Starbucks plans expansion into India this summer

Can the coffee company conquer a country of tea lovers?

By Feb 1, 2012 9:40AM

Purestock/SuperStockBy Zacks Equity Research
Starbucks Corporation (SBUX) is slated to make its way into India by the end of August. Starbucks, along with Asia's largest publicly traded coffee grower, Tata Coffee Ltd, is planning to open 50 stores, which will spread its Frappuccino aromas either in Mumbai or in the capital, Delhi, the two largest cities of the country.

A year back, Seattle-based Starbucks entered into an agreement with Tata Coffee Ltd. Per the agreement, Starbucks got the right to procure coffee beans from India and engage in sourcing and roasting of beans while exploring the possibility of opening outlets in the country.

Although the Indian law allows 100% foreign ownership of single-brand retail, the coffee maker opted for a 50-50 joint venture with Tata Coffee, to avoid the skyrocketing real estate costs in India.

Starbucks has promised that the coffee served at the stores in India will be 100% locally sourced. The food items served at the stores will also be locally sourced. Tata will use the brand name of Starbucks and serve its lesser popular items like Tazo Tea and Himalaya drinking water through future Starbucks stores.

Moreover, for the first time in Starbucks' history, the white and green logo of the coffee giant will have another brands' name along with it. The stores will be branded as "Starbucks Coffee - 'A Tata Alliance.'"

Reportedly, the coffee outlets are about to open in shopping malls, office parks, universities, airports and train stations. The joint venture states that stores will also be opened at properties owned by Tata group of companies, for example the Taj chain of luxury hotels.

The Tata-Starbucks joint venture will aim for the fast growing nouveau riche of the country and Starbucks hopes to capitalize on the rising aspirations and fattening wallets of many Indians.

India is better known as a country of tea lovers. The average Indians mostly crowd at the road side tea stalls for a cup of chai. For the newly minted urban Indian bourgeoisie, Starbucks can be a status symbol like a European fashion label. However, although the coffee giant plans to target the top-end of the Indian market initially, its expansion plans also target the B and C towns later.

Café Coffee Day, a local chain, currently dominates the Indian market. Barista, owned by the Italian company Lavazza S.p.A, also has numerous outlets in the fast growing coffee market of India. Coffee exports to India shot up by 56% last year.

The joint venture will help Starbucks to nurture its aggressive plans for the Asian region. Starbucks management also revealed that it plans to open 3,000 stores in the near future in the Asia-Pacific region and to support that it will undertake an intense marketing plan for India.

Many other food chains have eyed the Asian subcontinent for long. Although these companies are ruling their respective markets in U.S., they are exploring these emerging markets as the American market has become saturated.

McDonald's Corp. (MCD) and Yum Brands Inc.'s (YUM) KFC and Taco Bell, have been expanding their presence across the country, thanks to the growing international tastes of India's young people.

Currently, we prefer to be Neutral on Starbucks' stock. Starbucks holds a Zacks #2 Rank, which translates into a short-term Buy rating.


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