TATA STARBUCKS: A BREW FOR INDIA?

In January 2019, Navin Gurnaney took over as the CEO of Tata Starbucks, succeeding Sumitro Ghosh. Under Ghosh's leadership, Tata Starbucks adopted a strategic vision tailored to the Indian market, introducing Starbucks Teavana with 18 tea varieties. This shift, along with other strategies, led to a reduction in losses and a 39 percent increase in sales. By FY18, Tata Starbucks became EBITDA positive and announced plans to open over 25 stores in 2019.

The joint venture, initiated in 2012, faced challenges initially, but strategic adjustments, including the partnership with Tata and the introduction of India-specific offerings, contributed to its recovery. Despite initial setbacks, the company expanded to over 145 locations across major Indian cities by February 2019.

The Indian café market, marked by intense competition and challenges such as high real estate costs, posed hurdles for Tata Starbucks. Notably, domestic giant Cafe Coffee Day (CCD) emerged as a formidable competitor, mimicking Starbucks' strategy. Cultural preferences, rental rates, and pricing pressures added to the complexities faced by new entrants in the Indian coffee market.

The former CEO, Avani Davda, acknowledged the humbling initial experience, citing difficulties in securing discounted real estate rates despite Tata's high-profile partnership. The company's growth trajectory was adjusted, possibly adopting a slower and more selective expansion approach.

Tata Starbucks' strategic decision at a crossroads involved choosing between aggressive store count growth, akin to Starbucks in the United States, or a premium-priced, niche approach targeting an older business elite. Gurnaney's leadership aimed to crack the code for sustained success in the complex and competitive Indian market.

In conclusion, Tata Starbucks, through strategic adjustments and India-specific offerings, managed to recover from initial losses, becoming EBITDA positive by FY18. The challenge ahead involved navigating the competitive landscape and making critical strategic choices to ensure long-term success in the dynamic Indian market under Gurnaney's leadership.

Schultz and Starbucks—Cultivating a Company from an Idea

Starbucks, founded in 1971 in Seattle, experienced significant global expansion under the visionary leadership of CEO Howard Schultz, who joined the company in 1981. Schultz transformed Starbucks into more than just a coffee provider, envisioning its coffeehouses as a "third place" for people to socialize, in addition to home and work.

Starbucks gained a reputation as an employer of choice and a socially responsible company. Upon going public in 1992, all employees became "partners" with equity shares and comprehensive healthcare coverage. The company prioritized ethically sourcing products and establishing strong relationships with coffee-producing farmers worldwide. Even during economic challenges like the 2008–2009 recession, Schultz maintained employee benefits, emphasizing long-term interests over short-term cost-cutting.

In 2019, Starbucks continued its commitment to social responsibility by pledging to hire 10,000 refugees by 2022 and 25,000 military veterans by 2025. The company's mission aimed to inspire and nurture the human spirit globally, reflected in its iconic Norse twin-tailed siren logo, inspired by the sea.

Financially, under Schultz's leadership, Starbucks performed well, with total revenues reaching $21.3 billion in 2016. In 2017, Kevin Johnson succeeded Schultz as CEO, maintaining a similar vision. Under Johnson's leadership, the company's performance further improved, with revenues reaching $24.7 billion and net earnings of $4.5 billion in 2018.

Initial Expansion into Asia—Targeting the Westernized and the Wealthy Top of Form

Starbucks initiated its global expansion into Asia in 1996 with the opening of its first store in the Ginza district of Japan. Despite Japan's tea-drinking culture, Starbucks quickly gained popularity by offering a Westernized coffee experience, complete with comfortable seating and a no-smoking policy. The company's entry into Japan proved highly successful, leading to a strong performance on the NASDAQ Japan exchange.

Japan's familiarity with coffee culture, dating back to the 17th century, and the association of coffee with wealth and European influences contributed to Starbucks' rapid acceptance. By 2000, Starbucks Coffee Japan turned a profit, emphasizing the company's commitment to long-term success in new markets. Starbucks in Japan attracted a loyal clientele, including wealthy individuals aspiring to adopt a Western lifestyle.

