Is Starbucks Losing Its Appeal in India

In 2012, Starbucks, in collaboration with Tata Consumer Products, entered the Indian market with aspirations to embed premium coffee culture into the hearts of a predominantly tea-drinking population. For several years, the strategy appeared to be working, with sales booming and store counts multiplying. The Seattle-based retailer experienced a compounded annual growth rate of 21.89% between FY17 and FY23 in the world’s most populous nation. The only exception to this trend was in FY21, when sales plunged by 33% as shops were forced to shut down due to the impact of Covid-19.

However, in 2024, the picture looks less appealing.

While the brand generated an impressive ?1,218 crore in sales, its losses have spiralled to ?82 crore, a threefold increase compared to the previous year. The sales growth rate, which once soared, dwindled to 7% by the second half of FY24.

The Indian Market Conundrum

Starbucks’ challenge in India lies in price sensitivity. At ?300 for a cappuccino, it’s seen as a luxury, not a daily necessity. For a brand deeply rooted in affluent urban centers, inflation has hit hard, driving customers to rethink that extra spend on premium coffee. Rising living costs make this purchase feel indulgent rather than essential, and as a result, sales have stagnated.

India's evolving coffee landscape adds another layer of complexity. When Starbucks first entered India, it positioned itself as a trailblazer, pioneering coffee culture in a largely tea-dominated market. However, post-Covid, coffee drinkers have matured in their tastes, seeking artisanal brews and gourmet offerings. Speciality coffee brands like Blue Tokai and Third Wave Coffee, which deliver high-quality experiences at a lower price point, have created significant competition.

Global Lessons

Starbucks’ struggles in India mirror the challenges it faced in markets like Australia and Italy. In Australia, an established coffee culture rooted in simplicity and quality left Starbucks floundering. Aggressive expansion was met with resistance, and Starbucks ultimately had to scale back significantly. Italy, with its centuries-old café tradition, also proved to be a hard nut to crack. Starbucks’ lounge-style takeaway model didn’t resonate with locals accustomed to quick espresso shots at the bar.

These experiences underscore an important lesson: Starbucks cannot rely solely on its global playbook. Localisation and understanding the pulse of the local market are crucial for sustained success.

India’s Changing Coffee Culture

In India, the shift is clear. Younger consumers, with exposure to global trends, are exploring beyond Starbucks. Artisanal coffee, gourmet food, and more nuanced experiences have become more appealing to a rising group of coffee connoisseurs. As more local players and even international brands like Tim Hortons and Pret A Manger enter the market, Starbucks must redefine its value proposition.

The Coffee Taste Conundrum: Why Does It Differ in India?

Although Starbucks uses the same high-quality Arabica coffee beans and state-of-the-art equipment worldwide, the taste of coffee can vary across different regions due to local variables such as water, milk, and climate. Water is one of the most critical elements in coffee preparation, making up around 98% of a brewed cup. The mineral content and water hardness differ significantly from country to country, even from city to city, which can alter the way coffee flavours develop. In India, water tends to have higher mineral content compared to the soft water often found in places like the USA or Australia. This impacts how coffee extracts, leading to a subtle difference in taste.

Milk is another key factor. Starbucks beverages often rely heavily on milk, especially in popular choices like lattes and cappuccinos. The fat content, freshness, and flavour of locally sourced milk in India may differ from what is available in the USA or Australia, altering the texture and taste of the final product. Additionally, India's unique climate and humidity can also influence how coffee is brewed and consumed, affecting flavour stability.

These factors, while subtle, can create a noticeable difference in taste for customers who are accustomed to Starbucks coffee in other parts of the world.

Pricing Strategy: The Global vs. Local Dilemma

Starbucks employs a premium pricing strategy worldwide, but this approach faces unique challenges in price-sensitive markets like India. While the brand uses similar pricing structures across developed markets such as the USA and Australia, India presents a different set of dynamics.

USA

• Per Capita Income (2023 estimate): $75,000 annually
• Price of a Starbucks Cappuccino: $4 on average

The cost of a cappuccino as a percentage of per capita income:

Percentage=(4/75,000)×100=0.0053%

India

• Per Capita Income (2023 estimate): ?1,70,000 annually (approximately $2,050)
• Price of a Starbucks Cappuccino: ?300 on average

The cost of a cappuccino as a percentage of per capita income:

(300/170000) x 100 =0.1765%

Comparison:

• USA: A Starbucks cappuccino represents just 0.0053% of the average annual per capita income.
• India: A Starbucks cappuccino represents a much larger 0.1765% of the average annual per capita income.

Conclusion: In the USA, buying a cappuccino is a relatively negligible expense when compared to the average income. However, in India, a cappuccino represents a significantly larger share of an individual's income, making it a more premium and less accessible product for the average consumer. This stark difference demonstrates why Starbucks is perceived as a luxury item in India, whereas it might be seen as an everyday indulgence in the USA.

Reinvention: Starbucks’ Next Move

Despite its challenges, Starbucks isn’t giving up on India. In fact, the brand is aiming to double its store count to 1,000 by 2028, including expanding into tier-2 and tier-3 cities with drive-throughs and experiential stores. It is experimenting with localised flavours like the Malabar Coconut Cream Latte, and creating innovative, immersive experiences in cities like Delhi. Starbucks seems determined to adapt to India’s evolving market by investing in regional preferences and affordable luxury experiences.

Conclusion: What’s Next for Starbucks in India?

Starbucks is facing a pivotal moment. Simply expanding won’t be enough; the brand needs to address price sensitivity while offering localised experiences that resonate with Indian consumers. The coffee landscape is crowded, and Starbucks must now compete with both premium and budget-friendly alternatives.

Whether Starbucks continues to thrive or falter in India will depend on its ability to localise, remain affordable, and stay relevant in the face of growing competition.