15173068 international-business starbucks-in-india
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STARBUCKS IN
INDIA: THE TIME
IS JUST RIGHT
4th May 2009 An OLI-PESTLE Analysis
The paper analyses the entry prospects of Starbucks Coffee into India. The analysis is based on the framework provided by the Eclectic Paradigm and the PESTLE analytical structure and shows that in spite of previous setbacks the current conditions in India are highly conducive for the likes of Starbucks to set up shop and be successful. Bhooshan Parikh
Copenhagen Business School
Full Time MBA 2008-09
Bhooshan Parikh
CBS FT MBA 2008-09
Term Paper-International Business Page 1
INTRODUCTION
India has a population of nearly 1.2 billion people and a majority of this falls into the age bracket of
15-60 years of age, making it one of the youngest countries in the world with a median age of just
above 25 years (www.cia.gov). Compared to this, the median age in the US and China is 37 years and
in Japan it is 45 years. The per capita GDP in India has seen a constant rise and with the booming IT/
Software services industry, India’s average economic growth over the last decade has been an
impressive 7% (www.cia.gov). With almost 29% of the population living in urban areas (and an
annual urbanisation rate of 2.4%) (www.cia.gov), the Indian consumer market holds immense
potential for most businesses. Improved political and legal reforms since the beginning of the 1990s
have made it increasingly attractive for Foreign Direct Investments (FDI) inflows into India and
equally easier for foreign companies to set up shop in India.
Starbucks Corporation (Starbucks), the owners and makers of the world famous Starbucks Coffee
opened its first shop in Pike Place, Seattle, US in 1971 and since then has become the fastest
growing coffee chain in the world with over 16000 retail outlets in more than 40 countries
worldwide (Starbucks Corporation, Annual Report 2008). It was only a matter of time that India
would see its first Starbucks, especially when the coffee consumption in India was also rising along
with the economical growth. However, in 1999 (www.starbucks.com) Starbucks decided to enter
China and put the Indian plans on hold for the next few years. This could well have been a big
mistake by Starbucks as the coffee revolution in India had already begun and local chains like Barista
and Cafe Coffee Day (CCD) were mushrooming in every part of the country with almost one new cafe
every day (www.businesstoday.intoday.in). Since 2006, Starbucks has had a series of failed attempts
to enter India starting with the joint venture with India’s RPG Enterprises to begin operations by
mid-2007 (www.seekingalpha.com). Unsure of its strategies, the coffee giant pulled back only to
enter again along with Future Group, another Indian conglomerate, through a joint venture (New
Horizons Retail) with its Indonesian franchisee (www.economictimes.indiatimes.com). This time it
was the Indian government and the Foreign Investments Promotion Board (FIPB) that played the
spoil-sport and the company was asked to re-submit its proposal through a FDI route instead of a
franchisee. With the Indian FDI regulations allowing only up to 51% investment in a single brand at
that time (www.economictimes.indiatimes.com), Starbucks joined the likes of Tesco and Carrefour
and decided to wait for the changes in FDI to take effect. By the end of 2007, Starbucks entered into
a distribution tie-up with a leading multiplex operator PVR Cinemas for its select products on an
experimental basis. However, with unclear evaluation of the demand for Starbucks in India, PVR
Cinemas was cautious in rolling-out the coffee stores at its multiplexes (www.financialexpress.com).
Martin Coles, President of Starbucks Coffee International, once said, "Without sounding arrogant,
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CBS FT MBA 2008-09
Term Paper-International Business Page 2
we're looking at our own strategy. There's nothing that keeps us doing business in India."
(www.cnnmoney.com). However, it does not seem to have worked out that easily for Starbucks,
because as of today, much to the dismay of many Americans visiting India, Starbucks still does not
have any presence in India.
