It's a mega alliance between two multi-billion-dollar brands that is poised to change the latte landscape in the country. But, even "the frappe folks" from Seattle's Starbucks will have to strictly follow the Tata Group's brand code and licence fee as their joint venture kicks off. This, say brand consultants, is perhaps a first of its kind arrangement in India.
After four years of diligence, Starbucks, the world's largest coffee chain, on Monday announced an equal JV with Tata Global Beverages (TGB) to roll out its cafes nationwide.
A separate new company, Tata Starbucks, will be formed with an equal 50 per cent stake held by the two. This announcement comes a year after Starbucks entered into an agreement with Tata Coffee Ltd, a listed subsidiary of TGB, to source and roast arabica coffee beans in India.
Sources close to the development say separate legal contracts have been signed by which the JV will have to adhere to the brand fee rules the Tata Group follows and pay royalty.
In the mid-1990s, Tata Sons, the closely held holding company for the group, had announced a royalty - or a "contribution" or a "fee" - to be charged from all Tata group companies for the use of the Tata name, either directly in the company's name or indirectly.
The fee ranged from 0.25 per cent of the turnover (not exceeding five per cent of net profit) from blue-chip group companies to 0.10 per cent, depending on the brand leverage. Joint ventures where the foreign partner was offering its brand name gratis were exempted.
Tatas are possibly the only Indian corporate house to have institutionalised a brand code of conduct and have a separate cell within Tata Sons called Brand Equity and Brand Promotion Fund to monitor all brand-related issues.
In 2011, according to the world's leading brand valuation consultancy firm Brand Finance, the diversified Tata Group corporate brand was valued a little over $15 billion. It was the only Indian conglomerate to have broken into the top 50 global brands in the elite Brand Finance 500.
This annual league table values top brands worldwide. In the same year, Starbucks was ranked 184th, with a valuation of $5.4 billion.
When it comes to branding initiatives, the JV will have some unique features, too. In a first of its kind move, Starbucks outlets in India will be branded as "Starbucks Coffee, a Tata Alliance". This very usage will make Tata Starbucks Ltd dish out the royalty.
So how will it work out? Sources close to the negotiations say first both the stakeholders of the JV company will pay an equal "equity" or licence fee to Starbucks and Tata Global Beverages, respectively, for using their brands and services.
This could even be as high as one per cent of sales. Tata Global Beverages, in turn, will sign a separate agreement with Tata Sons to share 0.25 per cent of the sales value for using the Tata moniker.
Tata Group's spokesperson, however, did not want to comment on the subject. When contacted, he said, "These are part of a commercial agreement and so the Tata Group doesn't want to comment on it."
Tata Group insiders say the template has been similar even in the past when the group has had several global JVs with big brands like IBM, Honeywell or Avaya. "In many cases, only the international partner gets a fee for their brand usage. But in our case, we insist that it be paid equally to both," said a senior official who did not wish to be named. "It's not just about using a brand, but also the different services," he added.
Brand consultants could not agree more. "This is perhaps the first time an Indian corporate has been able to command a value or a licence fee for an intangible asset like a brand. So, it's a marriage of equals and Starbucks in India will not be an overriding foreign brand," says Unni Krishnan, India MD, Brand Finance.
"Typically, in such JVs, the Indian partner is mostly the hardware provider whereas the software and the brand premium is always provided by the foreign partner. Despite the strength of the Starbucks brand, here the iconicity and legacy of the Tata brand is getting respected," he added.
The alliance will indeed be intrinsic. The formats will vary as they expand the operations by tapping into shopping malls, hotels, offices, airport lounges, railway stations, colleges and other public spaces.
Tapping into the existing Tata eco system of Taj hotels and retail outlets will be an obvious option, even though the first store is likely to be a stand-alone one.
But, the group has been using its brand strategically. For example, in many of its marquee brand acquisitions the Tatas have not insisted on their names being added. For example, Jaguar Land Rover, the iconic British carmaker that Tata Motors acquired in 2008, does not bear the Tata name anywhere and retains its initial luxury equity. Therefore, JLR does not pay any brand royalty to Tata Sons though it is very much a part of Tata Motors.