CASES

CASE 12TATA STARBUCKS; HOW TO BREW A SUSTAINABLE BLEND FOR INDIA·

[n early 2015. the financial press reported that the Tata Star-bucks [oint venture had incurred major losses in its first fullyear in the Indian market. However, the company remainedcommitted to making this venture a success over the longterm. I Starbucks had had its eye on the large Indian marketfor a while. An attempt to enter the market several years ear-lier had failed due to complications with the Indian govern-ment and foreign direct investment (FDf) restrictions:' Thecompany had withdrawn its application then and was aneager responder when India's esteemed Tata Group knockedon its door with a partnership opportunity. A 50-50 joint ven-ture was formed, and Starbucks coffee was introduced to theIndian market in October 2012 with a generous initial invest-ment of $80 miJlion.2 The Tata Global Beverages board ofdirectors expressed a lot of excitement about the potentialof the newly formed joint venture between the company andStarbucks." "Through Tara Starbucks, your company offersthe legendary Starbucks coffee experience, backed by thetrust of the Tara name. to the Indian consumer." announcedCyrus P. Mistry. chairman of Tata Global Beverages.'

The Indian care market offered a lot of potential forthe new Tala Starbucks alliance. While India was a nationknown for its tea drinkers, sipping coffee and socializing atcoffee shops was becoming increasingly popular. Domes-tic consumption of coffee had risen 80 percent in the pastdecade. Given these encouraging trends, Starbucks CEO.Howard Schultz, believed that India could one day rival thecompany's successful venture in China.

Wi th its store count exceeding 40, the Tata Starbucks jointventure had clearly come a long way sinee it was kicked off inJanuary 2012. but it was too early to celebrate. Continuing tosucceed in the Indian c:Ue market would not be an easy taskdue to two key challenges-competition and profitability ..

The market was intensely competitive, with multipledomestic and foreign players. The most formidable com-petitor was domestic giant Cafe Coffee Day (CCO). whichhad already adopteda strategy of flooding the market withits cafes. closely mimicking what Starbucks had done inthe United Stales.

Another critical challenge companies faced was theability to break even. High real estate costs and rental

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rates, along with competitive pricing pressures and India-specific cultural preferences, made it extremely difficultfor coffee companies to recover their initial investments.

Tara Starbucks CEO Avani Davda admitted the initialconsumer experiences had been a humbling experience.Tara Starbucks had opened its first store with a lot of fanfarein the trendy Horniman Circle area of Mumbai, Despitehaving a high-profile local partner. Starbucks was unable touse its name to secure any discounted rates in renting realestate. The first store ' ...·as located in a Tala Group-owned4.000-square-foot site that had been vacant for a while.

By 2015, Tata Starbucks appeared to have expanded toover 50 locations across the country in major metropolises likeMumbai, Delhi. Pune. and Bengaluru, 4- Yet this was well shortof the initial expectations-the target at launch had been set at50 stores by the end of the 2012 bunch year. Clearly, some-thing had changed in management's expectations of the size orpace of growth from the venture. Quarterly earnings presenta-tions since then had boasted of robust store profitability withno numbers provided, possibly pointing to a slower and moreselective approach to expansion' However. i:nits first full yearin the Indian market (12 months ending March 2014), TataStarbucks reported losses of Rs 51.87 crores," more than halfits total sales of 95.42 crores during the same period. I

The joint venture appeared to be at the crossroads ofan important strategic decision. It could revert to a plan 10grow its store count aggressively. much like Starbucks didin the U.S. It is possible that this was the original intent.After all. the initial launch pricing had been set to be com-petitive with CCD's pricing (coffee drinks available for aslow as Rs 100). This approach would put it in direct pricecompetition with CCD, the domestic cafe market leader.

However. gaining market share among the youth of thecountry would allow Tara Starbucks to tap into a large demo-graphic segment. India's population showed a pronouncedskew to younger age brackets (see Exhibit 1) and lowerincomes when compared to countries like Japan and theUnited Stales. Building a presence within these segments asCCD had done could be critical for success in the long term.

Alternatively, the venture could choose to embrace apremium-priced. niche approach similar to the one Starbucks

~T:lI.1 GI("'31Ik\'"rag~~ is the Tala Gm~p subsidiary tb:lt m.lJmg~~ cotlee andIQS:Ucs.