India is too lucrative a market for any international firm to overlook, especially for Starbucks when it
has been successful in establishing itself in other traditionally tea-drinking nations like China and
Japan. This paper is structured around the Eclectic Paradigm (OLI Framework) and incorporates a
PESTLE analysis and attempts to bring out the major areas of concern for Starbucks Corporation in
order to enter the India market. Although, the FDI regulations and legal requirements have been
reformed over the last couple of years and doing business in India is gradually improving, it seems
that Starbucks needs to focus its attention more towards the economical and socio-cultural areas
rather than the political and legal aspects of the business environment in India.
OWNERSHIP SPECIFIC ADVANTAGES
The Starbucks brand has become almost synonymous with coffee all around the world and the same
is the situation in India even though India does not have a single Starbucks outlet. Having opened its
first store in 1971, Starbucks has been highly successful in starting a cult following that has put the
Starbucks brand at a level higher than just a coffee shop. The passionate staff and their unique
blends of the best coffee beans have propelled Starbucks as a way of life in many parts of the world.
The vision created by Howard Schultz, the President and CEO of Starbucks, has resulted in over
16,000 stores adding almost 1500 stores in the last one year (Starbucks Corporation, Annual Report,
2008). The company has recorded revenues of more than $ 10 billion and over $ 300 million in net
earnings (Appendix A), with an increasing share coming from its international operations (20% as
compared to 18% in 2007) (Starbucks Corporation, Annual Report 2008). The strong financial
position and the relatively low debt-ratio, gives Starbucks a very big advantage over its rivals
especially in terms of expansion strategies and the ability to undertake risks and buy-out local
competition, irrespective of which market it chooses to enter. Additionally, Starbucks has years of
experience and knowledge about various cultures around the world which gives them an edge in
international operations. Their success in tea-drinking nations like China and Japan has to be given
due credit and the company will surely benefit from these learning when it looks at the Indian
market. Starbucks has built up a reputation it cannot afford to damage.
As far as India is concerned, Starbucks has already had prior association and some knowledge about
the Indian market conditions, economic and political situation and the changes in consumer trends,
as has been brought out earlier. Their alliance with India’s Tata Group for sourcing coffee beans has
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CBS FT MBA 2008-09
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been in existence since 2004 (www.tata.com), and although previous joint ventures have been
unsuccessful, Starbucks has had relations with a number of Indian retailers for entering the Indian
market. This gives the company definite advantages as compared to Costa Coffee (the first foreign
coffee chain in India)(www.financialexpress.com), which has been around for a few years now but is
relatively unheard of in most parts of the country. Besides the above, the corporate culture,
efficient governance, and the employee welfare schemes of the company have received wide
acclaim, making Starbucks one of the best employers in the US. As a mark of recognition, President
Bill Clinton had even discussed the Starbucks’ employee health scheme with Schultz in 1992
(www.mhhe.com). This is an area which could strongly favour Starbucks in a country like India
where employee welfare is given low priority and most low level workers are still treated shoddily
and without any family or health benefits.
INTERNALISATION (CONTROL)
Following up on the ownership advantages, it may seem necessary for Starbucks to focus on these
areas in order to internalise certain activities so that its competitive edge is maintained especially in
India where tough competition is already governing majority of the market share. The most
important for Starbucks is its blends of coffee and its unique roasting techniques. The company has
to be very careful while entering into joint ventures in India so as not to lose this advantage to its
rivals. Moreover, its relations and contracts with Tata Coffee for supply of coffee beans have to be
looked into. The major issue here for Starbucks is the continued source of the best coffee beans as
one of the major competitors of Starbucks in India (Barista Coffee) is owned by the Tata Group. This
puts Starbucks in a precarious situation and there may be a need for the company to secure other
sources for the coffee beans that it might need for the Indian operations. Moreover, the ‘Starbucks’
brand that has such a strong connotation to it must be protected at all costs. Starbucks is already
into legal battles with similar sounding names like ‘Starstruck’ in India. Following a similar suit in
China (www.managingip.com), Starbucks has registered trademarks in several different Indian
languages (www.livemint.com), but what is more important is that the company must also devise
means to trademark similar sounding names in order to protect its brand and intellectual property
rights. Another possible threat to the ownership advantages of Starbucks lies in the prevalent
‘employee theft’ in India, and the strong likelihood of competitors ‘stealing’ trained personnel and
baristas from Starbucks and thereby undermining its success in the Indian market. Under such
circumstances it might seem that an agreement with a local well-established partner would be a safe
bet and Starbucks could look at reviving the relations with those Indian companies that had shown
interest early on.
