AMITY BUSINESS SCHOOL

NOIDA, UTTAR PRADESH

201303

TATA STARBUCKS LTD.

A STRATEGIC ANALYSIS
TABLE OF CONTENTS

INTRODUCTION................................................................................................................................... 4
SITUATIONAL ANALYSIS .................................................................................................................. 4
STRATEGIC INTENT ............................................................................................................................ 5
Starbucks Mission Statement................................................................................................................ 5
SWOT ANALYSIS ................................................................................................................................. 8
Internal Factor Analysis Summary (IFAS) ........................................................................................... 8
External Factor Analysis Summary (EFAS).......................................................................................... 9
Strategic Factors Analysis Summary (SFAS) ...................................................................................... 10
Strengths ........................................................................................................................................... 11
Weaknesses ....................................................................................................................................... 11
Opportunities .................................................................................................................................... 11
Threats .............................................................................................................................................. 12
SCANNING THE ENVIRONMENT - PESTEL ANALYSIS ................................................................ 13
Political Factors ................................................................................................................................ 13
Economic Factors.............................................................................................................................. 13
Socio-Cultural Factors ...................................................................................................................... 13
Technological Factors ....................................................................................................................... 14
Environmental Factors ...................................................................................................................... 14
Legal Factors .................................................................................................................................... 15
INDUSTRY ANALYSIS PORTERS FIVE FORCES FRAMEWORK .............................................. 16
Industry Rivalry ................................................................................................................................. 17
Potential for New Entrants ................................................................................................................ 17
Threat of Substitute Products ............................................................................................................. 18
Bargaining Power of Suppliers .......................................................................................................... 18
Bargaining Power of Buyers .............................................................................................................. 18
MARKET ANALYSIS - DAVID AAKER'S 7 DIMENSIONS OF MARKET FORCES........................ 19
Market Size........................................................................................................................................ 19
Market Growth Rate .......................................................................................................................... 19
Market Profitability ........................................................................................................................... 19
Industry Cost Structure ...................................................................................................................... 20
Distribution Channel ......................................................................................................................... 20

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 Market Trends ................................................................................................................................... 21
Key Success Factors .......................................................................................................................... 22
COMPETITOR ANALYSIS - PORTER'S 4-CORNER ANALYSIS ..................................................... 23
Market Share of Major Coffee Retail Chains in India, FY2010 ......................................................... 23
Caf Coffee Day ................................................................................................................................ 24
Barista .............................................................................................................................................. 25
Costa Coffee ...................................................................................................................................... 26
Quiky's .............................................................................................................................................. 26
EXECUTIVE SUMMARY ................................................................................................................... 27
REFERENCES...................................................................................................................................... 28

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INTRODUCTION

Tata Global Beverages Limited and Starbucks Coffee Company launched a joint venture
between the iconic international coffee brand and the 2nd largest branded tea company in the
world. The 50/50 joint venture, named TATA Starbucks Limited, owns and operates Starbucks
cafs, branded as Starbucks Coffee A Tata Alliance. The first store has already opened and
subsequent stores are in line to be opened at Mumbai in India at the end of October, 2012. The
alliance is expected to be very fruitful to both the companies in the long run. The report seeks to
strategically assess the viability of this strategic alliance by peeping into its myriads of
dimensions.

SITUATIONAL ANALYSIS

India and China are the worlds two fastest growing economies. Starbucks had already
ventured into the Chinese market and not surprisingly, their Chinese venture turned out to be
much profitable than that of their US business. Thus, they want to replicate their success in
Chinese mainland in India. Also, the Indian market is heavily driven by the upcoming youth
culture which is totally driven by the western trends. With the growing disposable income of
Indians, people tend to spend more towards apparels and fast foods. With the success of Indian
owned Caf Coffee Day and Barista Coffee, it is a widely proven fact that there is lot of scope
for the development of coffee caf culture in India. Thus, Starbucks want to capitalize on this
particular opportunity. They are planning to start with targeting the niche upper class segment by
opening their outlets in TAJ Hotels and Resorts. Their primary target market is the younger
generation of age 16-40years. They will also target the tourists who will be visiting India. Since,
most of the tourists coming to India are from the countries of U.S., England, Germany, and Japan
who are well aware of Starbucks brand name. Thus, there will not be the problem of brand name
recognition among them.

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STRATEGIC INTENT

Starbucks Corp. is aiming India as its next major hub for development. Starbucks want to
replicate the success they had in USA and more recently, in china. Surprisingly, their venture in
China proved to be more profitable than that of US. Here in India, Starbucks entered into a deal
with TATA Coffee Ltd, Asia's largest publicly traded coffee grower. This is, in particular, a non-
binding agreement between two giants. There are plans to combine the trust and legacy of TATA
coffee with the iconic brand image of Starbucks which can move on to development of Starbucks
retail coffee chains in other parts of Asia. In addition to sourcing coffee beans from TATAs
Indian facilities, the companies will also work towards developing Starbucks stores in retail
outlets and hotels.

Starbucks Mission Statement

To inspire and nurture the human spirit one person, one cup and one neighborhood at a
time.

