Starbucks fordham university

Final PDF to printer CASES CASE 12 TATA STARBUCKS: HOW TO BREW A SUSTAINABLE BLEND FOR INDIA* In early 2015, the financial press reported that the Tata Starbucks joint venture had incurred major losses in its first full year in the Indian market. However, the company remained committed to making this venture a success over the long term.1 Starbucks had had its eye on the large Indian market for a while. An attempt to enter the market several years earlier had failed due to complications with the Indian government and foreign direct investment (FDI) restrictions.a The company had withdrawn its application then and was an eager responder when India’s esteemed Tata Group knocked on its door with a partnership opportunity. A 50-50 joint venture was formed, and Starbucks coffee was introduced to the Indian market in October 2012 with a generous initial investment of $80 million.2 The Tata Global Beverages board of directors expressed a lot of excitement about the potential of the newly formed joint venture between the company and Starbucks.b “Through Tata Starbucks, your company offers the legendary Starbucks coffee experience, backed by the trust of the Tata name, to the Indian consumer,” announced Cyrus P. Mistry, chairman of Tata Global Beverages.3 The Indian café market offered a lot of potential for the new Tata Starbucks alliance. While India was a nation known for its tea drinkers, sipping coffee and socializing at coffee shops was becoming increasingly popular. Domestic consumption of coffee had risen 80 percent in the past decade. Given these encouraging trends, Starbucks CEO, Howard Schultz, believed that India could one day rival the company’s successful venture in China. With its store count exceeding 40, the Tata Starbucks joint venture had clearly come a long way since it was kicked off in January 2012, but it was too early to celebrate. Continuing to succeed in the Indian café market would not be an easy task due to two key challenges—competition and profitability. The market was intensely competitive, with multiple domestic and foreign players. The most formidable competitor was domestic giant Café Coffee Day (CCD), which had already adopted a strategy of flooding the market with its cafés, closely mimicking what Starbucks had done in the United States. Another critical challenge companies faced was the ability to break even. High real estate costs and rental rates, along with competitive pricing pressures and Indiaspecific cultural preferences, made it extremely difficult for coffee companies to recover their initial investments. Tata Starbucks CEO Avani Davda admitted the initial consumer experiences had been a humbling experience. Tata Starbucks had opened its first store with a lot of fanfare in the trendy Horniman Circle area of Mumbai. Despite having a high-profile local partner, Starbucks was unable to use its name to secure any discounted rates in renting real estate. The first store was located in a Tata Group–owned 4,000-square-foot site that had been vacant for a while. By 2015, Tata Starbucks appeared to have expanded to over 50 locations across the country in major metropolises like Mumbai, Delhi, Pune, and Bengaluru.4 Yet this was well short of the initial expectations—the target at launch had been set at 50 stores by the end of the 2012 launch year. Clearly, something had changed in management’s expectations of the size or pace of growth from the venture. Quarterly earnings presentations since then had boasted of robust store profitability with no numbers provided, possibly pointing to a slower and more selective approach to expansion.5 However, in its first full year in the Indian market (12 months ending March 2014), Tata Starbucks reported losses of Rs 51.87 crores,c more than half its total sales of 95.42 crores during the same period.1 The joint venture appeared to be at the crossroads of an important strategic decision. It could revert to a plan to grow its store count aggressively, much like Starbucks did in the U.S. It is possible that this was the original intent. After all, the initial launch pricing had been set to be competitive with CCD’s pricing (coffee drinks available for as low as Rs 100). This approach would put it in direct price competition with CCD, the domestic café market leader. However, gaining market share among the youth of the country would allow Tata Starbucks to tap into a large demographic segment. India’s population showed a pronounced skew to younger age brackets (see Exhibit 1) and lower incomes when compared to countries like Japan and the United States. Building a presence within these segments as CCD had done could be critical for success in the long term. Alternatively, the venture could choose to embrace a premium-priced, niche approach similar to the one Starbucks * This case was developed by graduate student Dev Das, Pace University; Professor Alan B. Eisner, Pace University; and Professor Helaine J. Korn, Baruch College CUNY. Material has been drawn from published sources to be used for class discussion. Copyright © 2015 Alan B. Eisner.