Originally published in SME & Entrepreneurship, Malaysia
Starbucks’ strategy for India is not without risks. But the world’s largest coffee shop chain is building its position carefully, in a series of well-chosen steps.
Many global brands have entered India since the 1990s, attracted by its growing and aspirational consumer base. But not all have succeeded. Whether a failure of capital outlay strategy, target segment size, pricing, ability to create customer pull, etc, there has been an exodus of some brands as well.
Starbucks is a recent entrant. Interesting observations come out of its strategy on doing business in India.
Starbucks is not the first entrant into India’s organised coffee market, so does not have any first-entrant advantage. Cafe Coffee Day (CCD) is the market leader, while Barista Lavazza was the first coffee-chain to set up shop. They are priced for the middle-class. Costa Coffee, Coffee Bean and Tea Leaf (CBTL), Gloria Jean are priced for the affluent crowd.
India is traditionally a tea-drinking country, so coffee chains have focused on providing an ambience where people can relax and spend time with each other. This outlet format means higher capital outlay.
This is in slight contrast to the US, where most people have coffee on the move. The Indian consumer base has also evolved over the last decade. While the novelty of consuming global brands ruled earlier, the average consumer has now become more discerning, demanding, with minimal loyalty if expectations are not met.
So what can global brands like Starbucks do to maximise their chances of success in India? Here are some ideas:
Choose a Local Partner
Global brands face the dilemma of whether to go solo or tie up with a local partner. Starbucks’ decision to partner up with India’s TATA Global Beverages shows a focus on leveraging multiple benefits.
The TATA Group is one of India’s ethically-driven brands, a perception passed on about Starbucks India as well. The TATA companies also offer scope for backward-linkages. Its Indian partner produces the raw material (coffee beans) in Karnataka.
Given that India produces coffee beans in only a few places, the other sourcing option was importing the beans. But this would have hiked input costs significantly. TATA’s coffee plant in Karnataka has also been contracted to supply beans to Starbucks’ globally, creating mutual synergies.
Backward linkages also hold its Starbucks’ in-store menu. It has contracted catering to TATA’s TAJ SATS, which also supplies to TATA’s premium hotel chain – The TAJ. The TATAs are also invested into the retail sector – with store brands like Westside, Tanishq, Croma, Star Bazaar, etc.
Starbucks can leverage them for knowledge-sharing on Indian real estate, area-specifics, and on tackling real estate bureaucracies. This would help its own expansion blueprint. It also gives scope for store-in-store sales.
Consistency in store formats
This helps to maintain the unique selling point of consumer ‘experience’, and also to gain economies of scale on capex.
Starbucks plans to have the same store format across India, though the size can change based on economics. This is how it operates globally. Starbucks has projected itself as a place to have a likable ‘coffee-house’ experience.
Having the same format gives customers the comfort of receiving the same ‘Starbucks’ ambience wherever they go throughout the world creating customer pull, not to mention economies of scale to the company with its suppliers.
But keeping the store formats consistent means it has to choose and open new locations very stringently, such that the location can yield a throughput in line with the investment.
Its approach in store format is in contrast to CCD, which has opted for different formats in order to tap the potential demand in any area. CCD has opened few premium outlets based on the location’s client profile.
It has also gone for non-store formats like takeaway kiosks and vending machines. But Starbucks might fear that such non-store formats might dilute its brand value, given its positioning.
Measured Pace of Expansion
India is a market where a failure to monitor bottom-line has thrown many companies out of gear. In short, a top-line only approach does not work here.
Since Starbucks has to choose new locations stringently in line with its same-format approach, it has opted for a measured pace of expansion. It is focusing on the financial viability of each outlet, rather than going for an ambitious expansion plan which might have resulted in repeated calls for capital.
This is in contrast to its own strategy in USA and China where it has built scale by opening stores in almost every neighbourhood – being the first port-of-call for coffee by simply being everywhere.
CCD’s strategy behind flexible store formats was to ensure there is a CCD café at easy reach at any place. However, it would be interesting to check its average store profitability given its scale.
Opting for Realistic Pricing
This is based on market affordability and its own positioning. Globally, Starbucks is priced at a level at which it can be termed an ‘affordable luxury’.
In Japan, it went for median pricing, in-between the base-level and the expensive option. It has opted for a similar pricing in India – in-between the affordable CCD and the expensive Costa/CBTL.
CCD had a rationale to go for affordable pricing – to tap students, who are one of the largest client segments frequenting coffee shops. However, it is debatable whether ‘spending time’ equals ‘spending money’. Starbucks has priced itself out of this client segment. So, its approach seems ‘spend-driven’, rather than ‘footfall-driven’.
However, India is a country where the concept of ‘value-for-money’ rules as far as spending habits are concerned, even among the wealthy. Indians can spend huge amounts when they want to, provided they feel they got their money’s worth.
Matching this value-for-money concept with maximizing the clients’ spending means providing the highest level of quality and service so that the clients are willing to pay the higher price. This is a challenge.
Maximising Elasticity of Spending by Adding Value
Given longer break-even time, increasing the scope of spending by its customers is important. The aim is to increase throughput per visit.
The probability that its higher-end client segment would pay higher-than-average amounts in a single-visit might be high.
One way to achieve this was to position itself as a premium brand with which its target clients would like to associate, as well as creating a good ambience.
Another way was its high-quality menu. Contracting of the catering the supply to TAJ SATS (which also supplies to the premium TAJ Hotels) adds to the premium ‘Starbucks experience’.
Creating Customer Pull
This can be achieved by choosing a unique selling point (USP) that wins repeated business. It is imperative to enhance customer pull in order to bring home the money.
In India, it is fashionable to hang out in cafes. Hence, the focus of its USP is to create a conducive and likable ambience – the ‘Starbucks experience’.
But creating this experience would come at a cost. Its capital outlay would be higher to create the store ambience and furnishing in line with this brand positioning. Store collections might vary depending on average footfalls.
Combining these factors, the average break-even for a Starbucks store might be longer than that of other coffee-chains like CCD, etc. This is where the ‘Starbucks experience’ has to ensure high pull.
Location-choice based on footfall
In other words, choose an attractive location irrespective of its cost. Starbucks is targeting upmarket locations, in line with its premium positioning. These include ground-floor space in high-end shopping malls where footfall is higher.
The higher rents have to be negotiated based on longer tenure. Presence of well-known brands also creates footfall in the shopping mall itself, creating synergies for all the brands in that mall.
Starbucks’ experience shows that one has to be bottom-line conscious to succeed in India, while pitching a specific value proposition as its USP to create customer pull.
Value addition is favoured in India, which helps gain a higher wallet-share of clients. Scale can be added by combining experience, quality and throughput per client in a formula that creates value-for-money for the client, and hence scope for repeated visits.