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C82 CASE 12 :: TATA STARBUCKS: HOW TO BREW A SUSTAINABlE BLEND FOR INDIA

EXHIBI11 Age Dlstr,lbutlon by Country, 2014

100% 40%L 13%19'}, 14%80%

~to<\, 38%

60%15%

0%U~m__L.Jii0-14 years 15-24 years(children) (early vvork'ing

age)

• India

had used successfully in other Asian countries. like Japanand China. The premium offering would then cater to anolder, business elite with higher spending power. This wouldresult in less rapid growth. with a cherry-picked list of high-profile, business-friendly locations, that could also allow theventure to build a premium brand with premium pricing.

Would Starbucks and Tata under Davda's leadershipfinally be able to crack the code for sustained success inthe competitive and complex Indian market? While Davdaappeared proud of what the alliance had achieved at the2014 Starbucks annual shareholders meeting. some criti-cal strategic choices would need to be made to ensure thelong-term success of Starbucks in India,

Schultz '& Starbucks-Cultivatinga Company from an IdeaStarbucks started out in 197 I with a single coffee roasterand retailer store in the Pike Place Market in Seattle. Sincethen the company had expanded its global footprint con-siderably. with over 17,000 coffee stores in more than 50countries. t; The visionary behind this international successstory was CEO Howard Schultz.

Schultz joined the company in 198J and quicklyassessed its growth potential after visiting coffeehouses inItaly. He envisioned his coffeehouses offering much morethan just a cup of coffee. They were to become a thirdplace. in addition to home and work, for people to meet andsocialize. In addition to serving coffee, the coffeehouseswould help people connect with other people and theirlocal communities. Employees would be trained on coffee.company products, and customer service to deli ver a posi-tive "Starbucks Experience" to each and every customer.

Starbucks quickly acquired a reputation for being anemployer of choice and a socially responsible player:

• When the company went public in 1992. all employeeswere made "partners" in the company and given ashare of Starbucks equity (commonly known as "bean

15'lt

26%

10%

(prime vvorklngage)

(mature workingage)

65 years andover (elderly)

ChinCl Japan us

stock"). Comprehensive health care coverage was alsoprovided to both full-time and part-time employees.

• Efforts were made to ethically source products andestablish strong relationships with coffee-producingfarmers allover the world. III later years, the companybe "an to utilize reusable and recyclable cups in its~ .stores. Its employee partners contributed many hoursof volunteer work to help with community causes.

• After the 2008-2009 recession and the introductionof the Affordable Care Act in 20 IO.severalcompanies began to cut employee benefits to managecosts. Schultz refused to reduce benefits for hispartners, arguing that this was a short-term reactionand not in the interests of a company in the long term.

The company's mission was to inspire and nurture thehuman spirit one person, one cup. and one neighborhood ata time. The com pan)' planned on doing this not just in theU.S. but across the globe. The Starbucks name had beentaken from a character in Herman Melville's classic adven-ture novel, Mobv Dick. It was felt that the history of thecoffee trade and Seattle had a strong association with thesea. In keeping with the sea theme, the image of a Norsetwin-tailed siren was adopted as the company logo.6

The company under Schultz's leadership performedremarkably well financially over time. Performance in2013 showed total revenues tip 12 percent to $14.9 billion,same-store sales up 7 percent, and $2.9 billion in cash flow.Operating income, however. was hit due to a one-Limelitigation charge with Kraft Foods Global, which resultedin ; pretax ch~rge of $2.8 billion to fiscal 2013 operatingresults. Excluding this one-time charge, operating incomewould have grown 23 percent to $2.5 billion.7

Initial Expansion into Asia-Targetingthe Westernized and the WealthyThe first store outside North America opened in the fash-ionable Ginza district in Japan in t 996. Within the next

CASE 12 ;; TATA STARBUCKS; HOW TO BREW A SUSTAINABLE BLEND FOR INDIA C83

EXHIBIT 2 Annual per CapIta Income ($)

60.000...--------------------,50.000

40.000

30.000

20.000

10.000

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few years, Starbucks became a well-known brand name inJapan. Like Starbucks shops in the United States, those inJapan featured comfy sofas with American music playingin the background. Unlike most Japanese kisaten, or localcoffee shops, Starbucks did not allow smoking. The policyproved popular with women, who didn't smoke as much asmen in Japan. Men eventually followed the women to Star-bucks locations, and business started humming. Given thestrong performance. the stock of Starbucks Coffee JapanLtd. made its debut on the NASDAQ Japan exchange andperformed strongly ever since. "Any way you measure it,we've exceeded our wildest expectations:' CEO HowardSchultz announced jubilantly at the initial public offeringin Tokyo, October 200 I.