Starbucks is very quality driven organization and is passionate about ethically sourcing
the finest coffee beans, roasting them with great care and improving the lives of people who
grow them. They call their employees as their partners and treat each other with respect and
dignity. They believe in getting engaged with their customers and make connect with them so as
to laugh with them, uplift customers' lives even if it is just for moments. They believe in human
connection and developing the sense of belonging. They believe in creating good neighborhood
and each store is nourished as a community.

Tata has made the cultural fit for Starbucks which will help in building core
competencies of each other. (Tata has met all the stringent standards and conditions followed by
Starbucks such as quality, soil, water, pest, waste and energy management, forest and
biodiversity conservation to workers welfare, wages and benefits, living conditions, health,
safety, etc.)

Starbucks is committed to a role of environmental leadership in all facets of their business. They
strive to fulfill this mission by a commitment to:

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 Understanding of environmental issues and sharing information with their partners
Developing innovative and flexible solutions to bring about change
Striving to buy, sell and use environmentally friendly products.
Recognizing that financial responsibility is essential to their environmental future
Instilling environmental responsibility as a corporate value
Measuring and monitoring their progress for each project.
Encouraging all partners to share in their mission

Objective of Tata Coffee behind this Alliance:

The agreement will allow Tata coffee to provide roast coffee bean to Starbucks in India.
Get opportunity to jointly invest in additional facility for export to other markets.
Starbucks will help by providing new technologies for the promotion of responsible
agronomy practices.
A long term relationship will be formed with this Memorandum of Understanding with
Starbucks.
After this deal, Tata Coffee is poised to become Asias biggest publicly traded coffee
grower.

Objective of Starbucks Corporation:

To tap huge emerging market of India.

Help increase its profitability due to its declining market and over dependence on US
market.
To have access to the high quality Arabica coffee.

John Culver, president, Starbucks China and Asia Pacific on opening up of the first store in
India at Mumbai states, This is the first step Starbucks and Tata Coffee Limited are taking
toward developing and improving the profile of Indian-grown Arabica coffees around the world
by elevating the stature of Indian coffee, as well as improving the quality of coffee through
sustainable practices.

Tata Global Beverages is a company known for bringing memorable tea consumption
moments to consumers in India," stated Harish Bhatt, CEO, Tata Global Beverages. The joint

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venture is in line with Tata Global Beverages strategy of growing through strategic alliances in
addition to organic growth. We are excited about the opportunity to innovate in the retail space
and bring new beverage moments to more consumers.

As part of the agreement, Starbucks and Tata Coffee Limited will work toward
developing and improving the profile of Indian-grown Arabica coffees around the world by
elevating the stature of Indian coffee, as well as improving the quality of coffee through
sustainable practices and advanced agronomy solutions. Espresso sourced from India will be a
hallmark feature of all Starbucks stores in the market, highlighting the quality espresso available
in India and Tata Starbucks Limiteds commitment is to deliver a truly unique and authentic
Starbucks Experience to customers throughout India.

Deepening its commitment to community, Tata Starbucks Limited will work to improve
the lives of coffee growing communities in the State of Karnataka. The joint venture, through an
initial financial commitment, will work to support 'SWASTHA,' a school for children with
special needs (in partnership with the COORG Foundation). Additionally, Tata Starbucks
Limited will work on initiatives including the promotion of responsible agronomy practices and
training of local farmers, technicians and agronomists to improve their coffee-growing and
milling skills.

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SWOT ANALYSIS

Internal Factor Analysis Summary (IFAS)

Internal Strategic Weighted
Weight Rating Comments
Forces Score
Strengths
S1 - Brand Visibility
0.15 5 0.75 International popularity of the Starbucks
Brand.
S2 - Ethical and 0.10 3 0.30
Environmental Practices
S3 Marketing Skills 0.10 3 0.30

S4 Access to High Quality 0.15 4 0.60 Sourcing Agreement.

Arabica Coffee

S5 JV with Tata Coffee

0.15 4 0.60 Tata as a cultural fit for Starbucks will help
in building core competencies of each other.
Weaknesses
W1 - Image of luxury coffee 0.10 4 0.40
outlets
W2 Premium Pricing 0.05 2 0.10 High price of coffee is felt as a barrier as per
Policies capita income is low in India.
W3 Coffee Dominant 0.10 3 0.30 Need to diversify.
Business
They apply the same business models and
W4 Rigid Standards and 0.05 3 0.15 formulas, regardless of culture and values of
Policies at Outlets
the country.
W5 May affect JV
between Tata Coffee and 0.05 2 0.10 Tata Coffee also has a JV with Barista.
Barista
TOTAL SCORES 1.00 3.60

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External Factor Analysis Summary (EFAS)
External Strategic Weighted
Weight Rating Comments
Forces Score

Opportunities
O1 India Huge Market 0.15 4 0.60 India is the second most populated country in
the world.
O2 English Speaking 0.08 3 0.24
Market
O3 Increasing Spending 0.15 4 0.60
Power

