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Expansion of Starbucks in India Essay

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Paper type: Essay

Proposal by Ramanathan Ragupathi. Transmittal Letter Ramanathan Ragupathi [email protected] com International Strategy analyst Starbucks Seattle 98101 22 November 2010 Howard Schultz founder, chairman, president and chief executive officer Starbucks Seattle 98101 Dear Mr. Schultz Enclosed is a copy of the proposed report “Starbucks India”. This report is a summary of expansion of Starbucks outlets in India. The proposal covers the current strategies, target market, financial planning and a feasibility study to successfully operate in the Indian market.

This report also outlines recommendations which would further benefit the company to move forward regarding the proposed market. If you have any questions regarding the interpretation of this report please feel free to contact me at the address above. Thank you for your funding of this project and I look forward to working with you again soon. Sincerely, Ramanathan Ragupathi Table of Contents [pic] Executive Summary Starbucks is the world’s largest coffeehouse corporation with over 16000 outlets, operating in more than 50 countries.

The company has constantly been on an expansion move and focuses on entering many new markets with its growth potential. In line with this expansion strategy this report advocates and focuses on entering a new market in India. One of the prominent countries in Asia , India has become one of the most important and exciting business hub to the world with a massive increase in foreign investments especially from the United States and with consumers who are just willing to spend more and more. Regarding the legislative side, India has also reformed its export policy with the United States which was quite stringent few years ago.

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There couldn’t be a more appropriate time for Starbucks to open its outlets in this land of opportunities where most of the international franchises have earned outstanding profits and growth. The proposal is to open outlets in Mumbai, an important cosmopolitan business city and New Delhi which is the capital of India. These two strategic locations will be the most suitable place to test the initial success of the business. Starbucks will be customizing their standard menu to adapt to the local tastes of the market.

This includes addition of more tea flavors as Indians are known to be a more “Tea drinking population” and certain local coffee flavors as well. The Major competitor for Starbucks would be the Italian based coffee company Barista. Starbucks is expected to outwit Barista and capture the market share with its superb marketing and reasonable pricing schemes in addition to its excellent quality. In line with this strategy Starbucks will be able to gain the brand loyalty of the much anticipated Indian customers. Introduction Starbucks is the world’s largest coffee corporation employing more than 128,800 employees.

First started in Seattle’s Pike Place Market, the company has grown tremendously with over 16000 outlets worldwide. The next step is focusing on the Indian market. The likelihood of Starbucks succeeding in India is relatively high for many reasons. India’s consumer society is not only radically developing but also adapting to the western culture. ”India’s young are becoming world-class consumers and multinational are taking note” reads the article published by TIME magazine in their August 2003 issue “Hey Big Spenders! ”.

India opened up its economy to the world through its liberalization policy in 1991 which resulted in the flooding of foreign investment and trade. The custom duties were lowered which resulted in the devaluation of the currency. This virtually eliminated the permit controls on private investments and broke public sector monopolies. Many multinational corporations such as McDonalds and Barista have been taking advantages of these new policies and started expanding their business throughout India. The reason why these multinational were becoming more and more successful was due to the mass increase in outsourcing by foreign companies.

A study conducted by Forrester Research states that “Us companies are expected to send 3. 3 million jobs overseas in the next 12 years , primarily to India”. The attitude of the Indian people regarding the western culture has dramatically changed over the years. As stated by Mr Ravi Deol , The Managing Director of Barista India ”Indian consumers want to do what the rest of the world is doing”. The Indian youth wants everything from McDonalds to GAS Jeans but the more important part is that they are willing to spend even tough the cost is relatively high.

This kind of attitude will certainly help Starbucks operate successfully in the Indian market. The proposed outlets in Mumbai and Delhi , the two most happening cities in India will definitely ensure the success of the company as these locations have ample call centers, offices and universities which provides a massive market where the trend has already shifted to the consuming of western food. As more than 50% of the Indian population fall under the youth category, Starbucks can target the younger consumer generation with their creative advertisement campaigns.

