Reading the coffee grounds

In a few weeks from now Mumbaikars are expected to get a feel of the Starbucks experience at its first store in South Mumbai. The equal joint venture of the Tatas and Starbucks floated in January this year is a late entrant to the market but it will have the backing of the Tata Group to find the right locations for its stores.

After announcing its intentions to launch 50 stores early this year, the venture has been cautious in launching its first outlet. While there are more stores planned for Mumbai this year, the entry into the Delhi market is being rolled over to early next year.

John Culver, President, Starbucks China & Asia Pacific admits, “We are going to have challenges in doing business in India and have to make sure we enter the market in the right way for the location of our stores. We will leverage the expertise of the Tatas in understanding the real estate market to get the right locations.’’

Adds Avani Saglani Davda, CEO, Tata Starbucks, “We have a lot of companies across the Tata Group which have real estate across the country. These can help us in getting sites which are iconic.”

Realty bites

Most of the existing coffee retailers are already grappling with the prohibitive rentals in the two metros.

“Coffee retail is all about having neighbourhood stores and so finding the right location at the right price is imperative for any chain. While big players like Starbucks will create awareness and build the category, getting the right real estate is going to be the biggest challenge,’’ claims Joseph Cherian, CEO, GFA Global which operates specialty food brands such as Pizza Corner and Coffee World.

But Starbucks already has a head start. Its first store is being launched at a heritage property in Elphinstone House at Horniman Circle in Mumbai, owned by a subsidiary of Tata Sons.

Starbucks, however, will not be restricting itself to the Tata-owned properties and will be present wherever there is potential to get customers, across malls, high streets, business centres, offices and airports. “Café chains do not have high margins and getting the right rentals at malls and high streets will always be a challenge. While there might be a demand for cafés, there is not enough supply of properties due to which most of the players are suffering,’’ says Vishal Sawhney, President, Citymax Hospitality, the master franchisee for Gloria Jeans Coffee.

However, cracking the Indian market with the help of the Tatas may be relatively easy for Starbucks compared to its experience in 55 other countries with its 17,000 retail stores.

For instance, although it exists in Australia, Starbucks was forced to shut down stores as it could not adapt to local needs. Even in the UK market it slipped from the leadership position it enjoyed five years ago, ceding space to local chains such as Costa Coffee. Independent coffee shops run by family-owned businesses in countries such as Italy have also delayed the entry of Starbucks.

“The business model of Starbucks has been successful in non-coffee-conscious countries such as the US, North Europe and to a certain extent, in Japan. They built a brand and an experience due to which the brand sold. But this experience comes at a cost – you pay an awful lot of money for a barely decent coffee. Starbucks has been successful in the US where this business model is appreciated as Starbucks provides a rich customer delight and experience – you sit in a shop with free wi-fi, in a comfortable chair and you can work, eat and talk to your friends. Its business model is not about coffee; coffee is an excuse,’’ says Carlo Altomonte, Professor of Economics, SDA Bocconi School of Management, Italy.

However, Starbucks has tasted success in the Chinese market where, despite its premium pricing, it has managed to get converts to coffee in a tea-drinking nation.

“Starbucks did not change its business model when it entered the Australian market. Its large-sized coffees may have worked in America but Australians do not drink coffee like milkshake. As long as Starbucks adapts to the local needs of the market, it will do well. It has learnt from its Australian experience and pitched its brand to the Chinese consumer with a local menu,’’ observes Sachin Sabharwal, Managing Director, Di Bella Coffee, Australia’s premier coffee company which has already entered India through a joint venture.

Starbucks is making sure it caters to local tastes and has also drawn up an extensive food menu which will be region-specific. “We intend having a unique dish to cater to every region that we are in and the menu has been crafted by chefs from Taj to cater to the Indian palate. We intend surprising the consumers with our premium yet value for money offerings,’’ promises Davda.

Premium a problem

While it is positioned as premium, Starbucks may have to tweak its prices to suit the Indian market. For instance, there are signs its coffees will cost $2 (above Rs 100), a tad lower than its US pricing ($3). But the pricing dynamics in coffee retail are undergoing a change and it remains to be seen if consumers will be ready to accept its ‘premium’ offering. As R. Shivshankar, Director, South Asia, Barista Lavazza says, “Pricing at a premium is not going to be sustainable for Starbucks and it has to adjust it. After all, there are coffees which are being sold for much less in India through the branded coffee shops.’’

Other industry observers also believe India does not really have a coffee drinking culture unlike in the US where consumers head to a coffee place first thing in the morning.

“We are still at 85 gm of coffee consumption while in the US it is 4 kg of per capita consumption,’’ claims K. Ramakrishnan, President, Café Coffee Day, the market leader with 1,380 outlets today.

However, there is always room for more coffee chains. “There will not be a squabble with more coffee chains coming. The entry of Starbucks will only do good to the category as it is still the number one player while we are the second largest coffee chain,’’ adds Santhosh Unni, CEO, Costa Coffee.

Starbucks is also expected to face manpower challenges. The Tata-Starbucks alliance is already releasing huge ads in dailies for baristas, shift supervisors, assistant store managers and store managers with the promise of the ‘Opportunity to be more than an employee’, and be partner instead. “There has been a tremendous response and today we have already hired 60 people who are undergoing training at the support centre. There is a leadership programme in place and we are in the process of hiring store managers,’’ says Davda. The company is staying away from a franchise model and will own and operate the Starbucks cafes in India.

As Starbucks gets ready to unleash its ‘experience’ in the Indian market, its success will depend on how quickly it manages to scale up and impress Indian consumers.

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