Tea-drinking Japan W:lS not a total stranger to coffee.Dutch traders first brought coffee to Japan in the 17th century,but the shogun prohibited them from traveling freely in Japan,so very few Japanese were exposed to coffee and those whowere Livedmainly in port cities like Nagasaki. Coffee pen-etrated Japan further in the 18505 with the arrival of Ameri-can ships. Soon after, Japanese started to travel overseas andbrought back elements of the European coffee culture.

The first coffee shop opened in 18805 in Tokyo's Uenodistrict. and drinking the brew became associated with thewealthy classes. Over the next few decades. coffee increasedin popularity within Japan, and :J. number of coffee chainsentered the market. As business flourished between theUnited States and Japan. many Japanese traveled to theUnited States. West Coast cities like Seattle were populardestinations. So when Srarbucks finally entered Japan in1996. many Japanese were already familiar with the brand.Starbucks soon cultivated a loyal clientele of wealthy Japa-nese who considered it to be the original gourmet coffeeshop and aspired to emulate the Western lifestyle.

Starbucks Coffee Japan turned its first profit in 2000,nearly four years after its initial bunch. Clearly Starbucksentered markets with a. commitment to win them over thelong haul. Starbucks grew to over 1.000 stores in the coun-try. For a while. sales volume per store in Japan ,...as twiceas high as that in the United Slates.s

Between 1996 and 1999. Starbucks expanded to addi-tional markets in countries that had a high number of inter-national travelers and a growing segment of westernizedand wealthy locals. These were countries with high orgrowing per capita incomes (see Exhibit 2).

• Starbucks Singapore opened its first store in December1996 at Liar Towers. strategically located along thenation's renowned Orchard Road shopping belt.

• Starbucks then entered the Philippines (1997).Taiwan, Thailand. and Malaysia (1998). and SouthKorea (1999). once again selecting premium locationsfrequented by the country's growing westernized,affluent classes and international travelers."

Happy with its initial successes, Starbucks began plan-ning expansions into countries with more entrenched cul-tures and large. diverse populations.

Next Expansion Wave-Crackingthe Cultural CodesUnlike Japan. rea-drinking China had little prior experi-ence with coffee. in addition. the emerging superpowerhad deeply entrenched cultural traditions with regard tofood and drink. Succeeding in China would: be a criticalchallenge and opportunity for Starbucks, Cracking the cul-tural code there could facilitate conquering other emergingmarkets like India.

Starbucks opened its first store in Beijing in 1999. Thecompany recognized there was .1 universal need amongindividuals to be respected for their differences and to feelconnected with others. Srarbucks catered to this need byapplying its culture and values in a way that was conduciveto local values and tastes.

Within China. instant coffee accounted for upward of80 percent of :111coffee consumption. Given the averageChinese consumer's limited prior exposure to coffee, instantcoffee had proved to be a highly effective and affordableway of expanding consumption. Starbucks took a differentapproach and targeted affluent Chinese consumers with

C84 CASE 12 :: TATA STARBUCKS: HOW TO BREW A SUSTAINABLE BLEN!) FOR INDIA

beverages priced up to 50 percent higher than the pricesat its U.S. stores. Most Starbucks beverages in China costupward of 30 renrninbi (RMB), or about US$5. In con-trast. Nestle's Nescafe instant coffee could cost as little asRMB 1.5 (US$O.l 0) per packet.

Fueled by Starbucks, the wealthy commercial capi-tal Shanghai quickly became the coffee culture capital ofChina. The owner of Shanghai-based Cafe del Volcan,one of Shanghai's popular coffee retail outlets. noticed aninteresting phenomenon in the initial days after openinghis cafe. The prices had not yet been displayed. yet mostcustomers ordered their beverages without inquiring aboutprices. Clearly the Shanghai elite were not price-sensitive.Much like Starbucks, the cafe then began to focus primar-ily on achieving the highest level of quality and service.

