Starbucks market entry and operations in India

Starbucks in India

Identifying Global Opportunities

Global Business Opportunities

Starbucks is a global retailer of coffee, and is seeking new growth markets, since its largest markets (U.S., Canada, UK) are all mature. The company has nearly 20,000 stores (2011 Annual Report). The company has premium positioning in the market with its brand, logo and patents providing key intellectual property to expand globally.

Potential Markets

When looking for potential markets, Starbucks seeks the opportunity to license or to form joint ventures with established food service companies. This allows Starbucks to leverage its brand in new markets, while gaining local market expertise. The company has demonstrated in the past that it is skilled at adapting to changing times and new technology, but at its core is a great coffee business.

Business Opportunity Analysis

Looking at new market opportunities, Starbucks has already identified China as a major area for growth (Loeb, 2013). However, there remains several key opportunities in the world's largest emerging markets. Countries like India, South Africa and Vietnam are all relatively untapped. The most attractive of these is India, for a number of reasons. The country is large, with over $1 billion people. More important, India has a large middle class, which is about the size of the U.S. population. That makes India a potentially very lucrative market and the target of Starbucks' future growth strategy (McKinsey, 2007).

Absolute and Comparative Advantage

It is also important to consider the role that absolute and comparative advantage has in finding new opportunities. Starbucks benefits from having absolute advantage in running coffee shops, as the most successful firm in the country that has the most successful chains. This is an important consideration because some of the closer competitors are similar chains from other parts of the world.

SWOT Analysis

It is also important to take into account the company's internal strengths and weaknesses, because these will help define strategy. A SWOT analysis can help with this. Starbucks' strengths lie both in the power of its brand and the power of its systems. The company has considerable experience in moving operations overseas as well, and this experience will help it in the Indian market. There are some weaknesses, however, in that the company has no presence in India -- it is essentially starting from scratch. Also, it has premium positioning, which is a challenge in a country where the average worker makes around $1,000 per year.

Action Plan

That said, the tremendous nature of the opportunity in India is self-evident, especially if Starbucks can overcome the threat posed by the lack of knowledge of coffee shops in the market and by any competitor who is also trying to enter the Indian market.

Module 2: Analyzing International Competitors

Potential Competitors

The vast size of the Indian market makes it attractive for Starbucks. There is some coffee tradition in the south of the country, but the north drinks tea. In the big cities where there is Western influence the idea of the coffee shop is an easier sell. Starbucks would not face much competition in India. While many coffee chains exist in the world, few of them have attempted to succeed in the Indian market as of yet. Some of the potential competitors include Gloria Jeans, Costa and Coffee Bean & Tea Leaf, all chains that have a strong presence in various Asian and Middle Eastern markets that are close to India.

Competitive Advantages

A major competitive advantage for Starbucks therefore lies in its ability to deliver a more consistent, high-quality experience than its competitors can. Combined with the strong brand name, Starbucks should be able to outperform its competitors in the Indian market. It is hard to understate the value of having Tata on board as joint venture partner with regard to the respect that Indians have for that brand and the ability of that company to outperform the joint venture partners of any potential competitor in the Indian market.

International Strategies

In general, India is new to the idea of Western businesses. Some Western fast food chains, however, have successfully entered the Indian market, one example being McDonalds. Normally, some customization is required, for example McDonalds does not offer pork or beef products. There are no real taboos against anything Starbucks sells so the company can operate with a more standardized model, which is what it prefers.

Action Plan

Starbucks prefers to standardize its product around the world, so that inside a Starbucks the experience is always the same. The predictability of the Starbucks experience is one of the company's core competencies and adds value to the brand. At this point, the market for Starbucks is India is growing. The company only has nine stores in India at present (Bhargava, 2013). The company plans to open another fifty stores by the end of 2013, which means that the introductory phase is one characterized by high growth.

Module 3: Assessing the Economic/Geographic Environment

Geographic Influences

India is a developing economy, which can be quite challenging outside of the major cities. Infrastructure is poor. The company has partnered with the Tata conglomerate in India to take advantage of that conglomerate's purchasing power and domestic logistics capabilities. Many of the supplies will need to imported, the most important of which will be the coffee. India grows some coffee, but is not a major producer.

Current Economic Conditions

In terms of spending capacity, India has a middle class that numbers in the tens of millions, and is expected to grow rapidly in the next couple of decades. Thus, while the country ranks quite low on the GDP per capita scale, the potential market is still quite big, only that there are hundreds of millions of people who are not part of the target market. India is a challenging market in which to operate, with high levels of corruption, but is promising on the basis of its market size and growth rate.

Geographic Influences

Geographically, India is a vast country and the transportation infrastructure is strained. Also, wealth is concentrated in a handful of major cities. It is here that Starbucks should concentrate its efforts, where there are major ports and airports that will allow the company to get its supplies to the stores. Inland areas and minor cities will be almost impossible to serve efficiently at first. The country's geography also gives it good access to the main input -- coffee beans. While India does not have a large cultivation of coffee, it is near to many countries that do including Indonesia, Vietnam and Ethiopia. Furthermore, India is not far from the Starbucks regional distribution hub in Singapore, and there are many flights from there to the core Starbucks cities of Mumbai and New Delhi. Thus, India has a favorable geographic position for Starbucks that should make market entry -- at least to the big cities -- relatively easy.

