Starbucks and Tata Coffee brew India plan

Global coffee retailer Starbucks has been eyeing the growing out of home coffee market in India for years now, but players such as Café Coffee Day, Costa Coffee and Barista have been ahead in the curve. Starbucks has finally decided to take the plunge and announced a joint venture with the Tata Tea subsidiary Tata Coffee.

Tata Coffee owns coffee plantations, and has its own factories to process roast & ground coffee, instant coffee, which it sells both in the domestic and export markets. It also owns a stake in the US coffee marketer, Eight O’Clock Coffee, which is a significant contributor to its revenues. In the half year ended September, its consolidated operating income was Rs 616 crore and net profit was Rs 22 crore. EOC contributed $93 million or about Rs 420 crore to its income.

The current partnership between the two companies is limited to a sourcing arrangement for the domestic market. At present, both have entered into a non-binding understanding to explore the contours of the arrangement. The intention is to source and roast high quality coffee beans in Tata Coffee’s Coorg facility.

In addition, the statement says that Tata (which appears to mean the Tata group) and Starbucks will explore the development of Starbucks outlets in associated retail outlets and hotels. The Tata Group runs retailing operations through Trent, with formats such as Westside (apparel), Star India Bazaar (hypermarket), and Croma (electronics). It also runs a large hotel chain through Indian Hotels, with brands such as Taj, Gateway and Ginger. The statement is implying that Starbucks may set up its outlets within existing properties of the Tata group, which gives it a ready stock of properties to start with.

The investments from Tata Coffee’s side is expected to be minimal for the sourcing JV, since it already has an existing plant, and already supplies to global retailers, including Starbucks. If the volumes so dictate, at a later stage, it may have to expand capacity. Both companies intend to extend the sourcing and roasting arrangement, to supply coffee to other countries where Starbucks is present.

The interviews given by the Starbucks managing director appears to indicate that they will have Tata Coffee as their backend partner, but for the retail stores, it may not be a restrictive partnership. The rules regarding FDI in retail, make market entry into India a little tricky. It has been said that Starbucks will be treated as a single-brand retail, in which FDI is allowed compared to multi-brand retail, where it is disallowed. In food retail, global brands such as McDonalds and Dominos operate through the franchisee route.

It will be interesting to see how Starbucks structures its front end, because that is the most crucial part of a food retail business. Investments are significant, as location is very important. Real estate rentals in most metro cities in India are expensive and require hefty lease deposits. Starbucks comes with the advantage of being a well-recognised brand among its target market –the young population. It needs to get the right locations, the right business model, give an uniformly good experience (made difficult by the franchising model) to customers and get the product mix and pricing
India is a crucial piece in the strategy jigsaw that global companies are cobbling together, as they attempt to drive growth outside their home markets, traditionally in developed markets. Starbucks recently gave an update on how it intends to drive, where it said that growth outside US markets, in countries such as China, India, Brazil and Russia is central to its strategy. It plans to have 1,500 Starbucks stores in China, where it has already entered, by 2015.

On Friday, the Tata Coffee share hit the 20% upper price circuit on this development while Starbucks’ share did not react much to the news.

Read the Starbucks/Tata Coffee press statement on the joint venture.

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