Between 1996 and 1999, Starbucks expanded further into Asia, targeting countries with a high number of international travelers and a growing segment of westernized and affluent locals. This expansion strategy extended to Singapore (1996), the Philippines (1997), Taiwan, Thailand, and Malaysia (1998), and South Korea (1999). Starbucks strategically chose premium locations in these countries, frequented by the affluent classes and international travelers.

Notably, Starbucks' sales volume per store in Japan surpassed that in the United States for a period. Encouraged by these successes, Starbucks began planning expansions into countries with more entrenched cultures and larger, diverse populations, signaling the company's ambition to navigate new challenges and continue its global growth.

Next Expansion Wave—Cracking the Cultural Codes

Starbucks faced the significant challenge of entering the tea-drinking and culturally rooted market of China in 1999. Despite China's limited prior experience with coffee, Starbucks strategically targeted affluent consumers with prices up to 50 percent higher than those in the U.S. Starbucks' approach, focusing on quality and service, turned Shanghai into the coffee culture capital of China. By 2018, Starbucks generated $4.5 billion in annual revenue from China, surpassing its U.S. profitability. The company tailored its offerings to Chinese preferences, emphasizing milk-based drinks and adding local flavors to the menu.

Starbucks' success in China, marked by a 38 percent revenue growth in 2018, led to plans for an additional 1,400 stores by 2019, aiming for a total of 3,400 stores. Starbucks acknowledged the unique tastes and habits of Chinese consumers, accommodating preferences for sweeter coffee by offering milk-based beverages. Localized outlets with large seating areas were introduced to enhance the "Starbucks Experience," encouraging customers to enjoy their drinks on-site. Customized menu items, family forums to promote employment for children, and relaxed lounge areas further contributed to Starbucks' appeal in China.

This success in China inspired Starbucks to venture into India, recognizing the potential of another culturally diverse and large market. Howard Schultz emphasized the universal relevance of Starbucks' third-place concept, with stores becoming a primary destination worldwide. The company's ability to crack the code on cultural adaptation and create a universally appealing environment positioned it for continued global expansion.

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Conquering Unfamiliar Markets—Seeking the Magic Formula

Starbucks' successful expansion into Asia, particularly China, led to the identification of three key themes for entering unfamiliar markets:

1. Tactful Brand Marketing: Starbucks implemented a smart market-entry strategy in China, avoiding advertising and promotions that could be perceived as an American intrusion into the tea-drinking culture. The company focused on carefully selecting premium locations to build its brand image and capitalized on Chinese tea-drinking culture by introducing beverages with popular local ingredients like green tea. Starbucks adapted its menu to include more milk-based beverages, such as Frappuccinos, to cater to Chinese preferences for sweeter drinks.
2. Effective Local Partnerships: Recognizing the diversity within the Chinese market, Starbucks collaborated with three regional partners to address varying cultural nuances and consumer preferences. Partnerships included joint ventures with Beijing Mei Da coffee company in the north, collaboration with Taiwan-based Uni-President in the east, and cooperation with Hong Kong-based Maxim’s Caterers in the south. Each partner brought unique strengths and local expertise, aiding Starbucks in understanding and meeting the preferences of diverse Chinese consumers.
3. Long-Term Commitment: Starbucks emphasized the importance of making a long-term commitment, acknowledging that patience was required to educate the market and build customer loyalty. The company invested in recruiting and training employees, recognizing them as crucial to delivering the "Starbucks Experience" and representing the brand. This commitment and investment in human capital provided valuable insights and positioned Starbucks for success in entering the complex and competitive market of India.

These themes highlighted Starbucks' strategic approach to conquering unfamiliar markets and provided lessons for other companies seeking to expand internationally.

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Passage to India—Tata Group a Worthy?Partner

The Tata Group, founded in 1868 by Jamsetji Tata with a strong focus on nationalism, played a pioneering role in various industries in India, including steel, power, hospitality, and airlines. With over 100 operating companies in seven business sectors, Tata had a global presence in more than 100 countries and was recognized internationally. Tata's commitment to social responsibility was evident through the creation of national institutions and trusts supporting education, healthcare, and livelihoods.