Infrastructure

The infrastructure, however, will remain a challenge for the joint venture. While Tata should be able to overcome these difficulties with its home-market expertise, Starbucks will continue to rely on its distribution center in Singapore for the time being. The major cities can be accessed via air, but ultimately Starbucks is going to need to find a way to overcome the challenges presented by India's underdeveloped infrastructure.

Module 4: Assessing the socio-cultural environment

Cultural Analysis

India is a diverse country. Most elements of Indian culture are amenable to socializing in a coffee shop setting. Coffee as a beverage is preferred in the south of the country, while tea is preferred in the north. Starbucks has succeeded in many Asian countries despite the locals not drinking much coffee, primarily on the basis of the positive response to the in store Starbucks experience. The coffee-drinking areas are not the most populated areas of the country, but the most Westernized areas are highly-populated and that makes them a good initial target for Starbucks.

Demographic Trends

Starbucks can transport this in store experience to Indians. With a large youth demographic and greater engagement with the world, Starbucks can attract a core audience of well-off Indian youth and others who have been exposed to the Western coffee shop lifestyle. In major cities, there is much more interest in the Western way of life, and much better capacity to pay for it. Developing interest is the major way to overcome what is otherwise a fairly significant social barrier that will inhibit growth.

Social Institutions

These are complex given how many cultures are in India, but there are few social barriers for Starbucks to consider.

Informal Trade Barriers

Working with Tata will help the company to understand whatever of these might exist and set up an action plan to deal with them.

Module 5: Assessing the political-legal environment

Government and Politics

The Indian bureaucracy is corrupt, inefficient and clumsy. The company is ranked 94th in the world with a score of 36 on the perception index (Transparency.org, 2013). There are multiple layers of bureaucracy and in general a foreign company can expect significant problems opening a business in India. This is why Starbucks has partnered with Tata, in order to make these problems disappear. There are some incentives for foreign direct investment, but these pale compared the incentive provided by the size of the market. Each state and each city has its own government that must be dealt with.

Intellectual Property

There are issues with intellectual property protections that might be of concern to Starbucks. Protections are generally poor in India, and enforcement is lax. Without the cooperation of local government, IP rights can be hard to enforce. This cooperation may not be forthcoming.

Formal Trade Barriers and Promoting Global Business

Despite India's status as a major emerging market, the government there is doing little to create the conditions for substantial foreign investment. Countries enter India for the market opportunity, and despite the government. There are likely to be challenges at some point getting goods into the country, but this is why having a prestigious local partner is critical.

Module 6: Selecting a Global Company Structure

Entry Modes

There are a number of different modes of entry for foreign markets. A company like Starbucks can set up its own local subsidiary that it owns. Such an approach allows the company to retain all of the profits from the venture. However, it would also force Starbucks to figure out how to do business in India on its own. This is not desirable. Another form of market entry is a strict licensing agreement, something it has tried in the past. The issue with that tactic is that there is a lack of oversight from head office -- the partner is halfway around the world and without a very high level of trust Starbucks should never risk its brand and formula for success in the hands of an unsupervised license partner. Exporting is not much of an option -- the company could only sell retail, via its bottling agreement with Pepsi. This is not desirable for market entry since Starbucks wants to have its coffee shops.

Organizational Structure / Strategic Alliance

Starbucks sets up subsidiary companies in order to enter new markets, or at least it has since it entered Japan. For entering the Indian market, the company has a joint venture with the Tata conglomerate that runs the stores. Tata runs the stores, effectively utilizing Starbucks' expertise at running coffee shops, while the local company handles the local details. This alternative allows the company to work past problems with government, legal environment and local culture, since the partner company knows about all of these things. The drawback to this structure is that Starbucks only has 50% control and only 50% of the profits from the joint venture.

Module 7: Financing the Global Business Operations

Economic Environment

The economic environment is generally favorable for Starbucks. The company has enjoyed a financial rebound since Howard Schultz rejoined the company as CEO. As such, Starbucks is in excellent financial condition. Its foreign operations can be financed almost entirely from retained earnings, something that reduces the risk associated with setting up a foreign joint venture. Otherwise, the Indian economy is growing, and this is favorable because it is likely that the joint venture will also self-finance from retained earnings.

Financing Sources and Startup Costs

Starbucks and Tata each have a 50% stake in the joint venture, which implies that they each have contributed 50% of the capital. The new expansion will be conducted with this initial capital in addition to operating profits. Starbucks does not usually take its subsidiaries to the stock market. The startup costs do not appear to be significant. Most of the physical infrastructure is going to be with the stores, and they are relatively affordable to open. The company is capitalized to the extent that it plans to open another 50 stores in 2013 alone, so financing the start-up costs is definitely not going to be a problem.

Action Plan

The combined company will also need to evaluate its ability to finance the massive expansion that it has planned. After this year, it is expected that there will be more rapid growth in 2014 and beyond. Thus, the company will need to continue to be well-capitalized, either through injections from the parent companies or through its own operations.