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15173068 international-business starbucks-in-india


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15173068 international-business starbucks-in-india

  1. 1. STARBUCKS IN INDIA: THE TIME IS JUST RIGHT4th May 2009 An OLI-PESTLE Analysis The paper analyses the entry prospects of Starbucks Coffee into India. The analysis is based on the framework provided by the Eclectic Paradigm and the PESTLE analytical structure and shows that in spite of previous setbacks the current conditions in India are highly conducive for the likes of Starbucks to set up shop and be successful. Bhooshan Parikh Copenhagen Business School Full Time MBA 2008-09
  2. 2. INTRODUCTIONIndia has a population of nearly 1.2 billion people and a majority of this falls into the age bracket of15-60 years of age, making it one of the youngest countries in the world with a median age of justabove 25 years ( Compared to this, the median age in the US and China is 37 years andin Japan it is 45 years. The per capita GDP in India has seen a constant rise and with the booming IT/Software services industry, India’s average economic growth over the last decade has been animpressive 7% ( With almost 29% of the population living in urban areas (and anannual urbanisation rate of 2.4%) (, the Indian consumer market holds immensepotential for most businesses. Improved political and legal reforms since the beginning of the 1990shave made it increasingly attractive for Foreign Direct Investments (FDI) inflows into India andequally easier for foreign companies to set up shop in India.Starbucks Corporation (Starbucks), the owners and makers of the world famous Starbucks Coffeeopened its first shop in Pike Place, Seattle, US in 1971 and since then has become the fastestgrowing coffee chain in the world with over 16000 retail outlets in more than 40 countriesworldwide (Starbucks Corporation, Annual Report 2008). It was only a matter of time that Indiawould see its first Starbucks, especially when the coffee consumption in India was also rising alongwith the economical growth. However, in 1999 ( Starbucks decided to enterChina and put the Indian plans on hold for the next few years. This could well have been a bigmistake by Starbucks as the coffee revolution in India had already begun and local chains like Baristaand Cafe Coffee Day (CCD) were mushrooming in every part of the country with almost one new cafeevery day ( Since 2006, Starbucks has had a series of failed attemptsto enter India starting with the joint venture with India’s RPG Enterprises to begin operations bymid-2007 ( Unsure of its strategies, the coffee giant pulled back only toenter again along with Future Group, another Indian conglomerate, through a joint venture (NewHorizons Retail) with its Indonesian franchisee ( This time itwas the Indian government and the Foreign Investments Promotion Board (FIPB) that played thespoil-sport and the company was asked to re-submit its proposal through a FDI route instead of afranchisee. With the Indian FDI regulations allowing only up to 51% investment in a single brand atthat time (, Starbucks joined the likes of Tesco and Carrefourand decided to wait for the changes in FDI to take effect. By the end of 2007, Starbucks entered intoa distribution tie-up with a leading multiplex operator PVR Cinemas for its select products on anexperimental basis. However, with unclear evaluation of the demand for Starbucks in India, PVRCinemas was cautious in rolling-out the coffee stores at its multiplexes ( Coles, President of Starbucks Coffee International, once said, "Without sounding arrogant,Bhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 1
  3. 3. were looking at our own strategy. Theres nothing that keeps us doing business in India."( However, it does not seem to have worked out that easily for Starbucks,because as of today, much to the dismay of many Americans visiting India, Starbucks still does nothave any presence in India.India is too lucrative a market for any international firm to overlook, especially for Starbucks when ithas been successful in establishing itself in other traditionally tea-drinking nations like China andJapan. This paper is structured around the Eclectic Paradigm (OLI Framework) and incorporates aPESTLE analysis and attempts to bring out the major areas of concern for Starbucks Corporation inorder to enter the India market. Although, the FDI regulations and legal requirements have beenreformed over the last couple of years and doing business in India is gradually improving, it seemsthat Starbucks needs to focus its attention more towards the economical and socio-cultural areasrather than the political and legal aspects of the business environment in India.OWNERSHIP SPECIFIC ADVANTAGESThe Starbucks brand has become almost synonymous with coffee all around the world and the sameis the situation in India even though India does not have a single Starbucks outlet. Having opened itsfirst store in 1971, Starbucks has been highly successful in starting a cult following that has put theStarbucks brand at a level higher than just a coffee shop. The passionate staff and their uniqueblends of the best coffee beans have propelled Starbucks as a way of life in many parts of the world.The vision created by Howard Schultz, the President and CEO of Starbucks, has resulted in over16,000 stores adding almost 1500 stores in the last one year (Starbucks