to nongovernmental organizations (NGOs) was initiated to hire,
train, and retain employees with special needs.
Perhaps most important for success in a historically protectionist market, Tata’s coffee
bean farms and roasting facilities were successfully leveraged with Starbucks’
proprietary roasting techniques to introduce a new premium, Indian-sourced brand, India
Estates Blend .
The coffee bean partnership helped Starbucks create a cost structure that was comparable
to its local rivals. It ensured consistent quality control, and allowed Starbucks to avoid
paying 100% import taxes. This kept costs comparable to local competitors, and offered a
competitive advantage over multinationals that imported coffee.
The partnership with Tata was also consistent with Starbucks’ ethical sourcing initiatives.
The joint venture established the Café Practices program, to help local farmers improve
coffee bean quality, receive above-market prices for their coffee beans, obtain seasonal
loans, reduce coffee farming’s environmental impact, and improve working conditions
for farm employees
.
Conclusion
Starbucks expansion in India thus far has been successful. By November 2013, Starbucks
had 30 stores in India, in the cities of Mumbai, Delhi, Bangalore, and Pune. Its success in
India was partly attributable to its unique classification as hospitality, rather than a retail
business. This allowed Starbucks to avoid constantly shifting restrictions on foreign
ownership that have long plagued other retailers. The reason for this classification was
unclear.
Starbucks has stated it plans to keep its global strategy of identical stores offering
identical prices, with a modified menu. It is worth noting that other retailers that insisted
on following standardized approaches outside the West have often not done as well as
they could have. However, Starbucks also wanted to avoid direct competition with highly

successful local competitors. Starbucks therefore plans to emphasize its premium social
experience and foreign origins, as some European coffee retailers have done. Starbucks
also seems to have accepted the possibility that it will be unaffordable to the younger
generation, which ironically is more willing than older, wealthier customers to consider
foreign brands. How Starbucks will ultimately fare in the increasingly competitive Indian
coffee market remains to be seen.
References
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4
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http://www.cafecoffeeday.com/aboutus
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http://www.tataglobalbeverages.com/media- centre/news/news-detail/2014/07/09/tata-
starbucks-ltd.-celebrates-50-starbucks-stores-in- india-with-its-foray-into-chennai
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