O4 Young Population 0.07 4 0.28 Younger generation is more prone to visit

cafes.
O5 Out-of-home Coffee 0.05 3 0.15 Rating for coffee outside home is better than
Drinking Culture catching tea outside home, specifically in the North
O6 Favorable Cost of 0.05 2 0.10
Labor
O7 Favorable 0.05 3 0.15
Infrastructure and Cost
O8 Skilled Manpower 0.02 3 0.06
Availability
O9 Opportunity to cater 0.03 2 0.06
Tea Drinking Segment
Threats
Most of the Indians consumed tea at least
T1 Tea Drinking Country
0.08 4 0.32 twice a day, in the morning and in the
afternoon.
Coffee Caf Day (CCD) pioneered the
T2 Competition from 0.10 3 0.30 concept of specialty coffee in India followed
Homegrown Brands
by Qwikys and Barista Coffee.
T3 Low Per Capita Income 0.05 3 0.15 Immense need to offer products at locally
competitive price.
Campaign worldwide against the high-
T4 Health Consciousness 0.02 3 0.06 calorie and high fat products that Starbucks
sells.
T5 Rare habit of Visiting 0.02 3 0.06
Cafes
McDonalds, Dunkin Donuts, Burger King,
T6 Competition from 0.03 3 0.09 etc already have the infrastructure in place
Other Fast Food Chains and are instead adding quality coffee to their
menus.

T7 Rising Prices of Coffee

0.05 4 0.20 Rising prices of coffee are putting pressure
on the profit margins of the company.

TOTAL SCORES 1.00 3.42

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Strategic Factors Analysis Summary (SFAS)
Weighted
Strategic Factors Weight Rating Comments
Score

S1 - Brand Visibility 0.10 4 0.40 International popularity of the Starbucks

S4 Access to High Quality
Arabica Coffee
S5 JV with Tata Coffee
W1 - Image of luxury coffee
outlets
W3 Coffee Dominant
Business
Brand could be capitalized.
0.08 4 0.32 Arabica Coffee is of very high quality and
this could be hot selling products worldwide.
In addition to sourcing coffee beans from
0.08 4 0.32 TATAs Indian facilities, the companies will
also work towards developing Starbucks
stores in retail outlets and hotels.
Starbucks Coffee outlets have the image of
0.12 4 0.48 high end luxury caf and customers may not
turn.
0.10 3 0.30 Need to diversify well.

O1 India Huge Market

0.15 4 0.60 India is the second most populated country in
the world.
Increasing job opportunities and advances in
O3 Increasing Spending 0.07 5 0.35 services sector with globalization is raising
Power
standards of living in India.

O4 Young Population 0.08 5 0.40 Younger generation is more prone to visit

cafes.
Most of the Indians consumed tea at least
T1 Tea Drinking Country
0.07 4 0.28 twice a day, in the morning and in the
afternoon.
McDonalds, Dunkin Donuts, Burger King,
T2 Competition from 0.08 4 0.32 etc already have the infrastructure in place
Homegrown Brands and are instead adding quality coffee to their
menus.

T7 Rising Prices of Coffee 0.07 4 0.28 Rising prices of coffee are putting pressure
on the profit margins of the company

TOTAL SCORES 1.00 4.05

The Strategic Factors Summary shows that the most important factors overall received a score of
4.05 which is above average. This is positive for the company. They are responding well to their
strength, weaknesses, opportunities and threats. After some recent re purposing it is clear that the
company is focusing on its core competencies but has room to improve.

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Strengths
High Brand Visibility. (International popularity of the Starbucks brand.)
Ethical and Environmental Practices.
Superb Marketing and positioning skills of Starbucks.
Access to TATA's premium Robusta and Arabica coffees (Sourcing Agreement).
Tata as a cultural fit for Starbucks will help in building core competencies of each other.
(Tata has met all the stringent standards and conditions followed by Starbucks such as
quality, soil, water, pest, waste and energy management, forest and biodiversity
conservation to workers welfare, wages and benefits, living conditions, health, safety,
etc.)

Weaknesses
Image of luxury coffee outlets.
High price of coffee is felt as a barrier in the South and the North. (Starbucks products
were priced at a premium and the per capita income in India is lower compared to other
markets where it is already present, there is immense need to offer products at locally
competitive price.)
Coffee dominant business. (Need to diversify)
Certain rigid standards and policies at outlets. (They apply the same business models and
formulas, regardless of culture and values of the country they are operating in like no
smoking policy, etc.)
The entry of Starbucks is aimed at the out-of-home coffee consumption market and this
may affect the alliance of Tata Coffee with Barista.

Opportunities
India is the second most populated country in the world. Huge Market.
English speaking populations
Growing Middle Class and increasing spending power of Indian Population.
Young Population (Consumers in the age group of 2045 years were emerging as the
fastest growing consumer group and the average age of an Indian in 2020 would be 29
years, compared to 37 years in China and the United States, 45 years in Western Europe,
and 48 years in Japan. Younger generation is more prone to visit cafes as per a research)

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 Rating for coffee outside home is better than tea outside home, specifically in the North
and the East. (The people in southern states of India largely consume coffee. The people
in the northern states are generally not coffee drinkers, but drink coffee and experiment
with various flavors as a fashion statement.)
Favorable Cost of Labor
Favorable cost and quality of telecom infrastructure
Fair availability of workforce (Quantity as well as skilled)
Tea-based culture of India could be used as opportunities by offering more tea-based
drinks.

