Starbucks‐TATAAllianceMarketingStrategy

ByMartinaKancheva

UniversityofBath

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AccordingtotheHarvardBusinessSchool,afterStarbucksfirstenteredoneofthemosttea

lovingcountries(England) in1998,teasalesfellevenascoffeesalesroserapidly.By2008,

annualsalesofcoffeeinBritainhadexceededsalesoftea.India,whereStarbucksplansto

penetratethisyear,isalsonotahabitualcoffeedrinkingnation.Thecurrentpaperaimsto

proposeastrategyforenteringtheIndianmarketwhilethetakingintoaccountlocaltastes

andlifestyle.

The analysis begin with an overview of the Indian Coffee Retail Market; continues with

examiningthestrengthsoftheStarbucksbrandandthebenefitsofajointventurewiththe

India's largest coffee producer and exporter. The report will finally propose the most

effectivemarketingstrategyforStarbuckstoentertheIndiancoffeeindustryandgetapiece

ofthe'marketpie'.

1.SituationAnalysisoftheIndianCoffeeRetailMarket

As coffee shops may be nearing saturation point in the US and Europe, Starbucks has

identified the potential to expand in emerging markets like China and India. The coffee

industryisexpectedtocontinuegrowingthroughatleasttheyear2015andevenlongerin

emergingmarkets(Lingle2007).

As there no framework that provides a full

picture of the dynamics within a particular

market, a more holistic approach will be

adopted. Economic, Legal and Socio‐cultural

factorswillbeexaminedfromaPESTELanalysis

and the Power of Suppliers, the Threat of

CompetitorsandtheThreatofSubstitutesfrom

thePorterFiveModel.

Picture1:Porter’sFiveForcesModel

1.1.EconomicFactors

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TheIndianeconomywillexpandanestimated6.5percentthisyear,thefastestpaceamong

developingAsianeconomiesexcludingChina,accordingtoJanuaryestimatesfromtheWorld

Bank (Agrawal and Sharma, Bloomberg 2012). TheReserve Bankof India projects seven

percent growth for the twelvemonths endingMarch. As sales contribution in theUS has

declinedinthepastdecadetolessthan70%inthelastfiscalyear,Starbucksisexpandingin

fastdevelopingmarketslikeChinaandIndia.

India is one of the emergingmarkets throughout the world that is becoming a spending

orientedcountry.ThepersonaldisposableincomepercapitainIndiahasdoubledbetween

2000‐01 and 2009‐10 resulting in improved purchasing power (Deloitte 2011). Thus, its

upperandmiddleclassesaremoreabletospendmoneyoncoffee,beveragesandfoodin

coffeehousesthatmightnothavebeenthoughofasanecessityinthepast.

1.2.LegalFactors

India’s government on January the 10th raised the ownership limit to 100% for foreign

retailers selling a single brand, a decision benefiting companies including Starbucks

(Passport,Euromonitor2011).However,StarbucksandTATAwillpossessequalsharesinthe

ventureasbothcompanieswillbothbenefitfromsuchanalliance.

1.3.Socio‐CulturalFactors

Indiaisa“traditionalteadrinkingnation”(Vasudha2011,pp.2)whichisprovenbythefact

that69.9%ofthehotdrinksmarketisdominatedbytheteaindustry(Figure1).

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Figure1.IndiaHotDrinksMarketSegmentation

EventhoughinIndiateawasthecommonbeveragefortheupperandmiddleclasses,now

coffeeisbecomingastatementofwealthandprosperityamongthetraditionalsectorofthe

Indian population, i.e. people more resistant to changes (aged above 30) (Bose, Reuters

2012).Thisphenomenonmightbeexplainedbythefactthatasmoreandmoreeconomies

head towards industrialization, those economies also begin to be influenced by

westernization.

Westernization is also easily adopted by the younger generation in India (18‐25 years).

Researchshowsthat72%ofcoffeeshopscustomersarestudentsandyoungprofessionals

(Euromonitor 2011). Thepopularity of specialist coffee shops among youths as a place to

socialiseregistered18%growth in2010;withaveragetimespentonatablehigherthat in

other countries. Spending capacity of youth of India is increasing, as well as their brand

consciousness.60%ofIndia’spopulationisbelowtheageof30leadingtopopularizationof

brandsandproducts(Deloitte2011).

