INTERNATIONAL BACCALAUREATE DIPLOMA PROGRAMME

Extended Essay in

Business and Management

Research Question:

Which would be a better option? For Starbucks to enter the Indian Market through a joint venture with Tata global beverages limited (TGBL) or to enter by itself.

Name of the student: Jason Fernandes

Candidate Number: 002272-019

Name of School: Bangalore International School

School Number: 00

Abstract: 254 words

Main Essay: 3786 words

Session: May 2013

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Acknowledgements

First of all, I would like to thank Mrs. Chitra Iyer, my subject teacher for

Business Management and supervisor for this project, who gave me constant support

and advice throughout this work and without whom my work would be impossible. I

am also grateful to Mr. Steven Andrew the executive chef of French loaf who granted

me the opportunity to carry out this study and provide me with help and information I

needed through my interview with him.

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TABLE OF CONTENTS

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 01

Contents page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 02

Abstract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .04

2. Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 05

3. Techniques used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 07

4. Main results and findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .09

5. Analysis of primary and secondary data . . . . . . . . . . . . . . . . . . . . . .12

6. Marketing mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

7. Fishbone analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

8. Ansoff matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

9. Decision tree analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

10. Investment Appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

11. Conclusion and recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

12. Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

13. Appendix 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

14. Appendix 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

15. Appendix 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40

16. Appendix 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

17. Appendix 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

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ABSTRACT

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Introduction

On the 30th of January 2012 the US based Coffee giant Starbucks Coffee signed a

joint venture deal with Tata global beverages limited (TGBL). TGBL has signed an

equal joint venture with Starbucks Coffee where each of the companies will have a

50/50 percentage stake in the venture. The joint venture1 under the name of “TATA

Starbucks Limited” will now operate in India under the brand name of Starbucks

Coffee “A Tata Alliance”. Starbucks will setup shops in Tata group retail outlets and

hotels besides sourcing and roasting coffee beans.

Starbucks Coffee have also made a separate sourcing and roasting agreement with

Tata Coffee limited (subsidiary company of TGBL), were Tata Coffee limited (TCL) will

supply roasted coffee to all Starbucks outlets in India and abroad as well. The gives

Starbucks consumers the opportunity to enjoy the premium Starbucks Experience,

while further still feeling at home with the unique taste of high-quality Indian Arabica

coffee. And when news of this agreement reached the public TCL’s share price shot

up over 100 points

The question we are addressing here is could Starbucks have been in a more

beneficial position had it set out on this business venture on its own instead of joining

up with TGBL?

Keeping in mind the above question, what needs to be taken into consideration would

be the barriers to entry that the Indian government creates for these multinational

companies, the popularity demand for Starbucks brewed coffee, and many other

factors which shall be discussed.

‘Which would be a better option? For Starbucks to enter the Indian Market through a joint venture with Tata global beverages limited (TGBL) or to enter by itself?’

1 http://www.thehindubusinessline.com/industry

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Findings And Results

The cafe industry

The Indian Cafe market can absorb up to 5,500 outlets. At present the size of the

coffee chain market in India is Rs 1000 crore ($200 million) and is estimated to be

growing at a compound rate of 25% annually. And with a decreasing growth in

developed markets India is becoming a big hot spot for multinational coffee retailers.

Breakup of coffee outlets in India

café cofee daybaristacosta cofeeothers

The above statistics show that there is still room for Starbucks to open over 3000

more outlets in India. And being a world renown brand there is no need for them to

enter through a joint venture.

Starbucks biggest competitors currently would be Barista Coffee and Cafe coffee day.

Consumption of coffee in India doubled to over 100,000 metric tonnes between 2001

and 2010 therefore exposing a large potential to be exploited by Starbucks. The

Indian government is now allowing 100 per cent foreign direct investment in single-

brand retail. On January 10, the government fully opened the doors to international

single-brand retailers, paving way for global chains to have full ownership of their India

operations. This should enable Starbucks to enter India on its own and without

partnering with an Indian company. And Judging from the fact that Starbucks already

operates in over 17,000 retail stores in over 55 countries. This indicates that

Starbucks have plenty of brand awareness even in a country such as India where

there still isn't a single Starbucks outlet. From the broader view Starbucks seems to be

better off on its own than in a 50/50 joint venture partner ship with TGBL, so what

reason would they have to team up with TGBL?

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Till the mid-1990s, coffee consumption in India stagnated at 55,000 tons annually. It

has more doubled since then because of the growing number of coffee café led by

domestic brewers like Cafe Coffee Day (CCD) and Barista. Over the years, others like

the Coffee Bean & Tea Leaf, The Chocolate Room, Qwiky's, Café Nescafe and now

Starbucks have joined the industry resulting in a healthy and competitive market. India

provides a very fertile soil for a company like Starbucks to take its root and succeed

either by itself or through a joint venture; there is no room for failure when it comes to

a branded company like Starbucks.