Threats
India is a tea-based culture. (The Indian hot-beverage market is dominated by tea. India
was the largest producer and consumer of tea in the world and accounted for 29% of the
total production and over 20% of the total consumption globally.60 Most of the Indians
consumed tea at least twice a day, in the morning and in the afternoon.)
Homegrown brands dominate the retail coffee market. Coffee Caf Day (CCD) pioneered
the concept of specialty coffee in India followed by Qwikys and Barista Coffee.
Lower per capita income in India. High price of coffee is felt as a barrier in the South and
the North. (Starbucks products were priced at a premium and the per capita income in
India is lower compared to other markets where it is already present, there is immense
need to offer products at locally competitive price.)
Increasing Health Consciousness among consumers. (The increasing rate of obesity and
obesity related diseases such as diabetes, high blood pressure, and heart diseases in India.
Starbucks was said to have been on the target of many consumer health groups
worldwide who planned to campaign against the high-calorie and high fat products that
Starbucks sold and which could lead to increased obesity risk, heart diseases, and cancer.)
Visiting cafes is not a frequent habit among most of the Indians.
Other fast food chains like that of McDonalds, Dunkin Donuts, Burger King, etc., already
have the infrastructure in place and are instead adding quality coffee to their menus to
compete with Starbucks.
Rising prices of coffee are putting pressure on the profit margins of the company.

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SCANNING THE ENVIRONMENT - PESTEL ANALYSIS

Political Factors
Indias young are becoming world-class consumers, and multinationals are taking note,
reads the sub header for an article titled Hey, Big Spenders! in the August 2003 issue of TIME
Magazine. This change can be attributed to many factors. For one, the Indian economy went
through a massive liberalization under the new minority government of P.V. Narasimha Rao in
1991. Further, the current governments reform measures like approval to FDI in multi brand
retail for up to 51% will surely add up to these factors.

Economic Factors
The factors like inadequate infrastructure, bureaucracy, regulatory and foreign investment
controls, the reservation of key products for small-scale industries, and high fiscal deficits are
constraining economic growth of India. However, the liberalization measures taken in 1991
opened the economy to foreign investment and trade: it dismantled important controls, lowered
customs duties, and devalued the currency: it virtually abolished licensing controls on private
investment, dropped tax rates, and broke public sector monopolies. Further, reforms have been
seen in retail industry with Indian government's approval on FDI up to 51% on multi brand retail.
The country has recently become is a major exporter of software services and software workers,
and the information technology sector leads the strong growth pattern. With a world changing
from an industrial to an informational economy, India is bound to play a monumental role in the
future of the global industry.

Socio-Cultural Factors
As job opportunities increase in India, money stays in the palms of the Indian consumers
enabling them to reinvest in the Indian economy. Attitudes towards money are also changing.
The mantra for the average Indian family, as in most of Asia, has always been saving, but young
Indians today, inspired by job opportunities, have switched to spending extravagantly. The
attitude of the young generation is to enjoy life and spend money.

However, India is a tea-based culture. Most of the Indians consumed tea at least twice a
day, in the morning and in the afternoon. According to market research studies, coffee was

13
mainly consumed in the urban areas (71%) and to a much lesser extent in the rural areas (29%).
The people in southern states of India largely consumed coffee. The people in the northern states
were generally not coffee drinkers, but drank coffee and experimented with various flavors as a
fashion statement. The consumption of instant coffee and filter coffee was almost equal on the
national level. But region-wise, filter coffee was more popular in the south and the proportion of
instant coffee was very high in the non-south regions.

Technological Factors
The coffee beans and tea need be bought from local Indian farmers in order to support the
local agricultural economy, save money in transportation and tariffs, and gain tax benefits.
Indians tend to take more cream in their coffee. The association with the Tata Coffee Ltd for
sourcing its Arabica Coffee would surely help in the long run. Further, the skim milk option need
not be offered in India because dieting is not a commonly accepted practice in the country.
Indians will feel that they are being cheated out of their money if skim milk is put in their
beverages. Indians also like spices in their tea and coffee, especially ginger and black clove. One
of Indias favorite fruit flavors in mango, and in fact the mango is Indias national fruit. The food
segment needs to take care of vegetarians segment as they form the good proportion of the target
market. However, Indians specially the affluent and young class will be delighted to have fast
and efficient Wi-Fi services at the cafe plus; people here love to be associated with their
traditional and rich heritage as well as its blending with modernity and this may be reflected in
the stores' ambience. The awareness about how varieties of coffee are sourced, roasted, brewed,
etc needed to make people more loyal to coffee specially the Starbuck's.

The inventory policy requires keeping the stores stocked but not overstocked to ensure
freshness of products. Better gauges of the numerical figures in the inventory policies can be
made after observing consumer trends. To begin with policies can be formulated assuming an
average of five hundred consumers per day.

Environmental Factors
Starbucks believe in the importance of caring for our planet and working with and
encouraging others to do the same. As a company that relies on an agricultural product, it makes
good business sense. It engages itself in recycling, energy management, water conservation,

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green building, and in reducing carbon footprints wherever possible. With these integrated
environmental responsibilities, the company will obviously build its image in the eyes of Indian
Consumers as well. The ecological concerns regarding the farming of Arabica coffee must also
be addressed in order to ensure consistency in productivity.