Bhooshan Parikh
CBS FT MBA 2008-09
Term Paper-International Business Page 4
LOCATION SPECIFIC ADVANTAGES
Coming to the advantages inherent to the Indian market conditions, it might be suitable to cover the
PESTLE framework here as it is most relevant in describing the specific market environment.
POLITICAL ENVIRONMENT
The Indian economy has been experiencing more stability as far as the Government and political
scene is concerned. There has been reduced internal turmoil resulting from political influences and
this has created a better working environment for industries and businesses in India. The current
United Parties Alliance (UPA) government headed by the Indian National Congress party (INC) has
shown more tolerance towards foreign countries in general and towards foreign investments in
particular, and the recent reforms have placed India considerably high in the ‘Doing Business Report,
2009’ released by the World Bank (www.doingbusiness.org). However, the ongoing elections in India
are expected to result in turning the tide in favour of the radical Hindu opposition party the Bhartiya
Janta Party (BJP) led National Democratic Alliance (NDA), which is opposed to ‘westernisation’ of the
Indian culture. On the basis of this, it becomes safer for Starbucks to enter into an alliance/joint
venture with an Indian company that can provide a buffer from the political backlash and
consequent inroads into the Indian business scenario. Moreover, Starbucks needs to be vary of
possible opposition from the existing competitors (CCD, Barista, etc.) through use of political
influence and delaying tactics. However, likelihood of this is fairly low as the Indian market is large
enough to accommodate more players and the incumbents in the Indian gourmet coffee industry
will be minimally affected by Starbucks’ entry.
As far as the demographics are concerned, the majority of the Indian population is still rural
(www.eiu.com) but the urbanisation is occurring at a respectable 2.4 % annually. In spite of this, the
sheer size of the total Indian population (1.1 billion in 2007, www.eiu.com), makes the urban
population large enough for businesses to perform well. As the population gets increasingly
heterogeneous and the education levels improve, the standards of living have also been elevated,
which makes the environment extremely conducive for companies like Starbucks that are looked at
as an upmarket entity.
MACRO-ECONOMICAL ENVIRONMENT
The Indian economy has been predominantly based on agriculture as the majority of its population,
mostly in rural areas, is dependent on agriculture for sustenance. However, over the last decade or
so, the ratio is changing in favour of industrial and the services sector (www.eiu.com) with nearly
83% of the GDP arising out of these two sectors. Overall, the Indian economy faces a tough task as
the fiscal deficit has been increasing and the policies required to overcome it have been found
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difficult to implement. Many of the industries and sectors of the country depend on heavy subsidies
by the government and restrictions have been put on the extent of FDIs permitted in certain sectors.
In spite of the Prime Minister’s promise to open up the retail sector to FDIs, the issue has been
mainly unresolved. However, certain sectors like manufacturing, advertising, pharmaceuticals, hotels,
tourism & restaurants, and some others have been opened to 100 % FDI. This has great implications
on the future prospects of Starbucks in view of its India strategy. However, foreign investments in
real estate are largely prohibited and this strengthens the case suggested in this paper that
Starbucks needs to find a locally established retailing partner in order to set its foot into the Indian
gourmet coffee retailing business.
