Tag: Starbucks

Starbucks Moves to the Express(o) Lane in China

Starbucks is on a caffeine-fueled growth spurt in Asia. According to a report from the company newsroom, Starbucks plans to go from around 500 stores to at least 1,500 stores over the next three years, and predicts that its operations in China will be its second largest, outside of the U.S., by 2014. Starbucks coffee stores are currently located in 48 Chinese cities.

The company has had mixed success with expansion, however. Although it has strongly rebounded from flat sales in the U.S., it faces continuing resistance in Europe — where “fickle regional palates” and a sagging economy have weighed down performance, according to a recent New York Times article. Starbucks has yet to make a profit in France, the article adds, and “even in the parts of Europe where the company does make money, sales and profit growth lag far behind results in the Americas and Asia.”

Given this uneven track record, and continuing uncertainty over the global economy, how successful will Starbucks be in China?

“It has already been proven that there is a segment of consumers [willing to buy] premium coffee – given the huge success that Starbucks enjoys in big cities of China,” says Wharton marketing professor Qiaowei Shen. “In recent years, the number of coffee shops – national chain stores or local independently owned stores – that target high-income white collar [consumers] has been increasing dramatically. This is another piece of evidence to show that there is demand for high quality premium coffee, and the potential demand is likely to grow in the future.”

Also, according to Shen, the assumption that Chinese consumers tend to favor tea over coffee “may not be true for the young generation in China who grew up with Western food and drinks — such as McDonalds, KFC and Pepsi.”

At the same time, Shen adds, “Starbucks needs to be cautious about its expansion plan. The goal of tripling the number of stores in China within three or four years indicates that Starbucks is not only going to add new stores in the first-tier and second-tier cities, but is also expanding to third-tier or even smaller cities….. For large cities, the concern with proliferating stores is within-chain cannibalization, when the expansion rate exceeds the rate that the pie grows. For the new markets – third-tier or smaller cities — the concern is whether premium pricing is sustainable in less Westernized and economically less developed places. On the other hand, the aggressive expansion plan could potentially fend off some competitors and strengthen Starbucks’ foothold in the Chinese market.”

Wharton management professor Lawrence Hrebiniak is also enthusiastic about the expansion — with a few caveats. “China looks very good for Starbucks,” he states. “Coffee sales are up significantly as traditional tea drinkers [opt] for the newer form of caffeine. Sales are booming — revenue is up 38% — and margins are high, 35% versus 22% in the U.S.” When the company raised prices last year in China, he adds, “demand actually went up, a sign of a luxury good. Chinese customers seem to be enjoying the socializing at Starbucks’ sites, much like the original craze in the U.S. In addition, coffee sales forecasts show predicted increases of more than 50% by 2015.”

So, is there anything at all to be concerned about? “Perhaps,” he says. While the projected rate of growth is very robust — 200% in only three years — not all cities in China are alike. “Smaller cities with lower income levels may not react as strongly as their larger counterparts. Lower economic growth may affect the smaller markets more than the larger ones. And management attention definitely will be taxed somewhat as the top planners try to grasp and control such rapid growth.”

A “slightly slower, incremental approach” may be in order, he suggests. For example, the company should avoid undertaking too many initiatives simultaneously, such as openings, marketing programs, management controls and so forth. “This can tax even the best management team. China looks good and deserves a commitment to expansion and growth, no doubt about it,” he states, but “taking things a bit slower and opting for a less hectic growth program to avoid the problems of a too-large, complex change” may prove more successful, he notes.

For his part, Wharton marketing professor John Zhang suggests that Starbucks may not be moving fast enough. “The fact of the matter is that the U.S. would have a good year if its economy grows by 3%, and China would have a bad year if its economy grows by only 8%. Given the size of the China market and the projected high growth rate — 7% to 8% — for the coming decade, investors if anything may question why the company does not aim to grow faster. For instance, KFC already has more than 3,000 restaurants in 650 cities in China and is adding a new one every day. In comparison, Starbucks is definitely not turbo-charging its growth.”

There is “no question that the American brand is a big draw,” Zhang adds. “More importantly, consuming a cup of bitter-tasting, very expensive and foreign liquid is a sure way for someone to stand out as one of the sophisticates in China. Indeed, given the popularity of the brand” there, Starbucks can surely ride on the swelling middle class and fast urbanization in years to come. The risk lies in opening stores too slowly and losing the rare window of opportunity.”

As for the competition that Starbucks faces in China, Shen cites McDonald’s as one candidate, “but probably not the major one [because] McDonalds’ coffee is much cheaper and attracts different segments of consumers…. Currently, major competition comes from similar coffee chain stores from Taiwan and Japan, with some well-known brands. Competitors also include bakery stores that serve high-quality coffee. Many independently owned local coffee shops also are starting to populate the large cities. They typically have a very unique style and beautiful atmosphere,” attracting the same type of consumer that Starbucks is targeting. “The local competition,” Shen adds, “is intensifying.”