In 20 11, a Starbucks outlet in China averagedUS$600.000 in annual revenues. The strategy proved tobe successful, with Starbucks' Chinese outlets becomingmore profitable than those in the U.S. market. China/AsiaPacific operating margins in the last quarter of 2012 were33.7 percent in comparison to 20.8 percent in the UnitedStates. "It's no doubt that one day China will become oursecond largest market after the United States. and it's pos-sible that, over many years, potentially the largest one."mused Starbucks CEO Howard Schultz in an interviewwith Chillu Daily.

While Nestle and Starbucks had radically differentmethods for getting the Chinese to drink coffee. both suc-ceeded. This success in part can be attributed to segment-ing the market and recognizing the Chinese as uniqueconsumers with different tastes and habits than those ofAmerican consumers. For instance, Chinese consum-ers did not like the bitter taste associated with black cof-fee or espresso, so both players tailored their beveragesaccordingly. Nestle's Nescafe packets included sugar andpowdered milk. while Starbucks emphasized milk-baseddrinks like frappuccinos, lattes, and mochas in its stores.Starbucks' Chinese menus also added some local fla-vor, with customized choices like green tea tirarnisu andChinese moon cakes.

In addition. Starbucks localized its outlets by offeringlarge seating areas. since Chinese tend to not like to taketheir drinks off-site. Local Chinese customers beaan to

• 0enJoy the "Starbucks Experience" while sitting with friendsand having something to munch on along with their cof-fee. Further. "family forums" were introduced to explainto parents the merits of having their children work at Star-bucks. Large lounges with couches were provided at storesto accommodate working customers' need to relax for a bitduring afternoons. Menus were modified to include foodsthat were tailored to local tastes, for example, a HainanChicken sandwich and a Thai-style Prawn wrap.9

By the end of2013. Starbucks had opened its 1.0000hstorein the country. It was this success in China that made Schultzparticularly eager to venture into India. Like China, India wasanother large market with culturally entrenched tastes. 10

In a press interview, CEO Howard Schultz laterreminisced:

Our stores. domestically and around the world. havebecome the third place fur customers between homeand work. The environment. {he store design. the free\Vi-Fi~\'ery{hing we've been able to do hascreatedthis primary destination. That is the same in Honshu(China), III Beijing. in Shanghai, in Spain, in Tokyoor in New York City, We've cracked the code onuniversal relevance. II

Conquering, Unfamiliar Markets-Seekingthe Magic formulaWith Srarbucks' stellar performance in its initial expansioninto Asia, numerous industry analysts speculated on thebest practices that could be used by the company to pen-etrate other markets or be emulated by other companies_12

Three key themes emerged:

I. Be tactful ill marketing the brand:• Once Starbucks decided to enter China, it

implemented a smart market-entry strategy. Itdid not use any advertising and promotions thatcould be perceived by the Chinese as an Americanintrusion into the local tea-drinking culture. It justquietly focused on carefully selecting premiumlocations to build its brand image.

• Starbucks capitalized on the tea-drinking cultureof Chinese consumers by introducing beveragesusing popular local ingredients such as green tea.It also added more milk-based beverages. such asfrappuccinos, since the Chinese did not like thetaste of bitter coffee.

2. Find II good local partner:• Working with the right partners could be an effective

way to reach local customers and expand quicklywithout going through a signiflcant learning curve.

• China was not one homogeneous market. Therewere many Chinas. The culture of northern Chinawas very different from that of the east. Consumerspending power inland was not on par with that incoastal cities. To address this complexity of theChinese market, Starbucks partnered with threeregional partners 3S part of its expansion plans.

• In the north. Starbucks entered a joint venturewith Beijing Mei Da Coffee Company. In the east,Starbucks partnered with the Taiwan-based Un i-President. In the south. Starbucks worked withHong Kong-based Maxim's Caterers. Each partnerbrought different strengths and local expertise thathelped Starbucks gain insights into the tastes andpreferences of local Chinese consumers.

3. Make II long-term commitment:• Long-term commitment required patience. It took

Starbucks time to educate the market and aain"

CASE 11:: TATASTARBUCKS; HOW TO BREW A SUSTAINABLE BLEND FOR INDIA C85

customer loyalty. Starbucks also did an excellentjob in recruiting and training its employees.This turned out to be a win-win strategy becauseemployees. were. after all. the face of the Starbucksbrand and were at the heart of delivering the"Starbucks Experience" to customers.