The world’s largest democracy is currently also one of the largest and most attractive markets in the
world. The World Bank report (www.doingbusiness.org) has indicated that India had jumped 12
places in 2008 compared to the previous year and although it is currently placed at a dismal 122 out
of 181 countries, the report has indicated a respectable rank for the credit facilities for Indian
business environment. As a result, Starbucks or its likely Indian partner may find it that much easier
for establishment of the joint venture and retail outlets in India. Besides this, there is an increasing
trend for franchisees in India and the improved credit availability bodes well for the prospective
franchisees too.
The global economic downturn seems to have impacted the Indian economy to a lesser extent as
compared to its western and more developed counterparts. The Indian economy has been growing
at an average of 7 % for the last decade and has maintained an above average growth despite the
global financial slump (www.cia.gov). The trend is likely to continue and this makes India a safe
investment proposition, especially if Starbucks is likely to consider entering India in the near future.
Almost 80 % of India’s industrial growth is attributed to specific parts of the country; mainly in the
states of Gujarat, Maharashtra, Haryana, Karnataka and Tamil Nadu (www.eiu.com) and this also
indicates that Starbucks might have to explore early opportunities in these areas as the majority of
urban population is located in and around these areas.
SOCIO-CULTURAL ENVIRONMENT
The increasing number of educated youth in India has also fuelled the skilled English speaking
services sector leading to increased per capita GDP and improved living standards for the people.
India’s per capita GDP (PPP) was estimated to at $ 2800 for the year 2008 compared to $ 2700 for
2007 (www.cia.org), which indicates that the people are able and willing to spend more money on
life quality improvement. This has implications on coffee consumption as coffee is still considered as
an exclusive beverage compared to the traditional tea. Whereas tea has a market penetration of
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nearly 94 %, coffee consumption has increased from 59 % in 2003 to almost 65 % in recent times
(www.indiancoffee.org). The explosion of cafes and gourmet coffee outlets is an indication of the
rising coffee culture in India (Appendix B) and an indication to Starbucks that the Indian market is far
from reaching saturation. The main competitors for Starbucks (CCD and Barista) have already
established close to 1000 cafes in India over the last few years (www.businesstoday.intoday.in) and
they continue to expand at a phenomenally high rate. While tea consumption is reaching maturity,
the expenditure on coffee is likely to grow at 9.5 % (Appendix C).
On the other hand, with almost 550 million people forming part of India’s labour force
(www.cia.gov), and with unemployment considerably high at 6.8 % (www.cia.gov), the cost of labour
is likely to remain low. This possibility is augmented by the fact that an increasing number of people
are moving away from the traditional occupation of agriculture and turning to urbanised locations
for manual labour that is better paying. This again provides a significant advantage for Starbucks to
consider while entering India, especially if it is to source its raw materials locally.
With the changing culture of the Indians toward coffee consumption and the increase in disposable
income amongst the youth, the cafes have come to act as a place for socialising and as hangouts
mainly for collegians and young people. Although this might sound as a highly lucrative situation for
Starbucks, it must be kept in mind that the normal cup of tea or instant coffee at a road-side stall in
India would cost no more than Rs. 5.00 (approximately $ 0.10). The Indian consumers are extremely
price sensitive, and in many parts of the country the Rs. 35.00 (approximately $ 0.70) for a cup of
Cappuccino (at CCD or Barista) may still be considered a luxury. The most challenging task for
Starbucks will be to match this pricing if it aims to be successful in India. With an average Starbucks
coffee priced at over $ 3.00 (approximately Rs. 150.00) (www.siliconindia.com), Starbucks might
possibly face an uphill task in wooing the Indian consumers. However, it remains an option for
Starbucks that while the local chains like CCD and Barista focus on the large low end consumer
market, Starbucks could cater to the needs of the smaller but growing upper segment, thus
eliminating competition and maintaining its niche image in the environment.
