Blog Post 1: The Starbucks India Strategy

India is one of the most lucrative emerging markets for fast food companies, with its billion-strong population, burgeoning urban middle class and rapidly growing economy. Several global chains such as McDonalds’, Subway, and Dominos’ have a significant presence in the country. The latest entrant to the market is Starbucks, with its first store in the city of Mumbai opening its doors in Oct ’12, to an overwhelming response with people queuing up for hours in front of the store to get their first Starbucks India coffee. The Starbucks brand seems to have worked its magic. Or is it too soon to tell?

Barista Lavazza

While India has long been known as a predominantly tea-drinking country, cappuccinos and lattes have become an integral part of the urban Indian landscape. There are two major chains of cafés in India, Barista Lavazza and Café Coffee Day that have largely been credited with bringing about this change. Their extensive urban network of cafes is the first hurdle that Starbucks will have to overcome to truly penetrate the market. In addition, other international coffee brands such as Coffee Bean and Tea Leaf, Gloria Jeans and Costa Coffee have already entered the market. Although their market share is small, they also have brand value and first mover advantage. The other aspect that Starbucks will have to tackle is the pricing. International chains tend to charge twice the prices of local chains, in part due to high import taxes on coffee, and these high prices make market penetration even tougher for such companies.

Overwhelming response sustainable?

In a bid to capture the market, Starbucks has partnered with the Indian company Tata Global Beverages. This well-placed strategic move has enabled them to source all their coffee and tea locally and inexpensively. As a result, Starbucks India can afford to charge lower rates than other international chains. However, despite the local sourcing of ingredients, Starbucks is still priced higher than Barista or Café Coffee Day. It is now clear that Starbucks is not trying to compete on price, but instead, is charging a premium for the ‘Starbucks experience’.  Attempting to bridge the cultural gap, decidedly Indian food offerings are a part of the menu, in an ambiance that is unlike a typical American Starbucks.

Starbucks has decided to count on the Indian urban café culture and its superior brand value to account for the premium it expects the customer to pay. While it seems to have worked for the initial flourish, it remains to be seen if it will continue to pay off dividends in the long run. Starbucks India is positioned as a special experience, very unlike the everyday cuppa joe status it enjoys in most US cities. This strategy might work in urban areas; however semi-urban and rural areas will remain out of reach with this tactic, due to the wide urban-rural income gap and substantially different purchasing powers. What do you think? Do you think the current Starbucks India strategy will make the coffee behemoth as ubiquitous in India as it is in the United States? Or is pricing still going to bog it down?

References:

http://forbesindia.com/blog/business-strategy/what-starbucks-brings-to-india/

Image 1 and 2: Wikipedia Commons

Image 3: Starbucks India Facebook Fan Page