As illustratedabove, there isamarketpotential subject to ‘dualeconomies’, i.e. targeting

boththemodernsector(youths)andthetraditionalsector(nationalisticindividualsresistant

tochanges)(Nuttall2011).

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Intheprocessassessingthegrowthopportunitiesinthespecialtycoffeeindustry,onemust

alsoexaminethecompetitivelandscape.

1.4.BargainingPowerofSuppliers

Themajorthreat inthespecialtycoffee industry isthepowerthatsuppliershaveoverthe

priceofcoffee.Arabicacoffeepricessoared77%in2010whichcausedconcernstocoffee

retailers (Murphy 2011). Arabica coffee is one of the most sold brands of coffee in the

specialtycoffeeindustry.Withpricesforthattypeofcoffeeskyrocketing,ithurtthebottom

lineofcompetitors,especiallythosethatthriveonalowcoststrategy.However,Starbucks

strategy can be regarded as ‘charging premium price for premium product’; and it is

supplyingcoffeeformtheirpartner,sothepowerofsupplierscanberegardedasweak.

1.5.CompetitiveRivalrywithintheIndustry

The second threat is from specialty coffee competitors that Starbucks will face when it

enters the Indian market.Well‐established coffee shops chains, such as Café Coffee Day

(CCD)andBarista,enhancedtheirpan‐Indiapresencein2011.In2010,CCDandBaristahad

970and200stores,respectively,andtheyaimtocontinueexpandinginthenextfewyears

(Datamonitor2010).Meanwhile,severalrelativelynewplayers,suchasCostaCoffee,Coffee

Bean,Gloria Jean’s and Java Coffee, are trying to ‘get a piece of the pie’ in Indian coffee

retailing.Boththesefactorsdroveon‐tradeconsumptionoffreshcoffeebeansin2010,with

volumesgrowingby12%(Datamonitor2010).On‐tradesaleshaveemergedastheprimary

sales channel for fresh coffee beans, in the absence of any substantial off‐trade

consumption.However,“thepopularopinionwasthatwithonlyabout1500cafestheINR

20billionmarketprovidedenoughroomforgrowthandcouldaccommodatemoreplayers.”

(Vasudha 2011) Even that major players started expanding, there is potential for further

growthintheIndianCoffeeRetailMarket.

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1.6.ThreatofSubstituteProducts

A third relevant threat in the case of Starbucks entering India is the threat of substitute

goods. For instance, consumers may opt to reduce their caffeine intake due to health

concerns,whichwill influencecoffeeconsumptionsomewhat. Insuchcase,herbalteaand

functional drinks can be potential substitutes. However, considering the increased

consumption of coffee in recent years, it is unlikely that such substitution would

substantiallyimpactuponsales.Overall,thethreatofsubstitutesintheIndiancoffeemarket

mightbeconsideredasmoderate.

2.Starbucks

ThissectionaimstoexaminethestrengthsoftheStarbucksbrandandcriticallyevaluatethe

rationalebehindtheiralliancewithTATA.

2.1.SWOTAnalysis

SWOT analysiswill be used to evaluate Starbucks’s Strengths,Weaknesses, Opportunities

andThreats.

Strengths

‐ Leading retailer and roaster for brand

specialtycoffeeintheworld;

‐ Brand image with the motto ‘The

StarbucksExperience’;

‐ 17000storesacross57countries;1500

inChinaalone;

‐ Strongbalancesheet;

‐ One of the strongest franchises in the

world with more than 6 500 licenses

Weaknesses

‐ High pricing which not everyone can

afford;

‐ Starbucksrefusestoguaranteethatmilk,

beverages, chocolate, ice cream, and

bakedgoodssoldinthecompany’sstores

are free of genetically‐modified

ingredients;

‐ FocusedmoreonUSdomesticmarket;

‐ Starbucks Workers Union was made

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shopsintheworld;

‐ Starbucksisknownforprovidingsuperior

productsandservices;

‐ Have loyal customers in every country

thathasentered;

‐ Sophisticated atmosphere, music,

interiordesignandartwork;

‐ Havealotofflavoursvariation;

‐ Limitednumberofstrongcompetitors;

‐ Highmarketshareandmarketgrowth.

because some employees complain

about themanagement style within the

company;

‐ NoexperienceincountrieslikeIndia.