Legal Factors
Companies may be public or private but the common public is not allowed to buy shares
of the company and there can only be up to fifty shareholders. Import duties are applied to
almost all goods entering India. The tariff system is based on the Harmonized System (HS) and
tariffs are in the 40 to 60 percent range for basic raw materials, 60 to 100 percent for semi-
processed goods, and 100 percent and above on finished and consumer goods. Shipments to
India require a commercial invoice, a packing list and bill of lading. A certificate of origin is not
required on imports originating in the United States. FDI approval though has come to
relaxation.

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INDUSTRY ANALYSIS PORTERS FIVE FORCES FRAMEWORK

One of the widely held assessment tools of an industrys competitive forces is the five
forces model of competition created by Michael Porter. These five forces are: the competitive
force of rivalry among sellers, the competitive force of potential new entrants, the competitive
force of substitute product, the competitive force of supplier bargaining power, and the
competitive force of buyer bargaining power (Porter, 1980).

Threat of
Substitutes

Bargaining Industrial Bargaining

Power of Rivalry Power of Buyers
Suppliers

Threat of New
Entrants

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Industry Rivalry
Major competition for Starbucks in India comes from that of Caf coffee day. The
abbreviation CCD is known to most of the people in urban parts of India. Their positioning is
same as what Starbucks have in US. The other competitors include Barista Lavazza, Quicky's,
Barista and Costa Coffee, which are also the multinational brands, and widely recognized. Apart
from them, secondary competitors include the Georgia Coffee, served in fast food joints like that
of Mc Donalds and KFC, etc.

Potential for New Entrants

The entry barriers in the coffee retail industry are relatively low in India, particularly for
the foreign players. This is possible owing to the fact that 51 % FDI is allowed in India in retail
sector. Any large or well-funded company having the thorough understanding of the market can
enter into retail sector in India. Given the fact that Starbucks is a global, it is having its own
advantages when it comes to achieving the economies of scale. Starbucks being the global coffee
retail chain, they are not going to have any particular capital related problems. Also, they are
having MoU being signed with TATAs for opening their outlets in their TAJ group of hotels
and resorts. India, being the sixth largest producer of coffee in the world is having the largest
home grown supply of coffee beans and thus, sourcing coffee in this industry is not going to be
much of the problem.

Customer or Supplier Loyalty - Indian market is already being captured by the long
established brands like Caf coffee day, Barista, Barista Lavazza and Costa Coffee. Thus, it is
going to be pretty much difficult for any of the new entrant to establish its brand name in the
Indian market. However, Starbucks being the international brand will definitely help in attracting
the educated Indian crowd.

Market Experience - The existing players in the Indian coffee retail industry have been
here in the market from last 10 years. Thus, their management must be having greater
understanding of the Indian markets and Pallets. Therefore, for Starbucks, it is going to be
important to first understand the Indian preferences, before making any major move.

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 Differentiation - Coffee is not the product where there is a great scope for product
differentiation. However, it depends on most of the cases on the store ambience, which can act as
the point of differentiation.

Threat of Substitute Products

India has predominantly tea-based culture thus; awareness about coffee need to be
created more and more tea-based drinks in association of TATA coffee needs to be included in
its offerings. Besides tea, other product substitutes, here, will include other beverages, for
example, soda, fruit juices, water, beer or other liquid and/or carbonated beverages. Since
Starbucks also sells fast foods, other fast food beverages like burgers, etc. The lower end local
coffee houses or other snack shops which are less luxurious will also act as substitutes to
Starbucks. These are places which provide people with the place to sit, chat and relax at more
affordable rates.

Bargaining Power of Suppliers

In the case of coffee retail, the suppliers, supplying the retailer with the coffee beans are not
having much of the bargaining power. This is particularly because of the fact that coffee retailers
like that of Starbucks tend to be very big buyers for any of the supplier to lose as a whole. This
also gives the Starbucks to dictate terms to the supplier. However, this sourcing would be done
on ethical norms of Starbucks and TATA Coffee. Similarly, suppliers of other resources like that
of paper products etc., will not be having much of the bargaining power as there are many
sources from which the company can source them. However, this is not valid in the case of the
suppliers supplying the technological machinery and equipments as there are not many suppliers
here.

Bargaining Power of Buyers

In the past, buyers in India were not having much of the bargaining power as there were
not many food retail giants which were present in the country. However, with the advent of
multinational food retail giants in India, like that of Mc Donalds, Barista Lavazza, Caf Coffee
Day and Costa Coffee, consumer is faced with lots of choices. Thus, it will be difficult for
Starbucks to influence the Indian buyers to pay premium for their products. As also the per
capita income of Indian Customers is low and their mindset is not so affirmative with coffee

18
culture, however it is catching up among youths, the pricing need to be highly competitive and
on zonal basis.

MARKET ANALYSIS - DAVID AAKER'S 7 DIMENSIONS OF MARKET FORCES

Market Size
The recent past has witnessed an upward shift in the per capita consumption of coffee in
India, with growing preference amongst the young population. With a young population of about
35% below the age group of 40 spending most of their time at work or outside home, the out of
home consumption of coffee is spreading rapidly. Moreover, the increasing spending propensity
of the young Indians and their changing lifestyle has increased the demand for coffee in India.
As compared to FY2005 a clear growth can be witnessed in FY2010 in per capita consumption.
The per capita consumption in FY2010 increased to 89.3 grams as compared to 70.9 grams in
FY2005 due to presence of a strong preference towards instant coffee.

