What's brewing in Starbucks' cup? Find out...

While Starbucks is coming to India in a formidable alliance with the Tatas and lots of international experience, it can still fall victim to the perils of pricey real estate and staff churn.

They are two of the most formidable brand names, one, the Tatas, the other, Starbucks.

And their decision to come together has meant that the close to Rs 10-billion-coffee-chain market in India is unlikely to remain the same.

The $11.7-billion-Seattle-headquartered Starbucks Coffee Company will finally launch its stores in India in partnership with Tata Global Beverages with whom it has signed a 50:50 joint venture.

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For Tata, this will be its second bid to enter the coffee-chain business after it made a 34.31 per cent investment in Barista, a decade ago.

But, the firm subsequently exited the business in 2004, selling its stake to Sterling Infotech promoted by businessman C Sivasankaran, who eventually sold his entire holding to Italy's Lavazza in 2007.

Starbucks, in contrast, has been looking to participate in India's growth story for a long time now but was still waiting for the right opportunity.

India will now be its 58th market of operation. And the firm, according to its president, China and Asia-Pacific, John Culver, is here for the long term.

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"We are serious about the Indian market and are keen to grow quickly," he said in an interaction with Business Standard recently.

The Seattle-based coffee giant isn't interested in sitting around researching the market and deliberating on the right strategy. Perhaps, it has already done all of that.

Either way, it plans to set up 50 stores by the end of the current calendar year including standalones as well as outlets at select properties within the Taj group of hotels.

Starbucks will also look at tapping multiple channels such as universities, colleges, malls, hospitals, railway stations etc to set up shop.

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Soon, Indians may become as conversant with the terms frappe latte and grande mochaccino as the rest of their caffeine-loving cohorts around the world.

With this kind of pace, and other global players such as Dunkin' Donuts also slated for an India launch later this year, Indians are going to see an unprecedented onslaught of coffee vendors soliciting their palates, thereby significantly changing the coffee landscape in the country forever.

With 17,000 outlets across 57 countries, Starbucks, as experts say, is a master at its job. While the bulk of its outlets are situated within its home country of the US, the company has been rapidly expanding its footprint outside of the US for over a decade now.

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In most markets, Starbucks is a strong contender. Take China, for instance, where the coffee-chain major first set up shop in 1999.

In about 12 years, the chain is the leading organised player with a store count of about 500. It now plans to treble the number of outlets in three years. In India, Starbucks first set the ball rolling a year ago with an agreement with Tata Coffee to source and roast coffee beans.

The state-of-the-art roastery, according to Culver, will be commissioned shortly. This will be near Bangalore, where Tata Coffee has 19 estates spread across the districts of Coorg, Chikmagalur and Hassan in Karnataka and Coimbatore in Tamil Nadu.

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Starbucks plans to source Arabica coffee, not just for its local operations but also for its international business. It will also, as part of its menu in India, offer food locally developed by Tata's TajStats, a co-branded tea drink called Tata Tazo, unique beverages customised to Indian needs, Himalayan packaged water as well as merchandise and loyalty programmes.

Dalip Sehgal, a Hindustan Unilever and Godrej group-hand, who now runs his own consultancy called DS Consulting in Mumbai says that this kind of rigour and quality of service can be expected from players such as Starbucks.

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"They will obviously raise the bar," he says. Even rivals find it hard to disagree with this, admitting that players such as Starbucks will not only grow the market but also introduce best practices at the same time.

"Of course, one can expect the market to grow with the entry of Starbucks," says K Ramakrishnan, president, marketing, Cafe Coffee Day.

The top 40 cities in India, according to Saloni Nangia, president Technopak Advisors, a retail consultancy based in Gurgaon, near Delhi, has about 1,600 cafes at the moment.

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"These cities can accommodate another 2,000 cafes in the next few years," she says, pointing to the 200 cafes per annum added in the last five years as proof of the trend.

Bangalore-headquartered Cafe Coffee Day, the largest coffee-chain player in India with 1,200 outlets, alone proposes to add 1,000 stores by 2014, taking up its store count to over 2,000.

Lavazza, owners of Barista, has 154 outlets at the moment and proposes to get aggressive with its upscale, flagship format Expression, which has been recently launched in Delhi.

Attilio Capuano, Asia and Pacific Director, Lavazza, says that at least two more Expression cafes will be launched in Bangalore and Mumbai respectively, with plans to increase the number going forward.

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Costa Coffee, the number three player in India with 95 outlets, will add 50 to 60 cafes in the current calendar year, taking its overall count closer to 150, according to chief executive officer Santosh Unni.

Yet, despite the credentials of the venture and the abilities of both Starbucks and Tatas, the road towards retail coffee dominance in India is not an easy one. Barista found this out the hard way, being forced to shut close to 30 outlets in the last five years.

Capuano says that the outlets were closed because they were simply unprofitable. And therein, say experts, lies the catch.

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"Retail is a business of locations," says Sehgal. "If you have the right property and the right product mix, then there's no stopping the footfalls," he says.

A good example of this is McDonald's, which, according to experts, has managed to become the landmark of the locality especially in a city like Mumbai, simply because of its locations.

Yet, given the expansion activities of so many coffee retailers, finding good properties, say experts, is a challenge. Plus, the rentals are also steep.

For every Rs 100 worth of sales at a cafe, the costs works out as follows: Rs 35 is the consolidated cost of the product including food & beverage.

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The balance Rs 65, which is the gross margins for a cafe has to cover operational expenditure such as rent (15 to 18 per cent), staff (10 per cent), utilities (6 per cent) and store-level promotions (4 to 5 per cent). What they are left with is net margins of close to Rs 10, which is not very substantial.  

Retailers say that owing to the demand-supply mismatch in properties, managing rentals is clearly becoming a huge problem.

Add to this staffing woes, thanks to the churn in the food and beverage industry, which is nothing less than 30 to 40 per cent. Staff costs are also a challenge.

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However, the most challenging issue for Starbucks appears to be its price point. Culver says that Starbucks will be a 'premium' experience which experts feel means an average spend of nothing less than Rs 250 for both food and drink put together at a Starbucks cafe.

Experts say that in a price-conscious market like India, where the cafe culture is not very widely penetrated yet, being premium could be restrictive.

Culver responds to this by saying: "We feel the experience we propose to offer will live up to the pricing we propose to have. It will be competitive."

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