In addition these two cities are one of the major hot spots of tourism in the country with over 2300000 and 200000 tourists visiting Delhi and Mumbai each year. The Starbucks Indian menu should also customize their products by integrating traditional Indian menu items such as Indian filter coffee with their existing menu. Methodology: Starbucks coming into India requires an extensive amount of Primary and Secondary research. Mainly being a consumer good and within a 1 billion population only a certain amount of the population can actually afford a cup of coffee at Starbucks outlets. Secondary research gives us a lear understanding of the internal detail on Starbucks, their financial capability and supply chain evaluations have been done by our team. Linking these two aspects and entering into a market such as India mainly requires primary research. Surveys and evaluations such as the perfect price per cup to an average customer should be discussed. Also economic figures such as the GDP Per Capita should be identified through secondary research. In a country like India linking supply chains with its clustered outlets will be tough and our assumptions made in this reports are backed by valid proof.

Primary research is very minimum because of the time limit but secondary research has been done according to our teams maximum capability. Analysis of the International Business Situation: Strategic assessment of the company’s entry to India: A SWOT analysis will help us evaluate the feasibility of Starbucks’s entry to the proposed market. While it’s assessed below, Porters five force analysis is also done to evaluate the market attractiveness (Appendix 1). The foreign investment policy of India also plays an important role in the feasibility study. (Appendix 3) Mode of entry and strategy:

Starbucks in India will be a private business entity with a horizontal organizational structure. It is expected that the outlets in India will be operated with a single manager and five to six employees working in shifts. In addition to the outlets a regional office which will be responsible for its operations in the proposed locations will also be set up along side a small scale roasting plant. The regional office will be facilitating the marketing in the proposed locations through its HR managers, finance council, sales consultant and a regional marketing analyst.

The regional office would also be hiring a legal specialist who would be facilitating with the legal jurisdiction and customs of India. The production and distribution responsibility will be given to the roasting plant team which will also manage the required inventory and equipments to the retail outlets. The plant will be buying coffee beans and tea from local farmers at wholesale price, thus saving money in transportation and enjoy tax benefits.. The financial assessment and supply chain management will be handled by the Starbucks head office in Seattle, USA. Target Markets: Primary Target Market:

This market primarily consists of the youth in India who are not only aware of the western culture but also are very well educated. The proposed locations are in proximity to call centers and offices whose employees are well paid and thus unique marketing tactics will be implemented to gain their brand loyalty. Secondary Target Market: This market primarily consists of tourists who mainly come the United States, UK and Japan, thus making Starbucks more appealing and favorable compared to other brands as Starbucks is quite popular in these countries. This market also focuses on the upper and middle Indian class population who ould find Starbucks more attractive due to their excellent quality and brand name. Analysis of the proposed locations: Both Mumbai and New Delhi are important and busy cosmopolitans with numerous tourist spots, universities and offices. (Map of Starbucks in India: appendix 2) New Delhi The franchise for Starbucks in New Delhi will be located in the focal point of the city known as Connaught place and the second outlet in South Extension, a very posh locality. These locations are in close proximity with big offices and posh residential colonies and are one of the most preferred tourist hot spots.

New Delhi is also a strategically important place for Starbucks as it is the nearest urbanized city to the world famous Taj Mahal, thus making it an excellent place to give the company a push start. Mumbai: The proposed location in this important and busy cosmopolitan will be located at Nariman Point which is a premier business locality with a mixture of modern and traditional architecture. This location besides having numerous technology companies and affluent higher class societies also is in close proximity to the Gateway of India, which is one of the most visited tourist areas in the city.

Proposed product: Starbucks is renowned for its variety of coffee and tea beverages in addition to its confectionary’s and baked snacks. Apart from the edible items, Starbucks outlets provide a comforting and modern ambience which allows customers not only to enjoy their favorite drink but also helps them to work or study due to its customer focused services such as free wireless internet access. Starbucks India will customize their menu by adding additional local flavors in both tea and coffee such as “Indian Filter coffee” and “ginger tea”.

Apart from these additional flavors, new flavors will be added to the menu after the first phase of Research and Development is completed. . Proposed strategy: Pricing: Starbucks will be following a competitive and penetrating pricing policy. This means that Starbucks will be selling its commodities at a lower price than its biggest competitor Barista India. This is due to the fact that Starbucks will be having its own roasting plants which are responsible for the low cost of production thereby resulting in a significant reduction in retail cost.

