Business, Economics and Jobs

India: Local giants wait and watch as Starbucks opens in Mumbai

Starbucks' signature burnt and bitter coffee comes to India on Friday, with the opening of the global java chain's first outlet in Mumbai.  But the US giant's late entry could make cracking India's booming coffee business tougher than expected.

Two Indian pioneers, Barista and Cafe Coffee Day, succeeded in converting Indian youth from tea to coffee essentially by providing a cheap date. Stop by any outlet in Delhi, Mumbai, or even a remote locale like Puri, home of the Jagunath Temple, on the coast of Orissa, and you'll find teenagers and 20-somethings on stealth dates -- nursing a single coffee frappe or brownie sundae for hours, and occasionally slipping out to the street for a cigarette.  

Sure, there are professionals, too. You'll note the occasional laptop. But the music is loud and there's a guitar on hand for anybody who wants to start a spontaneous singalong.  

That doesn't mean there's unbreakable brand loyalty for either joint, I suspect. But it suggests that the Indian market isn't as big or as profitable as Starbucks likely estimates. (The margins on a 60 rupee cup of coffee, consumed over two-and-a-half hours, have to be razor thin).  And it means that the world's biggest purveyor of milky drinks (something has to kill that bitter taste!) is way behind when it comes to boots on the ground.

As the Hindustan Times reports, the organized cafe business in India is presently worth about $240 million in revenue per year, which is a drop in the bucket compared with the $3.3 billion in revenue Starbucks posted for the third quarter. While the sector is growing by as much as 30 percent a year, there are already some 1,950 branded cafe stores in operation -- led by Cafe Coffee Day with 1,350 outlets. And global competitors like Costa Coffee and Dunkin Donuts have yet to dent Indians' preference for the local outfits.

Tata Starbucks, a 50-50 joint venture between Starbucks Coffee and Tata Global Beverages, will launch the country’s first Starbucks outlet in South Mumbai's posh Horniman Circle neighborhood Friday, according to Business Standard. The joint venture plans to open 50 stores by the end of 2013.

Citing brokerage CLSA, the paper notes that the global coffee chain overcame the odds in China, where locals preferred tea, to become an aspirational brand among consumers looking to adopt western values -- and China is now the company's second-largest market, after the US.  But even in the PRC, which it entered in 1999, Starbucks is only looking to increase from today's 500 stores to 1500 by 2015.

And in India, things may well be tougher. India has its own set of "aspirational" consumers, to be sure. But Indians tend to be more cost-conscious than the Chinese, and India's youth are already demonstrating preferences for quality local brands over international ones in many cases. (This effect is even more notable if you consider the elite youngsters of Delhi and Mumbai, who are as apt to choose a local dosa shack or kebab stand as they are to visit McDonald's, to be the trendsetters of tomorrow).

"We are targeting a broader market by being present in various formats.. the premium 'Squares', the 'Lounges' and the Cafes... whereas, many others, as I understand, will be targeting one niche segment," Cafe Coffee Day's V.G. Siddhartha told Business Standard -- a hint that Starbucks will price itself out of the competition. 

Meanwhile, as this Business Today article on Siddartha suggests, to make money in India's coffee business, you've got to push deep and wide into the market -- shere "CCD" is opening a new store EVERY DAY. 

"By number of coffee outlets, his retail chain today figures among the top six globally, behind Starbucks, Dunkin' Donuts, Tim Hortons, Costa Coffee and McCafe, some of which are part of bigger chains," the magazine wrote in 2011. "'Our own target is to have 2,000 stores in India and 200 overseas, mostly in Eastern Europe, by December 2014,'" BT quotes Siddartha as saying.

He's already punching well above his weight. Siddhartha's empire, which runs the gamut from cafes and coffee exports to wealth management and real estate developments, is already worth a little more than $1 billion, according to Business Standard.

What's more? A market research study conducted in 26 small towns across India in 2011 found Cafe Coffee Day among the top five brands youngsters could recall, according to the magazine. The other four: McDonalds, Reebok, Nike and Levi's. "Cafe Coffee Day has an opportunity to brand-colonize smaller towns where the aspiration lies," BT quotes a retail consultant as saying.