Tata, valued at $19.5 billion, ranked 86th among the top 500 most valuable global brands. The company's strong values and business ethics, upheld for over 140 years, contributed to its respected reputation in India. In 2018, Tata companies generated $110.7 billion in revenue, with a significant portion from international operations and employing over half a million people worldwide.

Similar to Starbucks, Tata Global Beverages sought a retail partner for its coffee products, forming a promising partnership. With a diverse product portfolio including tea and bottled water, Tata Global Beverages shared Starbucks' commitment to strong values and purpose. This collaboration marked Starbucks' grand entry into the Indian market, leveraging Tata's established reputation and extensive business network.

Coffee in India—An Existing but Lesser-Known Tradition

In contrast to China, certain regions in south India had historical experience with coffee cultivation, dating back to the 17th century. The crop, initially cultivated in Ethiopia, gained popularity in the Ottoman Empire. Legend has it that a 17th-century Muslim pilgrim named Baba Budan smuggled seven coffee beans to India, planting them in the hills now known as Bababudan Giris. When the British arrived in the 1600s, tea and coffee were already cultivated in India, with tea being a larger crop in the north and coffee in the south.

The Coorg region in south India, particularly the Kodavu community, had been home to coffee plantations since the 19th century, initially established by the British. After India gained independence in 1947, these plantations were sold to locals. The mid-1990s saw a boost in India's coffee industry as government policies changed, allowing farmers greater control over sales and leading to improved quality and profits. Tata's alliance with Starbucks provided access to premium-quality coffee beans from Tata-owned plantations in the Coorg region.

Tata Coffee, a unit of Tata Global Beverages, produced over 10,000 metric tons of shade-grown Arabica and Robusta coffees across 19 estates in south India. This strategic asset became crucial for Starbucks as it prepared to compete with domestic giant Café Coffee Day in the Indian market. The partnership ensured a local and high-quality supply of coffee beans for Starbucks in India.

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Indian Café Market—Dominated by Café Coffee Day

The Indian café market, growing at a robust rate of over 11 percent, presented a crowded landscape with both international and domestic players. Starbucks' primary competitor was Café Coffee Day (CCD), a domestic giant with 1,600 outlets, significantly more than the combined number of international coffee chains. CCD, backed by the Amalgamated Bean Coffee Trading Company Limited (ABCTCL), maintained its market leadership by sourcing coffee locally, insulating itself from global price fluctuations, and offering coffee at lower prices.

CCD, led by CEO V. G. Siddhartha, became a ubiquitous and affordable destination for the youth, positioning itself as a socially acceptable place to socialize. The Indian café culture, distinct from the quick transaction model in the United States, emphasized sitting down and socializing for extended periods. The challenge for coffee chains in India was to maintain elaborate outlets to cater to this cultural preference, making it difficult for many companies to stay profitable and scale up.

The key player after CCD was the Barista chain, initially explored as a partner by Tata Global Beverages but later sold. Industry challenges included high rental expenses, intense competition, and the necessity for elaborate outlets. CCD addressed some of these challenges through revenue-sharing deals, paying a fee based on unit proceeds. The Indian coffee market's culture emphasized sitting down for extended periods, making profitability challenging for international entrants like Costa Coffee, Coffee Bean and Tea Leaf Company, and Gloria Jean's Coffee.

Starbucks, in partnership with Tata, entered the Indian market with a focus on quality and profitability. Initial stores reported robust profitability, with estimates suggesting that the Horniman Circle store generated higher daily sales than a comparable CCD store. Starbucks' success in India was attributed to its premium positioning and strategic entry into a market dominated by a strong domestic player.