Market Growth Rate

The consumption of coffee in India has grown steadily at a historical CAGR of 6.3%
during FY2005-FY2010 and is expected to pace at a CAGR of 4.9% in the near future. In
FY2010, the per capita consumption has increased to 89 grams from 85 grams in 2005 at a
growth rate of 5%. The Indian coffee market has witnessed a steady growth in the past 5 years
due to the growing preference for instant and organic coffee amongst the coffee drinkers.
Moreover, rising consumer expenditure and export promotion schemes implemented by
government has influenced the growth of the market in India. The coffee market in India has also
witnessed a growth in the demand for out-of-home consumption of coffee because to the
majority of time spent by the young adults at work or out-of-home. This potential of the market
and the preference of the young population have led many global players to foray into the
domestic market.

Market Profitability
The revolution in the Indian coffee market has changed the tastes of the consumers and
overwhelmed them with variety of new options. Thus, a change is witnessed in the coffee
drinking habits amongst Indians. Today people prefer instant coffee over the traditional coffee,

19
because of the busy lifestyle and changes in their tastes and preference towards instant coffee.
The Indian coffee market is dominated by big players such as Nescafe who has a share of 68.8%
followed by BRU and Tata Coffee with 13.5% and 3.2% respectively. Marketers today see a lot
of potential in the instant coffee segment, which is one of the reason many big companies are
adopting various strategies to capture it. The out-of-home coffee drinking culture is also gaining
pace.

Keeping all these in mind that the costs for the coming operating years will reduce and
revenues will increase, profit is expected to escalate. After the end of the first fiscal year, the
company may determine whether or not it should expand in the country of India. If the first year
proves to be a success, Starbucks Coffee can open over 200 location in the subcontinent of India,
taking advantage of their international partnerships with Sheraton (Starwood) Inn, and Hyatt Inn.
Starbucks will also try to win accounts with local airlines companies, so that they may serve
Starbucks drink on flight. In three years profits are expected to exceed one million dollars per
annum as per the research conducted.

Industry Cost Structure

Competitive pricing is necessary for the success of the venture; hence Starbucks must
take various costs into consideration. Because of the costs involved in startup, transportation and
imported goods, the price need to be set at about USD 1 per drink using the concept of zone
pricing to make the coffee affordable to the target audience. Exchanges need to be done in rupees
so that would be about 55 rupees. The prices for all goods need to be relative to the others. With
the use of this pricing policy, Starbucks prices would be 20% lower than those of the Barista
Company. This use of penetration pricing will ease the companys slide into the market place.
Though, it is possible to get a cup of coffee for merely 5 rupees in small stalls on the street, the
success of the Barista Coffee Company show that the customers are willing to pay for better
quality, service, and environment.

Distribution Channel
As its distribution strategy, the Starbucks has already started its first store at Mumbai.
This flagship store is located at the historic Elphinstone Building, Horniman Circle, Mumbai and
marks the beginning of the iconic brands India journey. In addition to the flagship store at

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Horniman Circle, Tata Starbucks Limited will launch two more stores in near future at Oberoi
Mall and the Taj Mahal Palace Annexe in Mumbai. Subsequently, the other stores will be opened
at other metropolitan areas. The urban areas are thus the first choice of Starbucks as its both
primary market of youths and secondary market of tourists from other countries are catered here.

Market Trends
A major part of the countrys foreign exchange earnings come from the Coffee industry.
Since the inception of coffee in India, the production has been rising along with changes
experienced in the consumption pattern over the years.

Increasing Per Capita Consumption - Due to the constant increase in population over the
period, the per capita consumption has also increased from 85 grams in 2009 to 89 grams in
2010.This increase in the per capita consumption has influenced the overall growth of the Indian
coffee market.

Evolving Coffee Retail Chain Concept - The Indian coffee market has been experiencing
activities in form of increasing coffee retail shops. This has been the result of the growing trend
of out-of-home consumption and increasing propensity of young population to spend. Many
coffee parlors or cafes such as Cafe Coffee Day (CCD), Barista and Costa Coffee are spreading
their distribution network to cater to coffee drinkers across India. There are 1,503 coffee retail
outlets across India to serve the out-of-home coffee drinkers across India.

Global players foraying into the Indian market - The increasing disposable income of
young Indians and their changing preference towards coffee consumption have led many global
players to foray into the domestic market. For example, Britains Costa Coffee entered the Indian
coffee market in 2005. Moreover, Starbucks, one of the leading global players is planning to
enter Indian market in the near future.

Increasing preference towards Instant Coffee - After Nestle and HUL launched their
product in the Indian coffee market, the popularity of instant coffee has increased gradually.
Today, people prefer instant coffee over the traditional coffee because of their changing life style
and variety of options available in the instant coffee market. About 23.1% of the market is

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captured by instant coffee and is expected to increase further in the near future with a strong
preference among the age group of 20-45years.

Growing preference towards organic coffee - Organic Coffee is usually considered to be

normal coffee beans that are produced without the use of pesticides or herbicides. The growing
health concerns and the preference of consumers to consume healthy beverage have led the
marketers and producers adapt to organically grown coffee.