Opportunities

‐ Highconsumerisminemergingmarkets;

‐ Easier to penetrate market because

Starbucks is selling as experience, not

justasimpleproduct;

‐ Many of Starbucks coffee are using

organicbeans;

‐ SomeofStarbucks’sbeansareharvested

in Indonesia island of Sumatra and

Sulawesi. Starbucks are purchasing at

premium prices to support local

community and sustainable production.

Starbuckspaysanaveragepriceof$1.20

per pound against the commodity

averagepriceof$0.40–0.50perpound;

‐ FairTradeProductscanbeoffered.

Threats

‐ Globalfinancialcrisismadepeoplespend

less on good that are not regarded as

necessities;

‐ Increasinghealthconcernofthenegative

effectofcoffee;

‐ Starbucks domination is driving small

cafesoutofthebusiness;

‐ Threatof substituteproducts in cultures

where there is a strong preference for

tea, like China, India and UK.

Table1:Starbuck’sSWOTAnalysis

AfterexaminingthestrengthoftheStarbuckscompany,oneshouldexaminethestrengths

ofthejointventurethatStarbuckswillenterwithTATAGlobalBeveragesGroup.

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2.2.TheJointVenturewithTata

StarbucksenteringintotheIndianmarketwillbeintheformof50/50jointventurewiththe

TATA Global Beverages Group. “Share prices of both companies soared following the

announcement of the pact.” (Vasudha 2011, pp. 10) This is the first time Starbucks is

enteringthemarketwitha localpartnerandwillbeco‐brandingtheirstoresandproducts

with their counterpart. The Indian outlets will be called Starbucks TATA Alliance. The

partnershipwillenableanexpandedrangeofbeverageofferingsforIndianconsumers.One

of these being the Starbucks’s premium tea product Tazo that will be available in Indian

outletsrenamedasTATATazoTea.

Themajoradvantageofthealliancewillbethat“theknowledgeandunderstandingofthe

IndianmarketcanbebroughtbyTATAGlobalBeverages.” (Vasudha2011,pp.10)Entering

intoastrategicpactwith“theworld’slargestintegratedcoffeeplantationcompany”should

enable Starbucks to ensure sustainable profit growth in India. Also, TATA Tea is the tea

market leaderwith18.4%share.Starbuckswillalsobenefit fromTATA’sexperience in the

Indianmarketregardingdifferenttastes indifferentregions;thusmakingsure itoffersthe

mostpreferableblendofbothteaandcoffeetocustomers.

Apartfromproductandlocalpreferencesknowledge,StarbuckswillbenefitfromTATA

Global’sinfrastructure.InIndia,thereisthechallengeofbalancinghigherrentalsand

profitabilitygiventhelackofinfrastructureinIndiaalongwithinflatingrealestateprices.

StarbucksisastepaheadofcompetitorsduetotheiralliancewithTATAGlobalGroup.TATA

hasalocalknowledgeontherealestatemarketandtheyhaveopportunitiestoleverage

theircapabilitiesinthisarea.StarbuckswillbeabletouseTATA’scurrentinfrastructureto

effectivelygrowthebusiness.

TATAGroupwillalsobenefitfromthepact.TATA’sexperienceinretailingisnotsufficientto

openacoffeeretailshopontheirown;so,byenteringinsuchalliancetheywillgainavast

amountofknowledge.Also,TATAGlobalBeveragesproducesbottledHimalayanwater

whichmightbeofferedinStarbucksstoresaroundtheworld.

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Starbucks should also consider the possible disadvantages of such joint venture. After

gainingenoughknowledgeinretailingindustryandknowingtheIndianmarketbetter,TATA

mightdecidetocompetewithStarbucksinsteadofworkingwiththem.Inaddition,potential

conflictmightoccur regarding thestrategyof theallianceandhow it shouldbemanaged.

Such jointventuresmightalsoaccruesignificantcostsofcontrolandcoordination;andon

topofthat,profitissharedwithapartner.

3.MarketingStrategy

TheHarvardBusinessSchoolFramework(Figure2)(Comrie2012)willbeusedasamodelto

explainthemarketingstrategyinthecurrentproposal.

Figure2.HarvardBusinessSchoolFramework

ThemarketinganalysiswasconductedinSection1.

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3.1.CaptureValue

In this section, toolsandtechniqueswillbeusedtoexplainhowStarbuckscancreateand

capturevaluefortheirproducts.

