Here’s Why Starbucks Is Not Expanding Aggressively In India

Starbucks’ (NYSE:SBUX)’ stock price is down nearly 20% since June this year amidst investor concerns on growth, as congestion impacted the company’s comparable sales, and it lowered its profit guidance for the rest of the year. While growth slowed down in the U.S., international expansion remains a key growth driver for the company. Starbucks is expanding aggressively in China.  However, in another emerging economy, India, the company reported the slowest revenue growth of 14% for the fiscal year ending in March 2017 — indicating that it is no longer expanding aggressively in the country. In the previous fiscal year (March 2016) the company had registered a nearly 40% growth in sales on the back of strong expansion. Currently, India does not contribute significantly to Starbucks’ revenues, where the company has less than 100 stores in partnership with the Tata Group. This number is fairly insignificant compared to the 1,300 stores it operates in China and the target of 5,000 stores in China by 2021. While Starbucks’ management has stated that it expects to open 1,000 stores in India in the distant future, this seems less likely in the short term. India is not likely to be a growth engine for Starbucks and the company appears to be following a measured expansion strategy in the country.

Organized Cafes Command Small Market Share

While economic development has led to the increase in per capita income in India, the consumers in the region are cost conscious and hence demand for a premium brand such as Starbucks would be limited. Further an aggressive expansion into the tier 2 and tier 3 cities in the regions might not be profitable for Starbucks in the immediate future given that most customers are looking for “value based products.”  Nearly 70% of the fast food industry in India is unorganized and organized formats command a less than 5% share in the food services industry in India. This makes growth for these cafes challenging and foreign chains (such as Gloria Jeans) have either exited the country or consolidated.

Aggressive Expansion Can Impact Profitability

Starbucks has been in China for much longer compared to India where it started around 6 years ago. Just like China, India has predominantly been a tea drinking nation and the coffee culture is slowly picking up among the younger generation. However demand for premium coffee brands such as Starbucks is currently restricted to the high spending urban population. Aggressive expansion in these areas can lead to lower traffic per store as customers choose to visit the nearest Starbucks restaurant, impacting profitability negatively. India can drive growth for Starbucks in the long term as per capita income increases and a larger section of the population adapts to the coffee culture. However, a measured expansion strategy in the short term can lead to profitable growth.

International expansion is essential for Starbucks to drive long term growth. We believe the company’s current focus on China is justified and as the India economy grows and matures, it would find more growth opportunities in the region. For now, profitable growth, as opposed to aggressive expansion, seems to be the right strategy for the country.

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