Starbucks Hopes To Replicate Its Chinese Success On Indian Soil

by Trefis Team
+7.77%
Upside
76.53
Market
82.48
Trefis
SBUX
Starbucks
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Starbucks Corporation (NASDAQ:SBUX) is lining up a $78 million investment to enter into the Indian market. The Seattle-based coffee chain formed a joint venture with Tata Global Beverages earlier this year, wherein the two companies plan to open outlets in India in the second half of 2012.¬†Dunkin Donuts, owned by¬†Dunkin Brands (NASDAQ:DNKN), has already opened its first restaurant in India this year, while Krispy Kreme plans to open 80 new restaurants in the country within the next five years. Apart from these two companies, Starbucks also faces competition from the already established players in the coffee chain segment such as India’s Cafe Coffee Day and Britain’s Costa Coffee.

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It hopes to replicate its Chinese success in the Indian market. In China, the brand has positioned itself as a destination for upper middle class people, where the consumers can get a high quality coffee experience. Eating out at Starbucks is considered hip and middle class Chinese consumers aspire to be seen at Starbucks. In many cases, the prices of its products are more than those in the U.S. For example, a basic grande drip costs around $3.2. [1]

What might be seen as part of an everyday life in the U.S. or Europe might be seen as a luxury in India or China. The fact that an average Chinese consumer is able to afford Starbucks comes with a feel-good factor; a few years ago he/she might not have been in the position to do so. Furthermore, the well-traveled and more-educated Chinese citizens are more likely to show an appreciation as well as awareness for Western culture; something which again works in favor of Starbucks.

India Not Easy

But cracking India won’t be easy for Starbucks. It not only has to introduce products suited to the local tastes, but also must take into account that India traditionally has a tea-drinking culture. India’s per-capita coffee consumption stands at a mere 82 grams annually, compared to 6.8 kg for Germany or 5.9 kg for Brazil. [2]

Another issue Starbucks is likely to face is that Indian consumers are going to be more price sensitive than their Chinese counterparts. Average incomes in India are half those in China (in terms of purchasing power) and the number of millionaires one-tenth. Maintaining a fine balance between brand perception and prices will be a tricky issue for Starbucks.

We have a $54 price estimate for Starbucks, which is about 10% higher than the current market price.

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Notes:
  1. China’s Favorite Affordable Luxury Lifestyle Brand: Starbucks, September 5, 2012, brandchannel.com []
  2. Coffee giant Starbucks taps into tea-loving India, September 2, economictimes.com []
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