3.1.1.MarketSegmentation

Apartfromthedemographiccharacteristicspresentedinpartoneoftheanalysis,marketers

should also consider psychographic variables such as interests and lifestyles. In general,

India’scoffeeculturehaschangedthewayyoungIndianssocialise.Inacountrywherethere

isalimitedbarculture,andwheredrinkingalcoholisstillnotallowedinmanycircles,ithas

provided an acceptable and safe outlet for people, particularly young Indians, to share a

drink(Vaidyananthan,BBC2012).

As mentioned earlier, coffee is becoming a statement of wealth and prosperity among

peoplewithhighdisposalincome,i.e.individualsinemployment.

3.1.2.TargetMarketSelection

Themarketingstrategywillfocusontargetingbothgroups–collegeanduniversitystudents

(aged18‐25)intheshorttermandworkingprofessionals(25‐40)inthemediumtolongrun.

Also,touristandfrequentflyerswillbeatargetaudienceinthelong‐run.

3.1.3.ProductandServicePositioning

It is essential to have a unique selling point to position Starbucks above competitors

(Pickton 2005). In TATA‐Starbucks customers will be able to rely on genuine service, an

invitingatmosphereandasuperbcupofpremiumcoffeeorteaeverytime.

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3.2.SetMarketingObjectives

Inorder tomake themarketing communicationsobjectivesas comprehensiveaspossible,

the SMART approach has been used, to ensure the objectives are specific, measurable,

achievable,realistic,timedandtargeted:

Theproposedstrategyprovidesaplan forTATA‐Starbucks toopen50storesby theendof

2012inmajormetrocitiesandsecond‐tiertownsofferingpremiumcoffeeexperiencetothe

primarytargetgroupofstudents(aged18‐25)andworkingprofessionals(aged25‐40).

3.3.MarketingMix(4Ps)

ThemarketingmixwillbeexaminedtodetermineStarbucks‐TATAuniquesellingpoints,i.e.

theuniquequalitiesthatwilldifferentiatetheirproductsandservicesfromthoseof

competitors.

3.3.1.Product

AnilDharker(2012),aMumbiancolumnistandsocialcommentatorinIndia,pointsoutthat

whenaforeignplayerseesacommercialopportunityandentersthenewmarket;andthen

itadaptsgivingMcDonaldsasanexample(Vaidyanathan,BBC2012).However,thisshould

notbethecaseandStarbucksshouldhaveaclearstrategyabouttheirproductrange(both

drinksandfood)it isgoingtoofferpriorenteringtheIndianmarket.CostaCoffeeShops in

India, for instance, offers products like Apple Pie Latte, Latte Caramellato, Coconut Hot

Chocolate,etc.suitedforIndiantaste(CostaCoffeeIndiaonline2012).Therefore,Starbucks

should adapt their drinks in order to cater local preferences. Ice coffees should also be

includedinStarbucks’smenuasIndianshaveastrongpreferenceforthembecauseofhigh

temperaturesduringsummer.

However, one should not ignore the fact that India is a tea loving country even though

people “prefer to consume tea at home because finding a perfect cup of chai outside is

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really tough," said Smiti Singh, a Bangalore‐based software engineer, who drinks at least

four cupsof tea aday (Madhok,Reuters 2012).TATATea (a unit of the software‐to‐steel

TATAconglomerate) istheworld’ssecond‐largestbrandedteacompany,sotheirpremium

teaproductsshouldbealsoofferedtocustomersapartformtheTazoTea.

ThebiggestdistinctionisnorthIndia'spreferenceforbread,meat,andchai(tea),compared

to the south's preference for rice, pulses, and coffee. Food‐wise, paninis, sandwiches and

wrapswithmeatbutnotwithbeef.ThecowisconsideredsacredbymostHindusandhence

beef is considered taboo in themajorityof Indian states. Predominant foodoption in the

southshouldbethebistroboxeswithriceandpulses.

3.3.2.Place

The first Starbucks locations are scheduled to open in August inNewDelhi andMumbai.