Corporation, Annual Report,2008). The company has recorded revenues of more than $ 10 billion and over $ 300 million in netearnings (Appendix A), with an increasing share coming from its international operations (20% ascompared to 18% in 2007) (Starbucks Corporation, Annual Report 2008). The strong financialposition and the relatively low debt-ratio, gives Starbucks a very big advantage over its rivalsespecially in terms of expansion strategies and the ability to undertake risks and buy-out localcompetition, irrespective of which market it chooses to enter. Additionally, Starbucks has years ofexperience and knowledge about various cultures around the world which gives them an edge ininternational operations. Their success in tea-drinking nations like China and Japan has to be givendue credit and the company will surely benefit from these learning when it looks at the Indianmarket. Starbucks has built up a reputation it cannot afford to damage.As far as India is concerned, Starbucks has already had prior association and some knowledge aboutthe Indian market conditions, economic and political situation and the changes in consumer trends,as has been brought out earlier. Their alliance with India’s Tata Group for sourcing coffee beans hasBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 2
  4. 4. been in existence since 2004 (, and although previous joint ventures have beenunsuccessful, Starbucks has had relations with a number of Indian retailers for entering the Indianmarket. This gives the company definite advantages as compared to Costa Coffee (the first foreigncoffee chain in India)(, which has been around for a few years now but isrelatively unheard of in most parts of the country. Besides the above, the corporate culture,efficient governance, and the employee welfare schemes of the company have received wideacclaim, making Starbucks one of the best employers in the US. As a mark of recognition, PresidentBill Clinton had even discussed the Starbucks’ employee health scheme with Schultz in 1992( This is an area which could strongly favour Starbucks in a country like Indiawhere employee welfare is given low priority and most low level workers are still treated shoddilyand without any family or health benefits.INTERNALISATION (CONTROL)Following up on the ownership advantages, it may seem necessary for Starbucks to focus on theseareas in order to internalise certain activities so that its competitive edge is maintained especially inIndia where tough competition is already governing majority of the market share. The mostimportant for Starbucks is its blends of coffee and its unique roasting techniques. The company hasto be very careful while entering into joint ventures in India so as not to lose this advantage to itsrivals. Moreover, its relations and contracts with Tata Coffee for supply of coffee beans have to belooked into. The major issue here for Starbucks is the continued source of the best coffee beans asone of the major competitors of Starbucks in India (Barista Coffee) is owned by the Tata Group. Thisputs Starbucks in a precarious situation and there may be a need for the company to secure othersources for the coffee beans that it might need for the Indian operations. Moreover, the ‘Starbucks’brand that has such a strong connotation to it must be protected at all costs. Starbucks is alreadyinto legal battles with similar sounding names like ‘Starstruck’ in India. Following a similar suit inChina (, Starbucks has registered trademarks in several different Indianlanguages (, but what is more important is that the company must also devisemeans to trademark similar sounding names in order to protect its brand and intellectual propertyrights. Another possible threat to the ownership advantages of Starbucks lies in the prevalent‘employee theft’ in India, and the strong likelihood of competitors ‘stealing’ trained personnel andbaristas from Starbucks and thereby undermining its success in the Indian market. Under suchcircumstances it might seem that an agreement with a local well-established partner would be a safebet and Starbucks could look at reviving the relations with those Indian companies that had showninterest early on.Bhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 3
  5. 5. LOCATION SPECIFIC ADVANTAGESComing to the advantages inherent to the Indian market conditions, it might be suitable to cover thePESTLE framework here as it is most relevant in describing the specific market environment.POLITICAL ENVIRONMENTThe Indian economy has been experiencing more stability as far as the Government and politicalscene is concerned. There has been reduced internal turmoil resulting from political influences andthis has created a better working environment for industries and businesses in India. The currentUnited Parties Alliance (UPA) government headed by the Indian National Congress party (INC) hasshown more tolerance towards foreign countries in general and towards foreign investments inparticular, and the recent reforms have placed India considerably high in the ‘Doing Business Report,2009’ released by the World Bank ( However, the ongoing elections in Indiaare expected to result in turning the tide in favour of the radical Hindu opposition party the BhartiyaJanta Party (BJP) led National Democratic Alliance (NDA), which is opposed to ‘westernisation’ of theIndian culture. On the basis of this, it becomes safer for Starbucks to enter into