This knowledge armed Starbucks as it prepared to penetratean even more~omplex and competitive market-India.

Passage to India-Tata Groupa Worthy PartnerFounded by Jarnsetji Tata in 1868, Tata's early yearswere inspired by the spirit of nationalism. It pioneeredseveral industries of national importance in india: steel,power. hospitality. and airlines. In more rece~t times, itspioneering spirit was showcased by compames such asTCS. India's first software company, and Tala Motors.which mode India's first indigenously developed car,the Tara Indica, and the world's most affordable car. theTuta Nano,

The Tara Group cornpri sed over 100operating companiesin seven business sectors: communications and informationtechnology, engineering, materials. services, energy, con-sumer products, and chemicals. The group had operations inmore than 100 countries across six continents. and its com-pan ies exported products and services to 150 countries.

Along with the increasing global footprint of Tatacompanies. the Tata brand w-as also gaining internationalrecoanition. In 2010. BlIsin('ssWeek magazine ranked Tata17th::>on its "SO Most Innovative Companies" list. BrandFinance. a U,K.-based consultancy firm. valued the Tatabrand at $18 billion and ranked it 39th among the top 500most valuable global brands in its Brandl-inance Global5002013 report.

Like Srarbucks, Tata had a strong belief in socialresponsibility. The company created national institutionsfor science and technology, medical research, social stud-ies, and the performing arts. Its trusts prodded aid andassistance to nongovernment organizations (NGOs) work-ing in the areas of education. health care. and livelihoods.Individual Taro companies were known to extend socialwelfare activities to communities around their industrialunits. The Tara name had been respected in India for morethan 140 years because of the company's adherence tostrong. values and business ethics.

The total revenue of Tata companies was $97 billion in2012-2013. with nearly two-thirds coming from businessoutside Indb. Tata companies employed over half a mil-lion people worldwide. Every Tata company or enterpriseoperated independently. Each of these companies had itsown board of directors and shareholders. The major Tatacompanies were Tala Steel, Tata Motors, Tata ConsultancyServices (TCS). Tata Power, Tata Chemicals, Tata Tele-services. Titan WJ.tches. Tata Communications, IndianHotels, and Tata Global Beverages.

Much like Starbucks, the Tala Global Beverages unitwas looking for a retail partner to sell its coffee products.Its broad product portfolio also included t~a and bottledwater. As with its Tata Group parents and Starbucks, TataGlobal Bevera"es was proud of having strong values andpurpose as a c~mpany. Thus a promising partnership wasformed, and Star bucks was ready to make a grand entryinto the market.S

Coffee in India-An Existing butLesser-Known TraditionUnlike China. tea-drinking paris of South India did havesome historical experience with coffee. The crop was firstcultivated in Ethiopia. and by the 1600s it was hugely pop-ular throushour the Ottoman Empire. According to coffeehistorian ;nd author Mark Pendergrast, the Turks boiled orroasted coffee beans before they left the Yemeni port ofMocha to keep them from being grown elsewh~re. ':hal. iswhy, according to legend. a 17th-centlifY Muslim pilgrimnamed Baba Budan taped seven coffee beans to his stom-ach and smuggled them to India. The hills where he plantedthose beans are now known as the.Bababudan Girls.

When the British ani ved in the 16005. intending tobreak a Dutch monopoly on the spice trade, tea and cof-fee were "backyard crops" in India. Over the centuries, theBritish installed plantations and established more orga-nized production processes. Tea. which was a much largercrop than coffee. was grown mostly in the north, while cof-fee was grown mostly in the south.

For decades, the Coorg (also called Kodavu) regionin south India had been home to coffee plantations. TheBritish began planting coffee there in the 19th century.When India gained independence in 1947, the originalBritish planters sold their estates to the locals (knownas Kodavas) and other southern Indians. Since the mid-1990s, when the Indian government changed its policiesand allowed farmers to take control of their own sales,India's coffee industry experienced a boost in quality and

-. d k a seat i ff . I I'profits an too' a seat In gourmet co lee nrc es. -With the alliance, Starbucks gained access to locally

produced premium-quality beans from Tata-owned plan-tations in the Coorg region. Tara Coffee. a unit of TataGlobal Beverages, produced more than 10,000 metric tonsof shade-grown arabica and robusta coffees at its 19 estatesin south 1';;di:.t.14This was a strategic asset for Starbucks asit prepared to do battle with the domestic glant, CCD.

