Stirring the coffee pot

Last week one of the world's best known consumer brands announced its much awaited entry into the country, but ironically consumers and competitors were left in the dark about what plans were brewing on the retailing front. After many years of deliberation, and speculation of whether ‘it would or wouldn't,' Starbucks opted for a tepid entry into the world's second largest economy.

While competitors are apparently not worried about coffee company Starbucks' India plans, they are hoping the global major will create a larger field for coffee retailing in the country.

“It's premature to talk about the specifics,” says Arun Bhardwaj, Vice President - Emerging Business, Starbucks Coffee Company. Starbucks' MoU with Tata Coffee signed last week is an unrestricting one, where the US coffee giant has only agreed to source and roast high-quality green coffee beans in Tata Coffee's Coorg, India facility. On the retail front, the company said ‘Tata and Starbucks will jointly explore the development of Starbucks retail stores in associated retail outlets and hotels,' indicating there were no firm retail plans yet.

Starbucks will set new benchmarks in the coffee retailing space in India, a fact even competitors accede to. Harish Bijoor, brand domain expert and CEO, Harish Bijoor Consults, says the Starbucks entry is a wake-up call. “I would equate the entry of Starbucks in coffee to the entry of MNP in telecom. Existing players need to up the ante on product range, service and customer delight norms. In many ways this entry will be good for the consumer, delivering better value and service. Add delight to that as well.”

Santosh Unni, CEO, Costa Coffee in India, says Starbucks coming in will help expand the Indian market. “There is not much concern about competition because the market needs to grow in India. And the country needs the right kind of players for that.”

The Indian coffee retailing market, estimated to be anywhere between Rs 800 crore and Rs 1,000 crore, growing at 40 per cent, includes players such as Café Coffee Day (CCD), Barista and Costa Coffee and smaller coffee shops in South India that serve coffee for Rs 10 a cup. CCD, the undisputed leader in the coffee retailing segment in India, has 1,040 stores with plans to take the number to 2,000 by 2014.

K Ramakrishnan, President - Marketing, CCD, concedes that the entry of the global brand would set certain benchmarks and pressurise some of the existing players to improve their offerings. “India being such a large country, there is plenty of room for several players,” he says. Will CCD, a player in the mid-to-premium segment, now move a notch higher to aggressively tap the premium market that Starbucks operates in? “We are guided by consumer needs. We will do what they demand,” is his non-committal reply. Bijoor agrees. His advice to Indian players is to remain besotted with their customers and their needs and aspirations. “Mining the needs of their consumers and catering to them is the strategic and tactical imperative at hand.”

Incidentally, CCD launched Coffee Day Square, a premium coffee lounge in Bangalore, a couple of years ago. It is more like a fine dining restaurant offering space for business discussions and meetings.

British coffee chain Costa Coffee reworked its India strategy last January to close unviable ones and focus only on the metros for expansion. According to Ravi Jaipuria, Chairman of Devyani International, the master franchisee for the coffee chain in India, pricing is the key to success in the Indian market. Costa's coffees are priced at $3 outside the country but are sold at about half the price here.

Costa currently has 70 outlets in India and is planning to add another 50-60 outlets by December 2011. There's no doubt that the company is pushing the pedal hard now. In 2010, Costa opened 25 new stores, a number that it would double in 2011. Although the company has broken even at the enterprise level now, says Unni, the CEO, it would be foolish to grow too fast because “we would be squeezing margins then”. Costa Coffee does co-exist with Starbucks in several markets in the world and Unni says he does not see the latter's entry as ‘threatening.' Although the market is large enough for all of the current players, Unni foresees some consolidation in the near future.

The country has 1,300 coffee outlets in the large organised segment with the potential to accommodate 5,000 outlets, which could happen in about five years. Bijoor believes India can take yet another 4,000 cafes even at this point of time and Starbucks will help this effort. In his opinion, existing players will retain their share and CCD will still remain the biggie out here. Starbucks will maintain niche status for a while.

Tony White, Regional General Manager of Australian specialty coffee retailer, Gloria Jean's Coffees, says competing with Starbucks is not new for the brand. “We are a good significant global brand too and we welcome Starbucks because it will make the market space bigger,” he says. The brand is present in around 35 countries, with 1,000 stores. Barista has earlier indicated that 2012-15 would be the actual expansion phase for the company. It has around 225 outlets, which it plans to take to 300 by end-2012 and once the market picks up, will take ‘necessary steps for further expansion.'

On pricing, Bhardwaj says it's premature to make a comment. Bijoor's advice to Starbucks is to stick to its American pricing policy. The rationale: the cost of doing business in India is expensive. “This is 2011 and food and beverage inflation is just around 18 per cent. Add to it the fact that Arabica prices are on a 13-year high as of today. The cost of new real estate locations on the high street is very high as well. Starbucks needs to hold its price line.”

Bhardwaj of Starbucks is, of course, pleased with all the ‘encouraging remarks by competitors,' and is very optimistic about the growth of the coffee market in India. “Right now we're focused on entering this dynamic market, and we look forward to offering a unique, values-based Starbucks experience to customers here very soon.”

For Karthik Raghavan, a coffee fan, it's not the coffee at Starbucks that lures him to the outlet in the US, but its appeal as a rendezvous to meet friends and business associates. The sight of Starbucks also gives him a feeling of comfort, especially at foreign cities and airports, because “I know my options and what goes into them”. But in India, “It's Madras filter coffee that I would rather be holding,” says the much-travelled Karthik. Will you raise your cup to that, Howard S. Schultz?

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