Quick-Service Restaurant ChainsA Looming Threat

In addition to traditional coffee chains, the Indian café market faced competition from quick-service restaurant (QSR) chains such as McDonald's and Dunkin' Donuts. These QSR options posed a threat to market share by offering lower-priced coffee options within their existing establishments. The competitive advantage for these chains included an established network of locations, contributing to ready accessibility and lower establishment costs. This ubiquity and competitive pricing allowed QSRs to target larger demographic segments within the Indian population.

Amit Jatia, the vice chairman and CEO of Hardcastle Restaurants, the McDonald's franchise for South Indian operations, highlighted McDonald's advantage in expansion due to its larger footprint. Price was identified as a key factor favoring McDonald's McCafe over Starbucks, with a cappuccino priced at 90 rupees in contrast to Starbucks' higher pricing for the same drink. McCafe, like Starbucks, sourced its coffee locally, adding to its appeal in the Indian market.

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The Chai Revolution

India, traditionally a tea-drinking nation, has seen a significant growth in coffee chains in the last decade, including global players like Starbucks. While Starbucks initially focused on creating an experience beyond coffee, the Indian market has a strong tea-drinking culture. Tea startups in India, such as Chai Point, have capitalized on this by offering sophisticated varieties of Indian chai at reasonable prices. Chai Point, with a presence in eight cities, focuses on tech parks and corporate professionals, providing affordable and flavorful tea options. This strategy contrasts with Starbucks Teavana, positioned as a premium offering. The competition between global brands like Starbucks and local tea startups raises questions about the right approach to capture the Indian market.Top of Form

Tata Starbucks—Challenging Decisions?Ahead

Tata Starbucks faced the complex challenge of maintaining the high standards associated with the Starbucks brand while adapting to the diverse Indian market. The company, led by CEO Gurnaney, aimed to extend the Starbucks Experience to India by carefully selecting partners, including store managers and stewards, and avoiding the franchisee route for expansion. To appeal to a broader Indian audience, Tata Starbucks experimented with different store formats, including smaller "abbreviated stores" and locations at college and school campuses. The company also introduced local innovations, such as the India Estates blend and the Indian Espresso Roast, showcasing the rich heritage of Indian coffee. Additionally, Tata Starbucks launched a modern tea experience with 18 premium tea varieties in its stores. CEO Gurnaney faced the challenge of maximizing long-term success by expanding into the next tier of Indian cities, targeting a larger demographic, and managing store financials for profitability.

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Analysis

Strategic Analysis of Tata Starbucks: A Brew for India?

1. Market Entry and Strategic Adjustments:

• Strategic Vision Tailored to India: Tata Starbucks, under CEO Sumitro Ghosh, adopted a vision tailored to the Indian market, introducing Starbucks Teavana and India-specific offerings.
• Initial Challenges and Adjustments: Faced with challenges in the competitive Indian café market, Tata Starbucks made strategic adjustments, including a partnership with Tata and localized offerings.
• Financial Performance: Reduction in losses, a 39 percent increase in sales, and EBITDA positivity by FY18 showcased the success of strategic adjustments.

2. Global Expansion Strategy of Starbucks:

• Global Success and Values: Howard Schultz's leadership emphasized social responsibility, ethical sourcing, and employee benefits, contributing to global success with revenues reaching $24.7 billion under CEO Kevin Johnson in 2018.
• Asian Expansion: Starbucks' successful entry into Asia, particularly China, showcased themes of tactful brand marketing, effective local partnerships, and long-term commitment.
• Cultural Adaptation: Starbucks successfully adapted to China's tea-drinking culture, offering localized drinks and creating a unique "Starbucks Experience."

3. Entry into the Indian Market:

• Strategic Partnership with Tata: Tata's strong values, reputation, and extensive business network made it an ideal partner for Starbucks' entry into India.
• Local Coffee Tradition: Tata leveraged India's historical connection with coffee, specifically in the Coorg region, and provided Starbucks access to premium-quality coffee beans.

4. Indian Café Market Dynamics:

• Competition with Café Coffee Day (CCD): CCD's dominance, local sourcing strategy, and affordability positioned it as a significant competitor, challenging Tata Starbucks in the Indian market.
• Challenges for International Entrants: High rental expenses, cultural preferences for elaborate outlets, and intense competition posed challenges for foreign coffee chains.