Indian Cate Market-Dominatedby Cafe Coffee DayBy 2014, the India.n coffeehouse market was $300 millionstrong and growing at a robust 20 percent rate from yearto year. While the market was crowded with internationaland domestic players. Starbucks' ma.in competition camefrom a domestic giant, Care Coffee Day (CCD). The pres-ence of international coffee chains was significant, but the

eg6 CASE 12 :: TATA STAR8UCKS: HOW TO BREW A SUSTAINABLE BLEND FOR INDIA

combined number of their outlets was only about on~_-thirdof the 1.500 outlets operated by home-grown CCD. )

CCD had been the market leader since its beginnings asa "cyber care" in 1996. A'I>the retailing arm of the nearly150-year-old Amalgamated Bean Coffee Trading Com-pany Limited (ABCTCL). it had the benefit of sourcingits coffee locally from a network of ABCTCL-owned cof-fee plantations and using ABCTCL-manufactLU'ed coffee-roastine machines. This allowed CCD to insulate itself..,from glob:lJ price fluctuations and serve coffee at lowerprices than the competition. Most of the foreign com-petitors relied on imported coffee and foreign roastingmachines.lf>

ABCTCL's charismatic CEO. V. G. Siddhartha, rapidlyexpanded CCD stores across the country. The mission ofthe company was to provide a world-class coffeehouseexperience at affordable prices. This made the storesubiquitous. much like Starbucks stores in the U.S. It alsomade CCD the destination of choice for the youth in thecountry who had limited money to spend and were lookingfor socially acceptable places to socialize. The majorityof India still disapproved of socializing at bars, and cafesoffered a respectable alternative. A 201-1-industry studyshowed that the CCD brand was synonymous with coffeefor most coffee drinkers in India.17

After CCD, the next-biggest player was the Baristachain, which started in 2000. In 2001-2004, Tata GlobalBeverages explored the option of partnering with Baristato sell its coffees but eventually sold its stake. In keepingwith Barista's premium positioning. most of the company'sproducts were imports and its coffee was roosted in Venice.Italy. In 2007. Barista Was acquired by Italian coffee com-pany Lavazza. However. profits proved elusive despite sev-eral years on the market and heavy investments. In 2013,Lavazza announced it would sell the Barista business.

Industry watchers said that the coffee business in Indiawas becoming a difficult one to turn profitable even afteryears of operations. High rental expenses and intense com-petition had left most foreign players struggling to achieveprofitability despite years of trying. According to indus-try estimates, rentals could account for 15 to 25 percentof the cost of running a c:tle chain. Typical monthly rentalmarket rates were 200 to 300 'rupees (Rs) per square footof real estate.IS Then. there was the investment in makingthe stores appealing to customers. finding people to runthem, and building a food and beverage menu that waship enough to keep 18- to 24-year-olds-the target mar-ket tor many coffee chains-coming back for more. CCDhold found a way around this problem by entering into arevenue-sharing deal. paying 10 to 20 percent of a unit'sproceeds as a fee. Coffee bars were a sit-in concept inIndia. where consumers generally hung around such out-lets for hOUI&. unlike the global phenomenon of grabbingcoffee on the go from generally tiny outlets and kiosks. II)

Industry experts argued that coffee chains in India hadto maintain elaborate and plush outlets-not kiosks-to

Dive indian consumers what they were looking for from acoffee chain even if the proposition turned out to be veryexpensive. and this concept made it difficult for manycompanies to stay in the business and made it hard to scaleup. Unlike countries such as the United Stales. where pur-chasing coffee was often a quick transaction at a counter orkiosk for customers on the go. the culture in India was tosit down and socialize for hours over coffee or tea.20 Somefrustrated customers stopped frequenting stores because itwas so hard to find a free table. 17 This made it much harderfor coffee retailers to turn a profit. According lo ManrneetVohra, Tata Starbucks marketing and category chief, peakhours in India were 2 p.m. to 6 p.m. (compared to 5 a.m,to II :1.1'11. in the U.S.) and takeout orders accounted forbarely 20 percent of the business in India (compared to80 percent in the U.S.). 1\1

Other international entrants like the U.K.'s Costa Cof-fee, the Ll.Si-based Coffee Bean and Tea Leaf Company,and Australia's Gloria Jean's Coffee experienced similarprofitability challenges.20 Costa Coffee entered the marketin 2005 and soon found its stores were too small to han-dle the peak-time crowds. The Coffee Bean and Tea LeafCompany started out in 2007 and tried to entice custom-ers by offering new menu items each month. Gloria Jean'sCoffee entered the market in 2008 hoping it could crack theprofitability code by serving coffee in more kiosks. whichrequired a lower capital investment. However. achievingprofitability continued to remain elusive for most interna-tional players.