Starbucks Coffee

Starbucks is the largest multinational Coffee Company in the world, which is based in

Seattle, Washington. They purchase and roast high quality coffee, which is then sold

along with hand, crafted tea and coffee beverages and a large variety of fresh food

items, through company operated outlets. Starbucks also sell other flagship brands

that are owned by Starbucks, which include Seattle’s Best Coffee, Tazo Tea, and

Starbucks VIA Ready Brew.

In their main aim of trying to achieve becoming one of the most recognized and

respected brands in the world, Starbucks maintains a disciplined expansion of their

store base, which is typically focused on growth of their brand in countries outside the

United States.

Operations of Starbucks Cafes in the world (19,555 stores)

USA Canada Japan Great Britain China South Korea 0

2000

4000

6000

8000

10000

12000

14000

Starbucks Coffee is a company that can manage to survive even if the market

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conditions aren't favorable. They have maintained a dominant market position through

various marketing strategies such as buying out competitors and intentionally running

under loss where they would use pricing methods such as predator pricing to drive out

small local competitors. This shows that Starbucks can be a very ruthless company

when it come to surviving and gaining market share. Through this we can make an

obvious prediction that Starbucks is equipped with the marketing skills needed to

ensure its success in India, without the help of TGBL.

Over the years Starbucks have show a steady growth in net revenues. At the end of

2011 star bucks reported a highest ever recoded annual revenue of 11.7 billions

dollars. This is the result of various expansion projects that star bucks initiated by

opening new stores at a rate of over 500 stores per year, mainly in new markets,

where India still remains one of the markets that are yet to be tapped by this

corporation. Based on Starbucks growth strategies in the past we can expect

Starbucks to launch a minimum of 500 new stores within the first year of its operation

in India. This would propel Starbucks into having the second highest market share in

the industry. Ahead of barista and below Cafe coffee day.

TGBL

Tata Global Beverages limited (TGBL) is a part of the global Tata Group. TGBL is the

world’s second largest tea company. The group’s annual turnover is US $1.5 bn and it

employs around 3000 people worldwide. The Company focuses on ‘good for you’

beverages and has a stable of innovative regional and global beverage brands,

including Tata Tea, Tetley, Himalayan natural mineral water and Eight O’ Clock

Coffee.

TGBL is now ready to make its entry into the fast growing Indian café retail market

through its partnership with the renowned international coffee brand, Starbucks Coffee

Company. Both these industry giants will operate under the name of TATA Starbucks

Limited (TSL). The joint venture is being made under a subsidiary company of TGBL

know at Tata Coffee. Tata Coffee is Asia’s largest coffee plantation company and the

3rd largest exporter of instant coffee in the country. They produce more than 10,000

MT of Robusta coffees and shade grown Arabica in plantations spread out over 19

states in India and its two manufacturing facilities have the combined capacity to

produced over 6000 metrics tones. They export their coffee to clients in Europe, Asia,

Middle East and North America which is also where Starbucks Coffee is based.

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2 http://corporate.indbankonline.com/documents/TATA%20Global%20Beverages%20Ltd.pdf

http://www.tataglobalbeverages.com/media-centre/news/news-detail/2012/05/21/tata-global-beverages-and-starbucks-form-joint-venture-to-open-starbucks-caf%C3%A9s-across-india

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Analysis

The following revenues show a steady growth in Starbucks sales over the years,

although this is without Starbucks operating in the largest population in the world. In

simple terms India would make 1/7 of Starbucks customer base. Out of the 59

countries Starbucks operates in, the Indian market one day would be equivalent to 8-9

of those countries.

Another factor that should be taken into account is that the Indian government

imposes very high taxes on the imported products, therefore sourcing most of its raw

materials through its joint venture with TCL from within the country itself can help

Starbucks work around this problem. This is one of the prominent reasons why

Starbucks signed the joint venture with TGBL, in view of the fact that it will save

Starbucks millions of dollars over the long term.

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3On the contrary the above statistics of the Starbucks sales mix shows that coffee

sales only amount to 3-4% of total sales. Therefore greatly reducing the beneficial

factor of the joint venture. Although there could other intentions such as the raw

materials being provided by Tata coffee are not only meant for the Indian market but

for the manufacture of coffee products worldwide in all other Starbucks outlets, in

which case coffee production on a scale that large would be largely beneficial for

Starbucks. Coffee could also be used

It will also enable Starbucks to keep costs low and in turn keep prices low so it can

compete with the rest of the market. In a country like India where the cafe industry

depends so heavily on the spending of the youth, keeping prices low would be very

essential in Starbucks success, as most youth in India are on a modest budget. When

it comes to a cafe chain like Starbucks they customarily charge high premiums for

their products all around the world at least when you look at it from an Indians

perspective, therefore they are going to have to completely change their pricing

strategy when it comes to the Indian market, and that is probably where TGBL comes

in. While Starbucks have a great deal of experience in running operations worldwide

they are still inexperienced when it comes running low cost operations efficiently in a

country like India. The kind of business strategies needed to adapt in the Indian

market could be unique compared to the conventional methods they are used to.

