Starbucks May Find Small Coffee More Profitable: Corporate India

Starbucks Corp., which today introduces India to its caramel macchiatos and espressos, may find smaller and cheaper beverages the fastest way to win local coffee drinkers from established rivals.

Starbucks Corp. (SBUX), which today introduces India to its caramel macchiatos and espressos, may find smaller and cheaper beverages the fastest way to win local coffee drinkers from established rivals.

The world’s largest coffee chain will need options that are priced as much as 33 percent lower than its U.S. offerings to succeed in the Indian market, said Saloni Nangia, president at Gurgaon-based consultancy Technopak Advisors Pvt. The company opens its first outlet in the country today with partner Tata Global Beverages Ltd. (TGBL) in an upscale south Mumbai neighborhood that also boasts a Hermes store.

Starbucks is entering the world’s second-most populous nation as part of a plan to counter slowing growth in the U.S. and a recession in Europe. The U.S. accounted for less than 70 percent of its sales last fiscal, according to data compiled by Bloomberg. In India, where consumption of the drink has almost doubled in the decade through 2010 to 108,000 metric tons, the chain will compete with Barista Coffee Co., a unit of Italy’s Lavazza SpA, and Cafe Coffee Day, run by Amalgamated Bean Coffee Trading Co.

“It’s a great time for Starbucks to come in because some of the base is already here, in terms of cafes, in terms of people using them as socializing hotspots,” said Nangia. “The average Indian consumer, or the current cafe consumer, is happy to upgrade to a Starbucks environment.”

Dunkin’ Donuts

Seattle-based Starbucks is among the latest entrants into the country of 1.2 billion people as chains including Dunkin’ Brands Group Inc., the owner of Dunkin’ Donut shops, and Krispy Kreme Doughnuts Inc. (KKD) are chasing emerging markets for growth. Higher disposable incomes and a growing, young population will boost the fast-food market in India to 146 billion rupees ($2.7 billion) in 2014 from 47 billion rupees in 2010, estimates by researcher RNCOS E-Services Pvt. show.

Café Coffee Day, the nation’s biggest chain with 1,360 stores across the country, sells a regular cup of cappuccino for 61 rupees ($1.14) in Mumbai, while its closest competitor Barista with 318 stores, sells for 69 rupees, in a nation where the World Bank says about two-thirds of the people live on less than $2 a day.

That may prompt Starbucks to sell its drinks for about $2 to $2.50 a cup, Nangia said, compared with about $4 in Beijing and $3.50 in the U.S.

Though India is a different market than other countries, the U.S. chain founded by Howard Schultz, may not price its products lower as it wants to be perceived as a premium brand, said Larry Miller, an Atlanta-based analyst at RBC Capital Markets Corp.

Similar Prices

“I wouldn’t be surprised to see similar levels to other markets around the world, which would be a pretty expensive proposition for the Indian consumer,” he said in a telephone interview yesterday. “In China, their products are just as expensive as they are in the U.S.”

Starbucks on Jan. 30 announced an equal venture with Tata Global Beverages, and said it plans to open as many as 50 stores in Mumbai and New Delhi in its first year. The first outlet in Mumbai’s Horniman Circle is two months behind schedule. Tata Global Vice Chairman R.K. Krishna Kumar was unavailable for comments.

“We are looking at this venture from a long-term point of view,” John Culver, president of Starbucks’s Asia-Pacific business told reporters in September. “We will open a series of stores and monitor consumer response and focus on the experience we provide.”

Price Sensitive

While India’s gross domestic product has grown an average 8.3 percent in the seven years through March 31 to about $1.8 trillion, the fastest pace of inflation among the BRIC countries at 9 percent since the start of 2010 makes the market more price sensitive, said V. Srinivasan, an analyst at Angel Broking Ltd. in Mumbai who tracks Tata Global. The pace of economic expansion is set to slow to 4.9 percent in 2012, the least in a decade, the International Monetary Fund said Oct. 9.

“Given the impact the macro-economic environment is having on discretionary spending, it remains to be seen what sort of a pricing premium they have over the other players,” Srinivasan said. “They will be at the high end of the spectrum.”

The entry of Starbucks won’t dent the prospects of Café Coffee Day, said K. Ramakrishnan, president of marketing at the closely held Indian chain.

Café Coffee Day, which also offers local dishes including samosas or savory pastries catering to Indian palates, plans to expand its stores to 2,000 by the end of 2014 that would serve all segments of consumers - teenagers, students, office goers and families, he said in a telephone interview yesterday.

Lot of Room

“This isn’t a market so saturated that one player will end up trampling others,” he said. “There’s a lot of room here to grow in this business. There’s a strong and positive demographic story here and the economy is what is attracting people.”

Tata Global shares have rallied 66 percent since making its Starbucks association public, the best performance on the BSE Ltd. FMCG Index (BSETMCG) after liquor maker United Spirits Ltd. The stock gained as much as 1.1 percent to 163.80 rupees in Mumbai trading today, and traded at 162.5 rupees at 11:04 a.m.

The U.S. coffee chain in January last year signed a deal to buy coffee beans from Tata Global’s unit Tata Coffee Ltd. (TCO), whose shares have climbed 35 percent this year, compared with a 21 percent gain in the benchmark Sensitive Index. (SENSEX)

Tata Global stock’s present value has fully priced in the partnership, Angel Broking’s Srinivasan said.

“Starbucks opening just one outlet needn’t add any value to the financials of Tata Global,” he said. “Turning the hype into actual performance will be a challenge. It will take some time, say at least about six to 12 months before they have a meaningful presence.”

Expanding

Chief Executive Officer Schultz said in an interview on Oct. 4 that his company plans to add 1,000 stores in the U.S. in the next five years. Starbucks said in July that it will open as many as 500 new stores in the Asia-Pacific region this year, more than of half of which will be in China.

Schultz will open the store in Mumbai today after third- quarter sales at outlets open for at least 13 months in Europe, the Middle East and Africa were unchanged.

India now is “what the U.S. may have been in the 1960s or 1970s in terms of coffee culture,” Nangia said. “The right- sizing for India could mean right pricing as well. In the U.S., the average size is much bigger and one has to see how Indians consume.”

To contact the reporter on this story: Malavika Sharma in New Delhi at msharma52@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net

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