It has also been noted from the success of Barista India that customers are willing to pay any price for a better service, quality and ambience. Promotion Starbucks India will be focusing mainly on using billboards and radio commercials as the proposed locations have one of the highest number of billboards and radio listeners in the country. Apart from these promotional brochures offering complimentary delivery services will be used to get in touch with the target market Revenue: Using the zonal pricing method the price of one coffee would be US$1. If on an average a customer spends about US$1. 0 and it is anticipated that there are about 2000 customers a day in each outlet then the projected revenue per day would be around US$9000 per day. Planned Financing It is expected that the costs in the following years will reduce as more and more trade policies with the United States will be liberalized. This will result in the absorption of more profits and thus will increase the revenue of Starbucks substantially. [pic] Threats The major threat comes from Barista Lavazza which is currently owned by Lavazza, Italy’s largest coffeehouse corporation with over 200 stores in India .

Although they are no match for Starbuck’s expertise and quality but due to Barista’s strong ties with the government and other key individuals such as C Sivansankaran , owner of Sterling Group which owns the majority of Barista’s share, Starbucks may be able to acquire only a small part of the market share. Barista’s existence in India for over 10 years has also resulted in a significant number of loyal customers. Further more the issues of bureaucracy and corruption may be seen as a bottleneck. Apart from this the trade union laws are quite rigid and needs to be assessed very carefully. Conclusion:

The suggested venture for Starbucks into India seems undoubtedly a market with great potential. The rapid westernization of Indian market foresees many large projects by both the domestic and International corporations will ensure that an excellent quality of commodities is delivered to the Indian people. India’s massive and profitable market along with the company’s current expansion strategy seeks to strike a balance between the ups and downs of the industry and makes the proposed entry ideal for Starbucks. Recommendations: Starbucks can move forward in the industry by focusing on the issues addressed below: . Implementing a feasible inventory policy thereby eliminating the problem of overstocking and thus ensuring fresh stock throughout the year. 2. Implementing partnerships with 5 star hotels such as hotel Taj and Hyatt 3. Implementing partnerships with the airline industry of India so that Starbucks can serve their high quality commodities on flights and Airports. 4. Setting up a joint venture for the production of high quality equipments and other supplies thereby eliminating tariffs and thus creating job opportunities for the local market. Appendix 1 Five Forces model

Competition: As stated in the report Starbucks will face much of the competition from the Italian based coffeehouse corporation Barista Lavazza. The suggested mode of entry together with the company’s core competencies will facilitate Starbucks to flourish in the Indian market. Threat of new entrants: India has one of the largest foreign direct investments and also a mammoth market which is yet to be exploited to its full potential. Thus there is a very high probability for Starbuck’s global competitor such as Coffee people and caribou coffee to enter the Indian market.

Bargaining power of suppliers: The suppliers bargaining power will be relatively low due to the presence of countless suppliers. In addition the high volume of supplies being purchased at wholesale price directly from the local farmers and other domestic suppliers will also fade away the bargaining power of the suppliers. Bargaining power of customers: As Starbuck’s target customers are primarily tourists, high paid employees and upper Indian middle class families, the bargaining power of the customers will be low. Threat of substitutes:

There is a high threat of substitutes as the market is flooded with both domestic and international outlets who constantly try to outperform each other. However this issue shouldn’t be a problem as no other company can provide the quality and service for which Starbucks is known for. Appendix 2 Map of Starbucks in India [pic] Source: http://www. globalsecurity. org/military/world/india/ Appendix 3 • All foreign investment projects, not considered a priority industry eligible for automatic Clearance by the Reserve Bank of India, require approval by the Foreign Investment. Promotion Board or a newly created committee for review of smaller investment projects. • The government permits foreign firms to hold up to 51 percent equity in Indian venture on a case-by-case basis. • Automatic approval is granted to foreign investments of up to 51 percent equity in 34 High-priority industrial sectors. • Foreign companies are permitted to acquire land and own buildings as long as permission is obtained from the Reserve Bank of India. • No specific tax incentives exist to attract foreign investment.

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