an alliance/jointventure with an Indian company that can provide a buffer from the political backlash andconsequent inroads into the Indian business scenario. Moreover, Starbucks needs to be vary ofpossible opposition from the existing competitors (CCD, Barista, etc.) through use of politicalinfluence and delaying tactics. However, likelihood of this is fairly low as the Indian market is largeenough to accommodate more players and the incumbents in the Indian gourmet coffee industrywill be minimally affected by Starbucks’ entry.As far as the demographics are concerned, the majority of the Indian population is still rural( but the urbanisation is occurring at a respectable 2.4 % annually. In spite of this, thesheer size of the total Indian population (1.1 billion in 2007,, makes the urbanpopulation large enough for businesses to perform well. As the population gets increasinglyheterogeneous and the education levels improve, the standards of living have also been elevated,which makes the environment extremely conducive for companies like Starbucks that are looked atas an upmarket entity.MACRO-ECONOMICAL ENVIRONMENTThe Indian economy has been predominantly based on agriculture as the majority of its population,mostly in rural areas, is dependent on agriculture for sustenance. However, over the last decade orso, the ratio is changing in favour of industrial and the services sector ( with nearly83% of the GDP arising out of these two sectors. Overall, the Indian economy faces a tough task asthe fiscal deficit has been increasing and the policies required to overcome it have been foundBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 4
  6. 6. difficult to implement. Many of the industries and sectors of the country depend on heavy subsidiesby the government and restrictions have been put on the extent of FDIs permitted in certain sectors.In spite of the Prime Minister’s promise to open up the retail sector to FDIs, the issue has beenmainly unresolved. However, certain sectors like manufacturing, advertising, pharmaceuticals, hotels,tourism & restaurants, and some others have been opened to 100 % FDI. This has great implicationson the future prospects of Starbucks in view of its India strategy. However, foreign investments inreal estate are largely prohibited and this strengthens the case suggested in this paper thatStarbucks needs to find a locally established retailing partner in order to set its foot into the Indiangourmet coffee retailing business.The world’s largest democracy is currently also one of the largest and most attractive markets in theworld. The World Bank report ( has indicated that India had jumped 12places in 2008 compared to the previous year and although it is currently placed at a dismal 122 outof 181 countries, the report has indicated a respectable rank for the credit facilities for Indianbusiness environment. As a result, Starbucks or its likely Indian partner may find it that much easierfor establishment of the joint venture and retail outlets in India. Besides this, there is an increasingtrend for franchisees in India and the improved credit availability bodes well for the prospectivefranchisees too.The global economic downturn seems to have impacted the Indian economy to a lesser extent ascompared to its western and more developed counterparts. The Indian economy has been growingat an average of 7 % for the last decade and has maintained an above average growth despite theglobal financial slump ( The trend is likely to continue and this makes India a safeinvestment proposition, especially if Starbucks is likely to consider entering India in the near future.Almost 80 % of India’s industrial growth is attributed to specific parts of the country; mainly in thestates of Gujarat, Maharashtra, Haryana, Karnataka and Tamil Nadu ( and this alsoindicates that Starbucks might have to explore early opportunities in these areas as the majority ofurban population is located in and around these areas.SOCIO-CULTURAL ENVIRONMENTThe increasing number of educated youth in India has also fuelled the skilled English speakingservices sector leading to increased per capita GDP and improved living standards for the people.India’s per capita GDP (PPP) was estimated to at $ 2800 for the year 2008 compared to $ 2700 for2007 (, which indicates that the people are able and willing to spend more money onlife quality improvement. This has implications on coffee consumption as coffee is still considered asan exclusive beverage compared to the traditional tea. Whereas tea has a market penetration ofBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 5
  7. 7. nearly 94 %, coffee consumption has increased from 59 % in 2003 to almost 65 % in recent times( The explosion of cafes and gourmet coffee outlets is an indication of therising coffee culture in India (Appendix B) and an indication to Starbucks that the Indian market is farfrom reaching saturation. The main competitors for Starbucks (CCD and Barista) have alreadyestablished close to 1000 cafes in India over the last few years ( andthey continue to expand at a phenomenally high rate. While tea consumption is reaching maturity,the expenditure on coffee is likely to grow at 9.5 % (Appendix C).On the other hand, with almost 550 million people forming part of India’s labour force(, and with unemployment considerably high at 6.8 % (, the cost of labouris likely to remain low. This possibility is augmented by the