One area where Starbucks can focus on is the Corporate Social Responsibility (CSR) and its policies
towards the upliftment of the Indian rural community. For the purpose of this paper, it would make
sense to include the Environmental Factors of this analysis here as most corporations are not directly
involved with environment conservation and similar efforts have been included as part of their CSR
activities. This effort would go a long way if Starbucks is looking at cementing its position in the
Indian sub-continent. Although the company may not expect to open any outlets in the villages of
India, it can work towards the betterment of the lives of these people. The best place to start could
be the coffee planters and the workers in India so as to create a synergy between the plantation
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CBS FT MBA 2008-09
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owners, workers as well as the Starbucks community. This will prove to be beneficial for Starbucks
in the long run when many of these workers and their family members would be part of the urban
population and when Starbucks would become a part of their lives. Potentially, this may also create
strong sentiments for providing high quality raw material for Starbucks.
TECHNOLOGICAL ENVIRONMENT
Indian coffee has been improving in quality continuously and almost 80 % of India’s coffee is
exported. As mentioned earlier, Starbucks has entered into an alliance with India’s largest coffee
producer, Tata Coffee since 2004. The whole process leading to the forging of this alliance was the
fact that in 2004 Tata Coffee had won the Gold Medal for the ‘Best Robusta in the World’ at Grands
Crus de Café, Paris (www.tata.com). This also shows that the Indian coffee growers are seriously
working at improving the standards in order to bring India up to mark in the world of coffee. With
low cost of labour and easy availability of high quality coffee beans, Starbucks would be well placed
to do business in India. If Starbucks was to take this into consideration, the building up of strong
working relations with the Tata Group could also be the key to achieving lower costs and probably
Starbucks might even be able to match the prices offered by its local competitors.
LEGAL ENVIRONMENT
In the business environment, there exists a perception that the sanctity of the contract may not be
well respected in India. However, India has adopted the Geneva Convention and is bound to enforce
international legal proceedings. Although it may be accepted that limitations do exist in the Indian
legal system, an autonomous body, the International Centre for Alternative Dispute Resolution, has
been established to hasten domestic and international disputes. Moreover, the Indian judicial
system remains largely free from the political interference and pressures that other institutions in
the country are subjected to. Moreover, enforcement of copyright laws and trademark protection is
questionable as in spite of improvement in the system over the years piracy is widely prevalent
(www.businessmonitor.com). The case of ‘Starstruck’ and the ongoing legal proceedings with
Starbucks has already been mentioned above.
The Indian government’s willingness to become part of the Madrid Protocol might provide some
consolation to foreign firms as this will allow the extension of trademark protection into India. But
the fact that India still remains on the US Trade Representative’s (USTR) Priority Watch List, does not
fare too well for firms looking at entering the country. Another drawback might be that India has yet
to approve the United Nations backed World Intellectual Property Organisation (WIPO) treaties
(www.businessmonitor.com).
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CBS FT MBA 2008-09
Term Paper-International Business Page 8
One concern that businesses in India cannot overlook is the prevalent corruption at all levels in the
business environment. According to the Bertelsmann Foundation 2008, the political system in India
has an inclination towards maintaining discretionary policies and that corruption has been found to
be deep-rooted at every level of the political and administrative systems. Moreover, the Indian
environment personifies the definition of emerging economies in that corruption, weak institutions
and political crime have undermined the effectiveness and accountability of the government
(Freedom House 2008). The Transparency International Global Corruption Report 2008
(www.transparency.org) has ranked India at a poor 72 out of the 180 countries included in the
survey and the World Bank Report (www.doingbusiness.org) has shown poor numbers for Indian
business environment (Appendix D). However, all does not look so grim for foreign companies like
Starbucks, as India has shown significant improvement in its reforms and in its performance in
trading across borders and that should boost FDIs into India.