TATA Starbucks might consider the option of opening on the 15th of August, India’s

IndependenceDay.Starbucks‐TATApartnershipisexpectedtoopen50storesinthecountry

by the end of 2012. Starbucks also plan to explore the retail properties of Croma, Star

Bazaar, Trent and Indian Hotels belonging to the TATAGroup to open stores and also to

“rope inanother franchisee for standalonecafes in the future.” (Vasudha2011)This isan

efficientwayoftargetingindividualsonbusinesstripsinNewDelhi,forinstance,whoprefer

to go to a place which is familiar for a cup of coffee; or tourists, who do not want to

experiencethelocalculture.Asaninternationalbrand,Starbucksshouldalsoopenkiosksat

airports; thus, not depending solely on Indian tastes and preferences as airports are

occupiedwithpeoplefromallovertheworld,whowillrecognisetheStarbuckslogo.

In Mumbai (most populous city in India) Starbucks should position the stores mainly in

shopping centres, cinemas, near universities or cultural venues as it is commercial and

entertainmentcapitalofIndia.

Coffeeshopsnormallyclosearoundeleveno’clockatnight,soStarbucksshouldconsiderthe

option of closing at midnight or even one o’clock in the morning; thus, becoming the

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preferredvenueforyoungpeople.Also,providingsomeguitarfor jamsessionsorkaraoke

nightsonFridayorSaturdaymayattractevenmorepeople.

Ascoffeechainsareseenasplacestosocialiseandpeopleaged25‐40willbealsoatarget

group of the Indian population, Starbucksmay consider opening a new type of Starbucks

coffee calledStarbucks Lounge, forexample. Theatmosphere in the loungeswill bemore

relaxedandtheinteriormoreexpensive;thuswealthyindividualswillbeabletoshowtheir

class.

Ingeneral,expertsfeltthatlargestcaféchainsinIndialikeCCD,BaristaCoffeeandQwiky’s

are targeting thesame locations,mainly the largecities.Geographicalexpansionhashuge

possibilities as cities are not saturated and the market is not limiting at all. Therefore,

Starbucks‐TATA should aim to gain competitive advantage in smaller cities as well in the

medium to long rum as people there are more likely to be brand‐loyal as opposed to

customersincosmopolitancities.

3.3.3.Promotion

PromotionalactivitieswillnotbeanalysedindetailsastheyshouldbeinlinewithStarbucks

promotionsworldwide.Besides, retailers in India relyheavilyonword‐of‐mouth (personal

communication).TheStarbucksCardwillbeintroduced–aconvenientwaytopayforyour

drinksandearnrewardsforyourpurchase.Furthermore,“in‐storepromotionsaccompanied

bynewproductssuchasdrinksandaccessoriessourcedfromtheregions”shouldbepresent

inIndiaaswell(Vasudha2011).

Even though it is highly unlikely for a coffee chain in India to advertise on TV, Starbucks

mightconsiderthatidea.IntheUS,therearethreeplacesthattheaverageAmericanspend

his time duringweekdays ‐ at home, in thework place and in Starbucks. So, they should

somehowshowthewesternlifestyletotheIndianandaTVadvertisementatthedayofthe

launchshoulddothejob.

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Furthermore, it is the first50/50 jointventure forStarbucks; so,bothStarbucks andTATA

Groupwillbenefitfromco‐marketingactivities.

3.3.4.Price

Historically Starbucks has retained it US pricingmodel in almost everymarket they have

entered, but should they follow the same pattern in India? Starbucks should adopt their

pricingbasedonthedemandformtheIndianconsumer.AfteranalysinganalysedtheIndian

market forhotdrinksand thepriceelasticityofproducts,probably thepricesofproducts

shouldbeatleast30%lowerthanintheUS.

Conclusion

IfStarbucks can adapt to thepeculiarities of the Indianmarket, coffeemay soonbecome

manyIndians’cupoftea.

Based on the analysis presented above, the current proposal contradicts Levitt’s

globalisationtheorysuggestingthat“companiesmustlearntooperateasiftheworldwere

onelargemarket– ignoringsuperficialregionalandnationaldifferences.”(Levitt1983,pp.

92)InIndia“F&Bandretailtypicallyisveryclosetolocalcultureandtaste”(Vasudha2011);

thus, the so adaptation or ‘glocalisation’ strategy should be adopted (Robertson 1994).

Glocalisation will serve as a mean of combining the successful Starbucks strategy in

“providingtheemotionalneedsaroundtheworld”(Vasudha2011)whiletakingintoaccount

localtastes.

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