Starbucks appeared to be doing well in its initial stores.In quarterly investor presentations, Tata Global Bever-ages reported robust profitability in its stores. While nonumbers were shared by the company, the informationwas corroborated by industry experts. The 4.000-square-foot Horniman Circle store was estimated to be generat-ing 8.5 lakh rupees in daily sales. which compared to1 lakh rupees generated by the 400-square-foot CCD storeat the Murnbai airport. Top Indian store revenues in U.S.dollars were comparable to those generated by the stores inChina (about $600,000 per year). Since the real estate forthe first store was obtained from the Tala Group, certainlythat store, at least. \\ILlS brewing a healthy profit.

Quick-Service Restaurant Chains-ALooming ThreatIn addition to traditional coffee chains. the Indian cafemarket was being encroached upon by other quick-servicerestaurant (QSR) options like McDonald's and Dunkin'Donuts. These players threatened to steal market sharewith lower-priced options for drinking coffee at existingquick-service establishments.

One of the major advantages for these chains overStarbucks and other competitors was the already-existingnetwork of locations in the country that allowed readyaccess and brought down establishment costs. Further. this

CASE 12:: TATASTARBUCKS; HOW TO BREW A SUSTAINABLE BLEND FOR INDIA C87

ubiquity and lower pricing, would enable these players totap into the larger demographic segments that made up alarge section of the Indian population.

Amit Jatia, vice chairman and CEO of Hardcastle Res-taurants. which is the McDonald's franchise for SouthIndian operations, stated: "Mcfronald's has the odvantage::IS their ability to expand is better, considering that theyhave :.1larger footprint now."

Price was another factor by which Mcfronald's McCafeexpected to hold an edge over Starbucks, Getting a cappuc-cino for 90 rupees for a global brand like McC"Je soundedmore appealing than spending more than 110 rupees for thesame drink at Starbucks. Much like Starbucks, McCaf€ wassourcing its coffee locally from Chikrnagalur in Karnataka.11

Tata Starbucks-ChallengingDecision AheadIn the words of John Culver. president of Starbucks CoffeeChina and Asia Pacific:

We have studied and evaluated (he market carefully(0 ensure we are entering India the most respectfulway. We believe the size of the economy, the rising.spending power and (he growth of cafe culturehold strong potential for our growth and we arethrilled 10 be here and extend our high-qualitycoffee. handcrafted beverages. locally relevantfood. legendary service and the unique StarbucksExperience to customers here.2~

The business looked simple-have a standardized decor.choose a sui table location. and offer good coffee and food-but ensuring that a customer's cappuccino tasted the same asit did yesterday and that the service did justice to the iconicStarbucks brand name every single day was far more com-plex, Doing 50 required carefully selected partners (storemanagers and stewards who went through intensive training)and an incredibly complex planning effort. For that reason.Starbucks had a"oided the franchisee route, which couldhave seemed like the obvious choice for rapid expansion.

Alw. Starbucks had to meet the expectations of its\\iorld-traveled customers, who were aware of the "Star-bucks Experience," Many of these clistomers would checkwhether the coffee tasted the same as it did :.1broad andwhether the slore ambience was equ:.1lly comfortable, If theexperiences matched up. they would become regulars.

