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local jobs and was eventually withdrawn.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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