CONCLUSION
In spite of some serious drawbacks mentioned above regarding the business environment for
Starbucks in India, the advantages as brought out with the help of the Eclectic Paradigm far
outweigh the limitations especially if Starbucks focuses its attention on the socio-cultural aspects of
the Indian business environment. The fact remains that India is an emerging economy and like all
emerging economies, it will be plagued by certain shortcomings. Over and above this, the retail food
market in India is expected to grow by 9 % (www.economictimes.indiatimes.com, www.ibef.com)
and although the traditionally tea-drinking country is the largest producer and consumer of tea in
the world, coffee has made steady inroads into the minds and lives of the people serving nearly a
million people every day (www.indiacoffee.org). Starbucks has already entered most of the
emerging economies except India, which seems to surprise everyone including its potential
competitors in India, and it is clear from the analysis and the arguments provided above that the
time is just right for Starbucks to try its luck now, albeit cautiously and with adequate preparation.
Of course, there will always be groups and organisations ready to protest against such companies
especially in emerging economies where the sentiments towards local companies are inherently
strong. Like the criticism by Taylor Clark in his book ‘Starbucked’ (Appendix E), Starbucks should
expect these and be prepared to overcome them with finesse. After all, India is (after China)
undoubtedly the most developing amongst the emerging economies (Appendix F). Finally, how
Starbucks decides to make its mark on the Indian gourmet coffee market and when it does so has to
be left to the management of the company. However, it might prove beneficial for the company to
dwell a bit upon adopting a multi-tier strategy and thinking beyond conventional greenfield entry
modes in order to harness the immense potential that India holds.
Bhooshan Parikh
CBS FT MBA 2008-09
Term Paper-International Business Page 9
Appendix A
STARBUCKS CORPORATION: FISCAL 2008 FINANCIAL HIGHLIGHTS
Source: <www.starbucks.com>: Annual Report 2008
Bhooshan Parikh
CBS FT MBA 2008-09
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Appendix B
INCREASE IN COFFEE CONSUMPTION IN INDIA (1991-2005)
Coffee consumption in India
Estimated Domestic Consumption (1991 - 2005)
Calendar Year Quantity (in MT)
1991 55000
1992 55000
1993 55000
1994 55000
1995 55000
1996 55000
1997 55000
1998 55000
1999 55000
2000 60000
2001 64000
2002 68000
2003 70000
2004 75000
2005 80200
Source: <http://www.indiacoffee.org/coffeeinindia/default1.htm#consumption>
Bhooshan Parikh
CBS FT MBA 2008-09
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Appendix C
INDIA: CONSUMER EXPENDITURE (2004-2009)
Source: <www.eiu.com>: Country Profile 2008: India
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CBS FT MBA 2008-09
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Appendix D
DOING BUSINESS 2009: COUNTRY PROFILE FOR INDIA
Source: <www.doingbusiness.org >: Doing Business 2009: Country Profile for India
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CBS FT MBA 2008-09
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Appendix E
REVIEW OF BOOK ‘STARBUCKED’ BY TAYLOR CLARK Starbucked-Taylor Clark, 2007, Little Brown and Company, NY
But the hugely successful coffee chain has also been the object of
criticism. Clark, who met more than a hundred sources and spent
countless hours reading the work of other authors, deals with five
thorny issues related to the company. These are accusations that a)
Starbucks drives local independent coffee houses and cafés out of
business; b) the company exploits coffee growers in poor developing
countries; c) generically coffee is bad for health; d) Starbucks
exploits its employees and, finally, e) that Starbucks is
homogenising the world by destroying cultural diversity. Apart from
the fifth accusation, which Clark seems to subscribe to, Starbucked,
by and large, attempts to disprove all of these charges, often quite
convincingly.
Source: <http://businesstoday.intoday.in/index.php?option=com_content&task=view&id=3635&issueid=56>
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CBS FT MBA 2008-09
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Appendix F
INDIA AS AN EMERGING ECONOMY: A COMPARISON
Source: ‘India’s new opportunity – 2020,’ Report of the High level strategic group in consultation with The Boston Consulting
Group
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