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India’s Largest Coffee Chain Prepares to Take on Starbucks

The coffee wars are beginning to heat up in India. Days after global coffee giant Starbucks unveiled plans to enter the Indian market, Café Coffee Day (CCD), India’s largest coffee chain, introduced a pre-paid card called Café Moments designed to compete with the Seattle company’s extensive customer loyalty programs.

Customers can fill up their Café Moments cards with Rs. 100 to Rs. 5001 (approximately $2 to $100) on an ongoing basis and use it at CCD outlets across the country. The validity will be for one year from the time of loading money onto the card. Apart from providing convenient cashless transactions, the Café Moments pre-paid card offers special benefits like discounts, free beverages and surprise gifts. The card has been launched in Bangalore, where CCD is headquartered. By end of March it will be available in eight cities and at locations across India by mid-May.

This may be a first in the Indian café market, but Starbucks is way ahead on this front, having introduced pre-paid cards over a decade ago. Starbucks cards are accepted at most locations in North America, including outlets at airports and inside grocery stores. The cards may also be used at most stores in Australia, Hong Kong, Ireland, Mexico and the United Kingdom. During rush hours, the cards come in handy for speedy transactions. Also, customers can check their balances on the company website, activate an automatic reload function, get refunds on unused cards, protect their cards against loss or theft, and take advantage of a host of other discounts and freebies.

According to K. Ramakrishnan, CCD’s president of marketing, the chain plans to position the cards primarily as a gift option that consumers can purchase for family or friends. But for the CCD card to be more than a clone of Starbucks’ program, observers say Ramakrishnan and his team will have to think more innovatively and add on a host of benefits. Otherwise, by seeding the pre-paid card concept among Indian consumers, the chain could end up only making it easier for Starbucks to find takers for its card once it becomes available.

While Starbucks is expected to impact CCD’s business, the Indian chain is currently on an expansion spree. CCD currently has around 1,275 outlets across the country, but plans to increase that number to 2,000 by the end of 2014. In the meantime, the chain’s food menu is being revamped and expanded, and the vendor base is being accordingly strengthened.

CCD is also becoming more active in Internet space. “We have 1.3 million fans on Facebook and this number is growing daily,” Ramakrishnan notes. “We see it as a great vehicle for communication and feedback and, most importantly, for co-creating new initiatives — like new food items, for instance.”

Ramakrishnan adds that CCD is well positioned to take on Starbucks and other global players that are expected to launch outlets in India later this year. “We are fully integrated from bean to cup [CCD is part of Amalgamated Coffee Beans, the largest individual coffee plantation owner in Asia]. With over 1,200 cafes, we have a large customer base; we understand the youth and their trends. And we stand for an Indian mass value brand.”

But Starbucks also brings strengths to the table, including a global footprint and having an Indian partner firm in the Tata Group. There is also the potential that some of CCD’s 9,500 employees, the largest pool of trained workers in the country, would be lured away by potentially higher pay at the one of the Seattle chain’s outlets. “The café market in India is still nascent and the potential is large enough for more players to come in,” Ramakrishnan says. “In some locations, we have outlets of our global competitors [such as United Kingdom-based Costa Coffee and Australia’s Gloria Jean’s] very close to ours and all of us attract customers.”

Ramakrishnan notes that the per capita annual consumption of coffee in India is 82 grams. In the U.S., it is four kilograms and in some countries in Europe it is around eight kilograms. There are around 6,000 towns in India, but coffee chains are present in only around 200 of them. “A cafe outlet is a hangout place for the youth and they want it close by. So the potential is huge,” he adds.

According to Ramakrishnan, Starbucks and all other global entrants will face challenges in India, including understanding the nuances of the Indian consumer. “In the U.S, 40% of coffee sales occur before 11 a.m. In India, sales typically happen only after 11 a.m.,” he says. “That’s a huge shocker for the Western brands.”

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Starbucks Comes to India, Selling Coffee and Atmosphere

After Starbucks detailed the roadmap for its entry into the Indian market on Monday, among the first to see an impact was Tata Global Beverages. Shares of the company, which has a joint venture with the Seattle-based coffee giant, jumped more than 10% on the Bombay Stock Exchange the next day. The increase reflected investor confidence in the prospects of Tata Starbucks, the 50-50 partnership between the two firms. “We are excited about the opportunities the alliance presents,” says Tata Global vice-chairman R.K. Krishnakumar.

The first India Starbucks locations are scheduled to open in August in New Delhi and Mumbai. Company officials have hinted that the grand opening could be August 15, India’s Independence Day. With an initial investment of around $80 million, the Tata-Starbucks partnership is expected to open 50 stores in the country in 2012. The locations will be branded “Starbucks Coffee — A Tata Alliance,” an unusual move, as the Seattle firm does not typically sell its products under a hybrid brand. The stores will be offering a range of teas in an effort to cater to local tastes.

Tata observers note that the partnership is a continuation of a trend. When Pepsi came to India, it did so as part of a joint venture with Tata Group subsidiary Voltas. The product name in that case was also a hybrid — Lehar Pepsi — due to restrictions on sale of foreign brands in India. Once the laws were changed, and Coca-Cola entered the country on its own, Pepsi parted ways with Voltas.

