The next battleground in the coffee wars

India's tea-drinking culture will make it challenging for Starbucks and Dunkin' Donuts to break into the beverage market.

By Trefis Mar 5, 2012 1:03PM
Image: India (© Donald Edwards/age fotostock)Barely two weeks after Starbucks (SBUX) announced plans to partner with Tata Beverages to open its first outlet in India, Dunkin' Donuts revealed that it will also open its first outlet in the country by June, setting the stage for a heated battle in the coming years. 

Dunkin' Donuts is owned by Dunkin' Brands (DNKN). Apart from Starbucks, Dunkin' Brands also competes with McDonald's (MCD), Krispy Kreme, Dairy Queen and Cold Stone Creamery to name a few.

Dunkin' Donuts has partnered with Jubilant Foodworks, and plans to open 80 to 100 outlets in the next five years in India. Jubilant Foodworks also operates Domino's Pizzas in India.

Dunkin Brands Dunkin Donuts Intl Total Number of Outlets

In the U.S., Starbucks can charge customers a premium as it is perceived to offer superior coffee. However, India traditionally has a tea-drinking culture that may not appreciate paying more for a "superior" cup of coffee. This means that Dunkin' Donuts will have an edge over Starbucks in terms of pricing. Besides, the two companies will also have to deal with other well-established players, such as Britain's Costa Coffee, and local companies, like Cafe Coffee Day and Barista.

Coffeehouses need to adapt to Indian menus

The typical Indian customer sees a beverage as an accompaniment to food. The idea of spending money for a stand-alone drink is a new concept, although it is slowly gaining followers. Many Indian customers prefer to spend money on value, and food is something they perceive to have greater value than a beverage. Hence, in our view, the coffeehouses will need to provide an extensive menu suited to local tastes in order to succeed.

And just as in the West, coffeehouses in India will have to compete against the ubiquitous McDonald's and Yum! Brands (YUM) outlets. Restaurants like McDonald's and Pizza Hut, with their extensive offerings in both food and beverages, provide a more holistic meal experience. A couple of months ago, McDonald's also revealed its plan to double the number of restaurants in India to 500 by 2014. As tempting as the market may seem, it is not going to be easy for new entrants.

We estimate a $29 price for Dunkin' Brands, which is in line with the market price.



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