3 http://corporate.indbankonline.com/documents/TATA%20Global%20Beverages%20Ltd.pdf

http://www.tatacoffee.com/

http://www.tataglobalbeverages.com/media-centre/news/news-detail/2012/05/21/tata-global-beverages-and-starbucks-form-joint-venture-to-open-starbucks-caf%C3%A9s-across-india

http://www.business-standard.com/india/news/finally-tata-coffee-to-bring-starbucks-to-india/462351/

http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4607

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In this case the Starbucks alliance itself and its brand would be the product. And while

most companies need to spend high amounts of capital in initiating brand awareness

and acquiring publicity, Starbucks got a little luck from the hype created from their

alliance with TGBL itself. Months before Starbucks even opened their first outlet in

India, they had already received plenty of valuable publicity from the media itself. And

once the general public is aware of Starbucks entering the market there nothing more

then need to do I terms of marketing as Starbucks already have a strong stance as far

as branding is concerned and most Indian consumers are already aware of that.

From the diagram we can see that in India's cafe market is still growing and would

therefore put Starbucks in the perfect position to set up outlets and penetrate the

market, as the market is still vacant to absorb more competition and supply. On that

account it will be years before Starbucks reaches its maturity and saturation point in

India. And Decades before it reaches a decline.

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Pestle analysis

Political - Indian government is now allowing 100 percent foreign direct investment in

single brand retail. Therefore this greatly reduces one of the barriers to entry to set up

in India. This would have also made it more feasible for Starbucks to penetrate the

Indian market own their own instead of a joint venture with TGBL.

Economical - The Indian cafe industry in India is currently strong and going through a

rapid growth and is still far from its maturity and saturation stage. Therefore the

perfect economic environment for Starbucks to be successful.

Social - Starbucks is a very popular brand worldwide. And its arrival into India will

definitely have created plenty of hype amongst consumers. This hype would also have

reduced the need for Starbucks to spend too much money on marketing the brand in

India.

Technological - New factories to be open for production of Starbucks products in

India. Starbucks might instead just set up assembly operations in current TGBL

factories. This would save Starbucks massive amounts of capital which would have

otherwise been invested in setting up new factories.

Legal - Many tax restrictions on imported products. The government is also very strict

about any meat products. In some states Starbucks will not be able to sell any beef or

pork. The smallest problem spotted by any consumer, can cost Starbucks millions. For

example when Mc Donald's was sued by a customer for millions of dollars for frying

their fries in animal oil instead of vegetable oil.

Environmental - India presents a very comfortable and inviting environment for

Starbucks to set up operations in India. While at the same time they might have to

adjust and cut down on their pricing as India offers a very competitive market and for

Starbucks to penetrate and gain market share they will have to present themselves as

a value for money brand. Which means their products will have be a lot more

affordable in India than compared to their products in other countries.

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An additional factor we need to consider is the fact that start bucks has reached its

saturation point with their cafes in many economies abroad where they still have a lot

of scope to exploit the Indian untapped cafe market.

INCOME & DIVIDEND, ETC. 2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

Sale Value of Coffee andEstate Products and Gross Income

From Services rendered (Rs. in millions)

38.25 537.0 65.39 57.36 74.68

Profit Before Tax (Rs. in millions) 5.27 5.55 7.72 5.68 10.0

As percentage of Sales 14, 10, 12, 8, 13

14 10 12 8 13

Profit After Tax (Rs. in millions) 4.46 4.05 4.94 3.73 6.4

Swot analysis for Starbucks coffee penetrating the Indian market on its own.

Strengths

18. Number one cafe in the world, big corporate image

19. Has experience in managing and running over 20,000 cafes in 58 countries, India being the 59th.

20.

Weakness

New to India. Not aware of its cultural practices wont know how to market

properly.

Opportunity

Big Market of over a billion people.Only 3 major competitors to compete

with.2nd fastest economic growth in the world

after china. Increased spending in lifestyle.

India has a young population. And it is the youth that fuels the india cafe

industry.Exploitation of low labour costs.

Threat

Already many competitors in the market.Very cultural country, some company

practices could offend the people which could lead to bad publicity for

Starbucks all over the country.

4

4 3 http://en.wikipedia.org/wiki/Starbuckshttp://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome

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Swot analysis for Starbucks entering the Indian market through a joint venture with

Tata global beverages limited.