Due to the current legal framework, Starbucks would have come to India without a partner; instead, it chose to enter into the venture with Tata. In addition, observers note, Tata had no experience in consumer products at the time of the Lehar Pepsi launch; Voltas was a marketing company that had handled successes such as dairy products brand Amul and soft drink concentrate manufacturer Pioma Industries (which sells under the popular brand name Rasna).

This time, the Tatas bring much more to the table, observers say. First, they have developed considerable retail experience, through chains such as Westside (clothing and accessories), Landmark (books), Croma (consumer electronics) and Titan (watches and jewelry). In fact, according to economic daily Business Standard, Noel Tata, who oversees many of the retail brands, is likely to be asked to oversee the Starbucks venture. (Noel Tata recently lost out to Cyrus Mistry in the race to succeed group chairman Ratan Tata.) “We are putting a high-caliber leadership team in place,” John Culver, president of Starbucks China and Asia Pacific, told the newspaper.

Secondly, the two firms are already comfortable with each other: There has been a sourcing agreement in place between Starbucks and Tata Coffee (also part of the group) for over a year. Starbucks will now be working with other group firms such as Taj Catering and the Taj hotel chain.

But the big benefit that the Tatas bring is the large number of outlets available under in different sectors and under different names, some of which could be used to accommodate Starbucks cafes. This provides a cheap entry point in a country where real estate is often one of the biggest costs for any retail venture. “We are keen to sell our products in multiple channels, such as hotels, restaurants, colleges and universities,” said Culver. “As part of this, we want to look at where we can place our stores in Tata hotel properties.”

Although coffee was practically virgin territory in India five years ago, Starbucks now faces considerable competition. Indian chain Cafe Coffee Day, for example, has more than 1,000 outlets. A dozen more chains, including Barista and Costa Coffee, have also established themselves. But competition may be helping the market grow. According to Technopak, a New Delhi-based research firm, the more than $200 million sector has been expanding at a compound annual rate of 25%. Information technology entrepreneur Subroto Bagchi gives one reason why. “CCD has raised coffee from a brew to an experience,” he told India Knowledge@Wharton. Says Culver of Starbucks: “We look forward to bringing the ‘Starbucks Experience’ to customers in India.”

See also: Logo Overhaul: Will Customers Still Answer the Siren Call of Starbucks?

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Trying for a Shot at India’s Java Market

With growth slowing down in developed markets, India is fast becoming a hot spot for coffee retailers across the globe. Homegrown brands like Cafe Coffee Day and Barista have increased their reach — and profits — significantly since India’s population eats out more often and the country’s sizable young adult demographic seeks a place to spend disposable income and establish social hubs.

“Companies have already established the café concept [in India], and the market is now beginning to look attractive to every coffee maker in the world. They feel they don’t have to start from scratch,” Ramesh Srinivas, executive director at consulting firm KPMG, told India Knowledge@Wharton.

Some firms, like the U.K.’s Costa Coffee and Gloria Jean’s of Australia have already gained a foothold. They set up shop in India a couple of years ago and are now in the process of expanding. Among those waiting to make a splash in the Indian market are players like U.S.-based Starbucks and Dunkin’ Donuts, London’s Coffee Republic, Australia’s Coffee Club and France’s Alto Coffee.

Until the mid-1990s, coffee consumption in India stagnated at 55,000 tons annually. It has doubled since then because of the growing coffee café culture. But unlike other markets, India’s coffee market still has plenty of room to grow — the predominantly tea-drinking nation’s per capita consumption of java is just 85 grams, compared to 4.5 kilograms in France, 4.6 kilograms in Japan and 6 kilograms in the U.S.

Seattle-based Starbucks recently completed an agreement with Tata Coffee, India’s largest coffee producer, to source and roast coffee from the Indian company and to set up retail stores in partnership with them. Starbucks (which recently unveiled a revamping of its U.S. brand) had initially planned a solo foray into India, but that effort was stalled by regulations that prohibit 100% foreign ownership in single-brand retail outlets. Dunkin’ Donuts, too, will partner with an Indian company — in that case, Jubilant FoodWorks, which also operates the Domino’s Pizza chain in India.

Like Western chains that have come before, both Starbucks and Dunkin Donuts plan to introduce a food menu that is relevant to Indian customers.

“The entry of Starbucks and Dunkin’ Donuts will energize the cafe market,” says Harish Bijoor, a brand consultant and visiting professor at the Indian School of Business in Hyderabad. According to Bijoor, there is bound to be a deeper degree of investment by the existing cafe players, which will help broaden and deepen the base for coffee in India. “Add to it the different formats that will enter. Dunkin’ Donuts worldwide is a pick-and-go play. On-the-go coffee consumption is still nascent territory in India, despite the population being peripatetic within cities. This will add more zing.”

Read more about India’s growing coffee shop market at India Knowledge@Wharton. Check back tomorrow for a post on a battle for dominance in the home-brewed coffee market in Europe.

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