But for sustained success, Starbucks needed to penet:r:l.lethe domestic young and middle-income markets. SI..1rbucksbid out plans for different formats, such as "abbreviatedstores" thut would be smaller in size :md stores at collegeand school campuses. The stores in Indb. began experiment-ing with their food menu. While Starbucks globally offeredblueberry :md chocolate muffins, it wanted to sen'e localinnovations al its Indbn locations, Coinciding with its firstanniversary in India.. the company launched a new. localIndia Estates blend. This blend was Tata Starbucks' spec-blcountry-specific coffee. developed thoughtfully with Tata forthe Indbn market, and it reflected the high-quality amhica

coffee available in India. Additionally. the company launchedthe Indian Espresso Roast. which was sourced locally througha coffee sourcing and roasting agreement between Starbucksand Tara, It was felt that the coffees captured the essence andrich heritage of the Indian coffee history,

The challenge facing CEO Davda and Tata Starbuckswas a difficult one. How could the company maximize theIon g.-term success of the venture in India? Doing so wouldmean going beyond "the westernized and the wealthy"targeting that had worked so well in relatively older andmore affluent Asian markets. While the partnership withTara was occasionally helping in negotiating for good realestate, Starbucks still needed to figure out how to leveragethe partnership to win over the larger young and middle-income demographic segments. Store financials needed tobe managed to maintain profitability, These issues wouldneed to be addressed quickly as the company prepared toexpand into the next Lier of Indian cities.

"As they move from high traffic and high spends loca-lion. revenues or productivity of the stores will come down.Hence. per store sales might come down over the yearsonce they open stores in smaller locations," said DevangshuDutra, chief executive at the Indian retail consultancy ThirdEyesightY

ENDNOTESI. Vijayarughllv:m. K. 2015. Growth lor now, but profits still need tocome in. sa)'~ Starbucks CEO Aveni Saglani Davda. Economic Times.

2. Bahree, M. 2011. Srarbucks will open cafes in India. lValf StlT!et Journul,

J. Tutu. 1012. Annual report.4. JYrl.l014. Sturbucks sa)'~ India operations liLSte~lgrowing in its

history. II1t'1r./il'(wlillt.COIII.

5. Tatu. 2014. Company website,6. Starbucks, 2014. Company web site.1. Starbucks. 2013. Annual report.S. Belson. K. 2001. As Sturbuckx glllW s, Japan too is awash, NI'\I' YOlt

Tilllt's. '

9. Burkitt. L. 2012. Starbucks plays 10 local Chinese taste~. Wall Sm',·JJOllrnal.

10. Barlow. N. 201:.'1.China's ronee industry is booming. China B,·icJillg.

II. Bartiromo. M. 20 I_:\.Sturbucks' Schult7 eyes gJobaJ growtb. us.-l TOell/Y.t2, Wang. H.10 12. FiI'e thi ng& Slarbu('k~ did 10 ~el ChiTlll right. Fm1u!i.

IJ. AIIi'on. M. 2010. As India gain~ stI~nglh, so do~s it~ conee . ;S('(l7IIeTiml'J.

14. Bndrinllth. R, 2011. TM3 mile.. to close runk:> \I'ith Sta ..bud.:~,BIISiIlCS,\ Slclllt/,mi.

15. Madonna. A. & Badrinath. R. 2013. If we find sOn1ethin~ uttructh-ewe wi 111001; lit iL 8111ill(,ssSUmduro. ~

16. CCD. 2014. Company websile.17. Kaushik_ M. 201 I. A !'lronger (.'ufJei ne kkk. 81";IICJ5 l1')(l"y.IS. Sri,·astu\,tl. S. 2012. Starbucks India i~n't celebrating y~t.Forbes.19. SlI.chiL1l1ilnd. R. 2014. How SWbucks and Calf Coffee Day II.re :;qullring

lip l(lr l'onool of Illdia's coffee retail illS market. E('y»Iolllic Timt'I.

20. BOlila)'_R. 2014. Coffee chaim Slarbuck!>expanding <lg~res~iyely inIndia. }:;coJlomic TIllles,

21. Allonymou~, 201~. Coffee war: McDonald's MCCilre Sell\) make ilsIndi:m debut. aims It' "\~-ipl' out" Slllrblicks. DIli/,' Hhaskar.

12. Bhattadtarya. A_1013. Pour oUI the cotTee. fiiUlflcin/ I!.lpl'C'H.

23. Ma]\'iyll_ S_ 2014. Sl3rbuch"UL<hine~ ,',>flee.'hain rivals in lirsl ruJlyeat' in India. 1:"t.'OIlOIlli£' Tillles.

C8S CASE 12 :: TATA STARBUCKS; HOVI TO BREW A SUSTAINABLE 8LEND FOR INDIA