fact that an increasing number of peopleare moving away from the traditional occupation of agriculture and turning to urbanised locationsfor manual labour that is better paying. This again provides a significant advantage for Starbucks toconsider while entering India, especially if it is to source its raw materials locally.With the changing culture of the Indians toward coffee consumption and the increase in disposableincome amongst the youth, the cafes have come to act as a place for socialising and as hangoutsmainly for collegians and young people. Although this might sound as a highly lucrative situation forStarbucks, it must be kept in mind that the normal cup of tea or instant coffee at a road-side stall inIndia would cost no more than Rs. 5.00 (approximately $ 0.10). The Indian consumers are extremelyprice sensitive, and in many parts of the country the Rs. 35.00 (approximately $ 0.70) for a cup ofCappuccino (at CCD or Barista) may still be considered a luxury. The most challenging task forStarbucks will be to match this pricing if it aims to be successful in India. With an average Starbuckscoffee priced at over $ 3.00 (approximately Rs. 150.00) (, Starbucks mightpossibly face an uphill task in wooing the Indian consumers. However, it remains an option forStarbucks that while the local chains like CCD and Barista focus on the large low end consumermarket, Starbucks could cater to the needs of the smaller but growing upper segment, thuseliminating competition and maintaining its niche image in the environment.One area where Starbucks can focus on is the Corporate Social Responsibility (CSR) and its policiestowards the upliftment of the Indian rural community. For the purpose of this paper, it would makesense to include the Environmental Factors of this analysis here as most corporations are not directlyinvolved with environment conservation and similar efforts have been included as part of their CSRactivities. This effort would go a long way if Starbucks is looking at cementing its position in theIndian sub-continent. Although the company may not expect to open any outlets in the villages ofIndia, it can work towards the betterment of the lives of these people. The best place to start couldbe the coffee planters and the workers in India so as to create a synergy between the plantationBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 6
  8. 8. owners, workers as well as the Starbucks community. This will prove to be beneficial for Starbucksin the long run when many of these workers and their family members would be part of the urbanpopulation and when Starbucks would become a part of their lives. Potentially, this may also createstrong sentiments for providing high quality raw material for Starbucks.TECHNOLOGICAL ENVIRONMENTIndian coffee has been improving in quality continuously and almost 80 % of India’s coffee isexported. As mentioned earlier, Starbucks has entered into an alliance with India’s largest coffeeproducer, Tata Coffee since 2004. The whole process leading to the forging of this alliance was thefact that in 2004 Tata Coffee had won the Gold Medal for the ‘Best Robusta in the World’ at GrandsCrus de Café, Paris ( This also shows that the Indian coffee growers are seriouslyworking at improving the standards in order to bring India up to mark in the world of coffee. Withlow cost of labour and easy availability of high quality coffee beans, Starbucks would be well placedto do business in India. If Starbucks was to take this into consideration, the building up of strongworking relations with the Tata Group could also be the key to achieving lower costs and probablyStarbucks might even be able to match the prices offered by its local competitors.LEGAL ENVIRONMENTIn the business environment, there exists a perception that the sanctity of the contract may not bewell respected in India. However, India has adopted the Geneva Convention and is bound to enforceinternational legal proceedings. Although it may be accepted that limitations do exist in the Indianlegal system, an autonomous body, the International Centre for Alternative Dispute Resolution, hasbeen established to hasten domestic and international disputes. Moreover, the Indian judicialsystem remains largely free from the political interference and pressures that other institutions inthe country are subjected to. Moreover, enforcement of copyright laws and trademark protection isquestionable as in spite of improvement in the system over the years piracy is widely prevalent( The case of ‘Starstruck’ and the ongoing legal proceedings withStarbucks has already been mentioned above.The Indian government’s willingness to become part of the Madrid Protocol might provide someconsolation to foreign firms as this will allow the extension of trademark protection into India. Butthe fact that India still remains on the US Trade Representative’s (USTR) Priority Watch List, does notfare too well for firms looking at entering the country. Another drawback might be that India has yetto approve the United Nations backed World Intellectual Property Organisation (WIPO) treaties( ParikhCBS FT MBA 2008-09Term Paper-International Business Page 7
