Saturday, June 9, 2012

Starbucks' New Customer: India

In this week’s reading article “Competing through organizational agility” by Donald Sull, three important, distinct types of agility were discussed, namely Strategic, Portfolio and Operational. Together, they help companies to survive in turbulent times, and flourish when opportunities arise. In this blog entry, we will discuss these three areas in relation to Starbucks, who is about to launch their very first stores in India. Starbucks currently owns over 1,900 stores in over 58 countries, and it has been estimated that India, with a population of over 1.2 billion, has the market capacity to cater to as many as double that number of stores. However, being rather unique in culture and traditions, India poses several challenges to Starbucks.

Firstly, the most common beverage for the majority of the population is not coffee, but tea. While coffee has managed to find its way around some South Indians, they generally prefer it to be milky and sugary filtered, which is not how Starbucks make their coffee. Secondly, there already exists several well-established local cafés such as Café Coffee Day, Barista and Costa Café. Not unlike many others, Indians are quite patriotic towards their own house brands. With these challenges, how should Starbucks strategize to succeed?

Strategic Agility

The article mentioned that Strategic Agility is a combination of patience (to wait for the right time to strike) and boldness (acting when that time arises). Starbucks has long been trying to enter the Indian market. However, prior to Jan 2012, India’s Foreign Direct Investment (FDI) policy forbids foreign companies to open stores in India unless they partnered (with at most 51% stake) with a local company. What was interesting was that although this policy was lifted in Jan 2012, Starbucks, instead, announced (in the same month) a 50-50 joint venture with Tata Group, one of the largest conglomerates in India by market capitalization and revenue.

Instead of maximizing profits, Starbucks decided to share them. Yet, after looking deeper into the issue, this decision seems to have its merits. Being a predominantly tea-drinking population, Starbucks will need in-depth insights into its core business plan. Should it continue to focus mainly on coffee, or should it consider shifting weight to tea-based beverages? In addition, Starbucks has decided to source its coffee from within India. Working with the local farmers and distributors who have not had much contact with foreign companies in the past could prove to be more than just challenging. Hence, playing it safe by partnering with a local company could ease some of these potentially catastrophic issues.

Portfolio Agility

According to the article, Portfolio Agility is about resource allocation. It is about shifting resources out of less promising areas and into more promising ones. For Starbucks, it is really about one thing: their store menu. Should it be similar to what is in the US, or should it be more customized to the locals’ tastes? My take is that it should be the latter. While some of the traditional coffee that has defined Starbucks (such as Frappuccino and Latte) should remain, new tea-based additions (besides chai tea) should be added. Some suggestions of Masala Tea, Alphonso Vivanno Lassi, and even Coconut Water have been made by posts on the Wall Street Journal and The Washington Post. Whatever it is, Starbucks must not come across to the locals as a new chain of stores selling radically different beverages and food. That would make it harder for people to switch from their local brands.

Operational Agility

The article states that Operational Agility is about a company being able to exploit both revenue-enhancing and cost-cutting opportunities within its core business more quickly, effectively, and consistently than its rivals. The local brands enjoy low costs as they obtain their raw materials (e.g. coffee beans and tea leaves) domestically. In addition, labor and production are relatively cheaper in India than in most parts of the world. For Starbucks to compete, they will need to eliminate this cost disadvantage by doing likewise. Tata Group would be a good avenue for Starbucks to look into such aspects.

Based on current observations, it looks like Starbucks is well on-track to open its first stores in Delhi and Mumbai in Aug 2012. Having addressed the Strategic and Operational areas, much now depends on their new store menu.


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