Key Success Factors

The Primary target market for Starbucks Coffee Co. in India is the young both male and
female from the ages of 16-38. This market is well educated and comes from middle class to
upper middle class population and out-of-home coffee drinking culture is catching up. The
international appeal of Starbucks will add up to the promotion of this culture. The highly trained
baristas of Starbucks, its technologies and processes by which it sources high quality coffee,
roasts, brews and serves to its customers will surely act as Key Success Factors of the Company.
Besides its alliance with Tata Coffee to source high quality Arabica Coffee will also help.

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COMPETITOR ANALYSIS - PORTER'S 4-CORNER ANALYSIS

Drivers Current Strategy

Financial Goals How the business creates

Corporate Culture value?
Organizational Structure Where the business is
Leadership team background choosing to invest?
External Constraints Relationships and networks
Business Philosophy the business has developed

COMPETITORS FUTURE STRATEGY

Management Assumptions Capabilities

Company's perception of its Marketing skills

strengths and weaknesses Ability to service channels
Cultural traits Skills and training to
Organizational value workforce
Perceived industry forces Patents and copyrights
Belief about competitors Financial strength
goals Leadership qualities of CEO

Market Share of Major Coffee Retail Chains in India, FY2010

The Indian coffee market is passing through an evolutionary phase where consumers
preference towards out-of home consumption is developing. The exceptional growth of out-of -
home consumption of coffee in the coffee chains has been triggered by the young adults. The
young adults segment of the population spends major time outside home or at work, which has
influenced the growth of the coffee chains in India. The retail coffee market in India is majorly
dominated by Cafe Coffee Day with 1,134 chains across India followed by Barista with 230

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coffee serving chains and Cost Coffee with 74 chains. It is being observed that almost 96% of the
coffee retail market has been held by these three players and the rest 4% being held by other
small and new players. Overwhelmed by the response in India, coffee retail giants are expected
to expand their network in India in the near future.

Caf Coffee Day

CCD Mission statement - "To be the best caf chain in the country by offering a world
class coffee experience at affordable prices."

Business Overview - CCD, Indias first coffee bar was established in 1996 in Bangalore
by the largest exporter of coffee in India, the Amalgamated Bean Coffee Trading Company
(ABCTCL).Dominates the market with a share of 75.5% in 2010 with total retail outlets of 1,034
in over 100 cities.

Products and Offerings - The company offers numerous options in the product offerings
such as cappuccino, Espresso, Caf Latte, Cafe Mocha, Irish coffee and Ice tea along with wide
variety of eatables such as sandwich, cakes, burger and others. The products are offered to be
consumed in the cafe as well as in take away format. The company also offers various
merchandise products such as coffee mugs, gift vouchers and others.

Geographical Reach - The Company has major presence in Delhi with 121 retail outlets,
Bangalore with 172 stores, Maharashtra with 225 stores and AP with 84 stores.

Customer Profile at CCD - Other brands are also promoted in a CCD outlet through
innovative and interactive use of posters, cards, danglers, leaflets, contest forms, etc. CCD has
tied up with popular television serials and also ran promotion contests for many brands. It had
also tied up with some popular Indian movies where CCD was featured in some of the scenes.
CCD has six caf formats; Music Cafs, Book Cafs, Highway Cafs, Lounge Cafs, Garden
Cafs & Cyber Cafs. Music Cafs provided customers with the choice of playing their favorite
music tracks on the digital audio jukeboxes installed in the caf. CCD has been also coming out
with more formats like sports Caf, singles caf, and fashion caf.

Speaking on competition with other players, Sudipta Sen Gupta, Marketing Head, CCD
said: We dont have any competition because we are not competing with the others. In fact we

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are aiding each other in creating and growing the coffee culture. All of us have a distinct
identity. We sure do!

Barista
Business Overview - Founded in 2000, the company is a pioneer of Indian Cafe culture.
The company has positioned the brand as a joint where people can indulge in conversations with
a cup of coffee. The target segments for the company are the youth and young adults, who are
aware about the global lifestyles and enjoy new flavors and taste of coffee. Barista is planning to
expand its latest chain of cafes Barista Creme Lavazza to more parts of the country. Presently
the company owns app. 15 such stores.

Products and Offerings - Along with offering coffee, the company also offers fresh
salads, sandwiches, pizzas, pastas and desserts. The company offers in -stores promotions from
time to time along with other promotions in commercials and films.

Geographical Reach - Barista has a pan India presence with more than 230 retail outlets.
45 of the top outlets offer Wi-Fi availability along with 75 outlets offering Blu-Fi for mobile
savvy generation.

Coffee and other products at Barista were priced high and its target audiences were youth
from the upper-middle-class segment. The coffee at Barista was made with high-quality Arabica
coffee beans and baristas (brew masters) were invited from Italy to make new blends. Brotin
Banerjee, Vice President of Marketing, Barista, said, Our inspiration was the traditional Italian
Espresso bars where the idea is to create a home away from home." In 2001, Barista entered
into a strategic alliance with Tata Coffee Ltd. (Tata), the largest coffee producer in India. Tata
later acquired a 35% stake in Barista. The alliance allowed Barista to enlarge its distribution
network and set up outlets in the Taj Group of hotels owned by Tata and its other allied
businesses.