Strengths

21. TGBL has been based in India for 50 years and have good knowledge

how the Indian market works.22. Both are well established brands23. Both have the advantages of a

CSR reputation24. Both use each others resources

such as raw materials like coffee beans, etc.

Weakness

Expensive premium pricingMay cause conflict with Tata’s alliance

with barista.Lack of brand awareness in India.

Opportunity

TGBL owns one of the largest coffee and tea companies in the world and has the

potential to take Starbucks to new heights!

Increase in consumption of coffeeTata’s dependency on commodities

lowers and can now diversify into retail.Easy to open up Starbucks outlets in

Numerous Taj hotels all over India.New line of products that can be

outsourced from TGBL.

Threat

Profits have to be split.Conflicts between strategies of the

joint venture.High level of competition such brands

like cafe coffee day, French loaf and other local brands.

Demand for cafe products is price elastic - therefore pricing ay be any

issue

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Products

Existing New

Markets

Existing

Market penetration Product Development

New line of coffees for Indian market.

Collaboration for raw materials with Tata Coffee.

Adopting TGBL products under the Starbucks brand

New

Market Development

Coffee, and Beverages Food and Pastries Large line of TGBL

products.

Diversification

.

Cost Differentiation

Bro

ad

Cost leadership Differentiation

Tata and Starbucks

Nar

row

Cost focus Differentiation focus

Market Share

High low

Mar

ket

Hig

h

Stars Problem child

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gro

wth

Lo

w

Cash cows Dogs

While market development is considered to be a medium risk business growth

strategy, it can be very risky for Starbucks to operate in a market it is unaware off.

Especially a market as unpredictable as India which is rapidly growing. Therefore the

joint venture with TGBL would make more sense. While at the same time Starbucks

would also be able to seize many other growth opportunities such as open up outlets

in most TAJ hotels due to the fact that in India Starbucks would be considered a high

end brand, their outlets would correlate well in five start Taj hotels.

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Appendix 4

Strengths

25. Number one cafe in the world, big corporate image

26. Has experience in managing and running over 20,000 cafes in 58 countries, India being the 59th.

27.

Weakness

New to India. Not aware of its cultural practices wont know how to market

properly.

Opportunity

Big Market of over a billion people.Only 3 major competitors to compete

with.2nd fastest economic growth in the world

after china. Increased spending in lifestyle.

India has a young population. And it is the youth that fuels the india cafe

industry.Exploitation of low labour costs.

Threat

Already many competitors in the market.Very cultural country, some company

practices could offend the people which could lead to bad publicity for

Starbucks all over the country.

Appendix 5

Strengths

28. TGBL has been based in India for 50 years and have good knowledge

how the Indian market works.29. Both are well established brands

30. Both have the advantages of a CSR reputation31. Both use each others resources

such as raw materials like coffee beans, etc.

Weakness

Expensive premium pricingMay cause conflict with Tata’s alliance

with barista.Lack of brand awareness in India.

Opportunity Threat

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TGBL owns one of the largest coffee and tea companies in the world and has the

potential to take Starbucks to new heights!

Increase in consumption of coffeeTata’s dependency on commodities

lowers and can now diversify into retail.Easy to open up Starbucks outlets in

Numerous Taj hotels all over India.New line of products that can be

outsourced from TGBL.

Profits have to be split.Conflicts between strategies of the

joint venture.High level of competition such brands

like cafe coffee day, French loaf and other local brands.

Demand for cafe products is price elastic - therefore pricing ay be any

issue

Appendix 6

Products

Existing New

Marke

ts

Existi

ng

Market penetration Product Development

New

Market Development

32. Coffee, and Beverages33. Food and Pastries34. Large line of TGBL

products.

Diversification

New line of coffees for Indian market.

Collaboration for raw materials with Tata Coffee.

Adopting TGBL products under the Starbucks brand.

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Bibliography

http://corporate.indbankonline.com/. (February 10, 2012). “Bright days ahead with Starbucks alliance”. Available:

http://corporate.indbankonline.com/documents/TATA%20Global%20Beverages%20Ltd.pdf. Last accessed 23/7/12.

http://www.tatacoffee.com/. (2012). Tata coffee. Available: http://www.tatacoffee.com/. Last accessed 23/7/12.

http://www.tataglobalbeverages.com/media-centre/news/news-detail/2012/05/21/tata-global-beverages-and-starbucks-form-joint-venture-to-open-starbucks-caf%C3%A9s-across-india

http://www.business-standard.com/india/news/finally-tata-coffee-to-bring-starbucks-to-india/462351/

http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4607

http://en.wikipedia.org/wiki/Starbucks

http://investor.starbucks.com/phoenix.zhtml?c=99518&p=irol-irhome

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