5. Threats from Quick-Service Restaurant Chains:

• Competition from QSRs: McDonald's and Dunkin' Donuts posed a threat to traditional coffee chains with lower-priced options, leveraging their existing network of locations.

6. The Chai Revolution:

• Tea vs. Coffee Dynamics: India's traditional tea-drinking culture posed a challenge for global coffee chains like Starbucks. Local tea startups, like Chai Point, capitalized on this cultural preference by offering affordable and sophisticated chai.

7. Challenging Decisions for Tata Starbucks:

• Maintaining Brand Standards: Tata Starbucks faced the challenge of maintaining high brand standards while adapting to the diverse Indian market.
• Strategic Experimentation: Experimenting with different store formats, localized offerings, and a modern tea experience reflected Tata Starbucks' strategic approach to appeal to a broader Indian audience.
• Expansion Dilemma: CEO Gurnaney faced the decision of aggressive store count growth or a premium-priced niche approach for sustained success in the Indian market.

8. Overall Strategic Implications:

• Local Adaptation: Success in the Indian market requires a careful balance between global brand standards and local adaptations to cater to cultural preferences.
• Partnerships and Innovation: Strategic partnerships, localized offerings, and continuous innovation are critical for success in the competitive and dynamic Indian market.

In conclusion, Tata Starbucks navigates a complex and competitive Indian market by aligning with Tata's values, adapting to local traditions, and experimenting strategically to ensure sustained success in a challenging environment.

recommendations for Tata Starbucks based on the case study:

1. Localization and Cultural Sensitivity: Recommendation: Continue to prioritize localization efforts, understanding and respecting the diverse cultural nuances of the Indian market. Rationale: Adapting menu offerings, store formats, and experiences to resonate with local preferences will enhance customer engagement and loyalty.
2. Strategic Partnerships: Recommendation: Strengthen partnerships, particularly with Tata, to leverage local expertise, resources, and networks. Rationale: Collaborating with a reputable and well-established local partner is crucial for navigating challenges unique to the Indian market and ensuring long-term success.
3. Innovation in Menu and Store Formats: Recommendation: Continue experimenting with different store formats and localized menu offerings to cater to a broader audience. Rationale: India's diverse demographic requires flexibility in offerings. Innovations such as India Estates blend and the Indian Espresso Roast showcase a commitment to local tastes.
4. Market Expansion Strategy: Recommendation: Implement a selective and well-researched expansion strategy, considering tier-2 and tier-3 cities while maintaining profitability. Rationale: Moving into smaller cities requires a nuanced approach, balancing the potential decrease in per-store sales with the opportunity to tap into untapped markets.
5. Competition Management: Recommendation: Develop strategies to differentiate Tata Starbucks from competitors, particularly addressing the threat from quick-service restaurant chains. Rationale: Implement marketing campaigns that highlight the unique Starbucks Experience, quality offerings, and the partnership with Tata to set Tata Starbucks apart from QSR competitors.
6. Digital Integration and Customer Engagement: Recommendation: Embrace digital platforms and technology to enhance customer engagement, loyalty programs, and online ordering. Rationale: In the age of digital transformation, leveraging technology will not only improve operational efficiency but also enhance the overall customer experience.
7. Sustainable and Socially Responsible Practices: Recommendation: Build on Starbucks' global commitment to social responsibility by incorporating sustainable and socially responsible practices in operations. Rationale: Given the growing awareness of sustainability, aligning with environmental and social causes can enhance brand reputation and attract socially conscious consumers.
8. Continuous Market Research: Recommendation: Invest in ongoing market research to stay updated on changing consumer preferences, market dynamics, and emerging trends. Rationale: The Indian market is dynamic, and staying ahead of evolving trends is crucial for adapting strategies proactively.

By implementing these recommendations, Tata Starbucks can further solidify its position in the Indian market and navigate the complexities while maintaining the essence of the Starbucks brand.

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