In 2004, Amit Judge, its promoter, sold 65.4% stake of the company to an NRI
businessman, Sivasankaran (Siva), who later in 2004 bought the remaining stakes from Tata as
well. After the acquisition, Siva revamped the chain, opened more Barista outlets in Southern
cities, and began franchising its outlets. It started opening up a new outlet every 10 days. A new

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look was given to its outlets by making changes in its seating arrangements, in-store
merchandise, and providing a better youthful ambience of the store. The brew masters
maintained friendly relations with the customers and called them by their first names.

Barista joined with specialty retailers such as the music retailer Planet M, the book
retailer Crossword, and the Taj Group of hotels for setting up espresso corners in their premises.
It also launched a concept called BanCafe, a coffee shop within the bank premises and joined
with the bank ABN AMRO.

Costa Coffee
Business Overview - Costa Coffee was incorporated in India in 2005 with a tie up with
Devyani International Limited, head quartered in New Delhi, the Company serves the coffee
lovers across India. Company inaugurated its launch with 4 cafes in Bangalore. The company
commands a share of 4.9% in the Indian coffee market in 2010.

Products and Offerings - The Company offers different variety of coffee such as
Espresso, cappuccino, cafe latte and others. Some of the premium offerings which the company
offers are muffins, cakes, desserts, sandwiches, wraps and pastas. The company operates with
nearly 74 stores across India.

Geographic Reach - The Company is planning to focus on the prominent cities such as
Pune, Delhi, Mumbai and Bangalore. The company is planning to predominantly expand in the
metros.

Quiky's
Two software engineers, Shashi Chimala and Shyam, opened the first Qwikys outlet in
Chennai in 1999. They were inspired by the specialty coffee bars in the United States. The menu
at Qwikys included varieties in hot Italian coffee, Indian coffee, specialty hot coffee, cold
coffee, frappes, milk shakes, tea, other beverages, desserts, and snacks. It targeted youths in the
age group of 18 to 30 years. By 2002, the annual revenues of Qwikys were 43 million INR.

Qwikys had three types of formats; Qwikys Coffee Pubs were stand-alone coffee bars,
Qwikys Coffee Islands were outlets within big stores, multiplexes, and movie theatres, and
Qwikys Coffee Xpress were coffee kiosks. By 2006 it had over 20 outlets in nine cities in India

26
and one franchise in Sri Lanka. Qwikys had plans to open more outlets in metropolitan and
large cities in India and abroad through franchising its business. It had joined with retailers such
as Lifestyle, Music World, and Ebony to open store-in-store outlets.

EXECUTIVE SUMMARY

Starbucks is another industry stalwart to enter the Indian markets due to vast potential
and the huge untapped market. Indian market is always influenced by the traditions followed in
the Western counterparts hence the success of Mc Donalds, KFC, etc to name a few. With
access to Hollywood movies where these brands are flashed quite often, the aura surrounding
brands such as Starbucks scale new heights.

Indian consumers have always welcomed change when it comes to their taste buds.
Cappuccinos, Latte have eclipsed the traditional Espresso filter coffee. Filter coffee seems like
an archaic notion, only restricted to the elderly people. In fact the coffee shops have itself
undergone a tremendous transformation, with them replacing a hang-out joint for the teenagers.

The timing of their entry could not have been better. With Barista, Caf Coffee Day and
Costa coffee almost losing their sheen, Starbucks comes in like a breath of fresh air. The future
outlook of any company is not complete without an analysis of the industry in which it operates.

The coffee industry of India is the sixth largest producer of coffee in the world,
accounting for over four percent of world coffee production, with the bulk of all production
taking place in its Southern states. India is most noted for its Monsooned Malabar variety. It is
believed that coffee has been cultivated in India longer than anywhere outside of the Arabian
Peninsula.

Tata Starbucks Limited, the 50/50 joint venture between Starbucks Coffee Company
(Nasdaq: SBUX) and Tata Global Beverages Limited is bringing an unparalleled experience to
Indian customers. Both companies have a history of delivering product innovation and the
highest quality experience to customers around the globe. They are delighted to come together
today and transform the coffee experience for consumers across India, while providing a

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community gathering place to connect with family and friends. Thus, Coffee culture is poised to
be deeply in-grained into Indian culture in the near future, if this strategic alliance succeeds.

REFERENCES

Vrushali Paunikar, 2011, "International Business Plan Starbucks India", A proposal

Ruchi Mankad and Joel Sarosh Thadamalla, 2011, "Case: Starbucks Coffee Company, The Indian
Dilemma", Strategic Management and Business Policy, 13th Edition, Thomas L. Wheelen, J. David
Hunger
Herve R., Dec 21, 2004, "The Starbucks Corporation: Past, Present and Future", Auch-Roy-Pen: 1207HA
Harold Brown, 2011, "External Environmental Analysis of Starbucks and the Coffee Industry"
Flight, Georgia. Grinding Out Success Next to Starbucks Business 2.0, Oct. 2006. Vol. 7, Issue-9
Ryan C. Larson, 2008, "Starbucks a Strategic Analysis - Past Decisions and Future Options", Brown
University Economics Department
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