  9. 9. One concern that businesses in India cannot overlook is the prevalent corruption at all levels in thebusiness environment. According to the Bertelsmann Foundation 2008, the political system in Indiahas an inclination towards maintaining discretionary policies and that corruption has been found tobe deep-rooted at every level of the political and administrative systems. Moreover, the Indianenvironment personifies the definition of emerging economies in that corruption, weak institutionsand political crime have undermined the effectiveness and accountability of the government(Freedom House 2008). The Transparency International Global Corruption Report 2008( has ranked India at a poor 72 out of the 180 countries included in thesurvey and the World Bank Report ( has shown poor numbers for Indianbusiness environment (Appendix D). However, all does not look so grim for foreign companies likeStarbucks, as India has shown significant improvement in its reforms and in its performance intrading across borders and that should boost FDIs into India.CONCLUSIONIn spite of some serious drawbacks mentioned above regarding the business environment forStarbucks in India, the advantages as brought out with the help of the Eclectic Paradigm faroutweigh the limitations especially if Starbucks focuses its attention on the socio-cultural aspects ofthe Indian business environment. The fact remains that India is an emerging economy and like allemerging economies, it will be plagued by certain shortcomings. Over and above this, the retail foodmarket in India is expected to grow by 9 % (, although the traditionally tea-drinking country is the largest producer and consumer of tea inthe world, coffee has made steady inroads into the minds and lives of the people serving nearly amillion people every day ( Starbucks has already entered most of theemerging economies except India, which seems to surprise everyone including its potentialcompetitors in India, and it is clear from the analysis and the arguments provided above that thetime is just right for Starbucks to try its luck now, albeit cautiously and with adequate preparation.Of course, there will always be groups and organisations ready to protest against such companiesespecially in emerging economies where the sentiments towards local companies are inherentlystrong. Like the criticism by Taylor Clark in his book ‘Starbucked’ (Appendix E), Starbucks shouldexpect these and be prepared to overcome them with finesse. After all, India is (after China)undoubtedly the most developing amongst the emerging economies (Appendix F). Finally, howStarbucks decides to make its mark on the Indian gourmet coffee market and when it does so has tobe left to the management of the company. However, it might prove beneficial for the company todwell a bit upon adopting a multi-tier strategy and thinking beyond conventional greenfield entrymodes in order to harness the immense potential that India holds.Bhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 8
  10. 10. Appendix A STARBUCKS CORPORATION: FISCAL 2008 FINANCIAL HIGHLIGHTS Source: <>: Annual Report 2008Bhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 9
  11. 11. Appendix B INCREASE IN COFFEE CONSUMPTION IN INDIA (1991-2005) Coffee consumption in India Estimated Domestic Consumption (1991 - 2005) Calendar Year Quantity (in MT) 1991 55000 1992 55000 1993 55000 1994 55000 1995 55000 1996 55000 1997 55000 1998 55000 1999 55000 2000 60000 2001 64000 2002 68000 2003 70000 2004 75000 2005 80200 Source: <>Bhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 10
  12. 12. Appendix C INDIA: CONSUMER EXPENDITURE (2004-2009)Source: <>: Country Profile 2008: IndiaBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 11
  13. 13. Appendix D DOING BUSINESS 2009: COUNTRY PROFILE FOR INDIASource: < >: Doing Business 2009: Country Profile for IndiaBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 12
  14. 14. Appendix E REVIEW OF BOOK ‘STARBUCKED’ BY TAYLOR CLARKStarbucked-Taylor Clark, 2007, Little Brown and Company, NYBut the hugely successful coffee chain has also been the object ofcriticism. Clark, who met more than a hundred sources and spentcountless hours reading the work of other authors, deals with fivethorny issues related to the company. These are accusations that a)Starbucks drives local independent coffee houses and cafés out ofbusiness; b) the company exploits coffee growers in poor developingcountries; c) generically coffee is bad for health; d) Starbucksexploits its employees and, finally, e) that Starbucks ishomogenising the world by destroying cultural diversity. Apart fromthe fifth accusation, which Clark seems to subscribe to, Starbucked,by and large, attempts to disprove all of these charges, often quiteconvincingly.Source: <>Bhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 13
  15. 15. Appendix F INDIA AS AN EMERGING ECONOMY: A COMPARISONSource: ‘India’s new opportunity – 2020,’ Report of the High level strategic group in consultation with The Boston ConsultingGroupBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 14
  16. 16. References:1. Economic Outlook-India, South Asia-April 20099. information/print?no_cache=1&print=110. http://www.doingbusiness.org13. http://www.eiu.com14. http://www.financialexpress.com15. 000B5DABF61318. http://www.starbucks.com23. Global Corruption Report, 200826. Market Penetration and Acquisition Strategies for Emerging Economies: Klaus E. Meyer and Yen Thi Thu Tran, Long Range Planning 39 (2006) 177-19728. Starbucks-Indian Dilemma (2006) IBS-CDC Case Study Reference Number MES0069A, ICFAI Business School, AhmedabadBhooshan ParikhCBS FT MBA 2008-09Term Paper-International Business Page 15