Starbucks: Coffee Wars in India

By: Ellen Zhang, Maya Neuman, Roberto Arguello, and Mridul Kapoor

IBUS 4401 – Managing Multinational Enterprises

Project Paper

March 20^th, 2018

Starbucks’ Business Model and Competitive Advantage in the US

Starbucks Coffee Company is currently expanding into India. With 11 coffee shops opened from 2012 to 2013, they are growing at a rather competitive rate. To successfully become the next specialty coffee shop powerhouse in India, both the U.S. strategy and the current Indian market strategy need to be analyzed and adjusted accordingly. An analysis was conducted to assess the Indian market conditions, the current Starbucks strategy, and the current strategy of the largest competitor in India; CCD.

Starbucks is already an internationally recognized industry leader because of the strategy that CEO Howard Schultz built through his first store. Soon after Schultz bought Starbucks, he began opening stores with the idea of gaining a strong foothold in each market and creating a strong presence in that city before moving to another city. His initial philosophy was for Starbucks to become the “third place” outside of home and work, where customers could go relax, meet friends, and enjoy a cup of high quality coffee and snacks. This created a distinct experience for customers as they could walk into any Starbucks store and find high quality products. The ambience created by the baristas, the furniture, music, and other customers was one unique to Starbucks, making it a place convenient for meetings, phone calls, and work. As Starbucks expanded into bigger cities, they opened stores in high-visibility locations with high foot traffic near offices, shopping areas, and schools. The proximity between stores helped build consumer loyalty and deter competitors. Starbucks did not advertise, rather, they relied on their superior customer service and word-of-mouth to attract new customers. These factors were crucial in helping Starbucks build a loyal customer base and positively build on their reputation. By focusing on providing freshly roasted and poured coffee, consumers were able to differentiate between tastes, giving Starbucks a sense of superiority over its competitors. Moreover, the support they gave its employees was unparalleled. The company invested heavily in their staff, who were referred to as “partners”. By offering stock options, health coverage, and better salaries, the company had approximately 60% annual attrition among staff, compared to 140%-300% in the industry. Their human resource management values-based approach allowed Starbucks to build strong internal and external relationships with suppliers. This drove the success of their business strategies when expanding into other markets and helped with the horizontal integration through smart acquisitions and alliances that helped maintain their long-term objectives of being one of the most recognized and respected brands. Overall, the core competencies of Starbucks have been its ability to manage their product differentiation strategies by offering a mix of high quality beverages and snacks. Their brand equity is built on selling the finest coffee and products and providing each customer a unique “Starbucks Experience”, derived from superb customer service, clean and well-maintained stores that reflect the communities in each they operate and thus building a high degree of customer loyalty.

Assessment of Starbucks’ foray into India

Starbucks entered the Indian market in January 2012 in a 50-50 joint venture with Tata Global Beverages, which was owned by the Tata Group. This joint venture has been quite successful since each partner could contribute its own share of expertise, with Starbucks knowing how to create the “Starbucks Experience” along with its products, and Tata bringing in the network of suppliers and connections that would otherwise have been difficult for a foreign business to tap into. This entry mode has been wise for Starbucks, especially in its initial stages expanding into the Indian market. Tata provides Starbucks with local expertise not only for the products in which Starbucks has been locally responsive as can be seen in its new product offerings which are more oriented towards Indian taste, but also in dealing with institutional voids that increase transaction costs (i,e. enacting and enforcing contracts with numerous suppliers in the process, regulatory inefficiencies). Tata has also helped Starbucks avoid many of the costs embedded in the liability of foreignness (i.e. avoided product adaptation costs since Tata has vast knowledge on local markets, additionally Starbucks is able to avoid governance costs by being in this joint venture with the largest conglomerate in India). The costs that Starbucks would have otherwise incurred without the joint venture would have been a great hindrance to its entry into India. Its largest competitor in the Indian market, Cafe Coffee Day, focuses on a low-cost strategy that allows it to achieve economies of scale and compete with Starbucks with their lower prices for relatively the same quality products they offer. Consequently, CCD is able to achieve this due to its vertically integrated business model and early entrance into the industry. Therefore, without the joint venture, Starbucks would have been far behind CCD in terms of lowering its cost of doing business in India. By 2013, Starbucks had 11 stores in metropolitan cities, such as Mumbai and New Delhi. All stores are in highly commercial areas, which is helping Starbucks sustain its initial growth in India since cities have higher per capita income and higher traffic flows, including international visitors that are already very familiar with the Starbucks brand, making its aggressive pricing and its premium over other coffee chains attainable initially. However, as Starbucks will continue to expand in India, they will need to focus on expanding beyond metropolitan cities and cater to a larger consumer segment.

Going forward

As a coffee powerhouse, Starbucks has been extremely successful expanding across the United States and internationally, with over 18,000 stores across 62 countries The Starbucks U.S. model puts a strong emphasis on the “Starbucks Experience”, focusing on superior customer service and high-quality coffee in an inviting and warm atmosphere. The Starbucks strategy has multiple key components.

High visibility locations: opening stores in areas with a lot of foot traffic, and heavily congested areas. Many times, opening multiple stores near each other building customer loyalty and deterring competition.

Superior customer service: the “Just Say Yes” policy referred to the customer always being right, if a drink wasn’t up to standards the customer would receive a free drink ticket. By connecting and building relationships with customers, Starbucks had no need for paid advertising, word of mouth from customers was beyond adequate.

Exceptional atmosphere: in order to become the “third place” where customers could go to relax, meet and socialize, attracting an array of customers.

A high quality of operations and offerings: to ensure superior quality, Starbucks owned most of its’ stores and purchased coffee beans directly from producing countries.

Employee compensation: to achieve superior customer service Starbucks needed to properly train and compensate its employees which were referred to as partners. Benefits included health coverage, stock options, tuition support and competitive pay.

As Starbucks began to expand internationally, it found that the most effective method was by working with local businesses to set up supplier relationships and understand the local market. Through the JV with Tata Global Beverages, Starbucks set itself up for 11 successful stores. Starbucks’ current strategy in India is like that of the U.S.

Tailoring to local culture: with the help of the Tata Group, Starbucks created a new blend of espresso specifically for the Indian market and set up an additional roasting plant in India. Additionally, Starbucks included locally inspired foods such as tandoori chicken in its food selections.

Engaging with local businesses: Starbucks turned to a local craftsman to help create the physical stores with some local flare to create a unique coffee experience.

Employee training: with superior customer service being a defining characteristic of Starbucks, training centers were set up in Mumbai and Delhi to train café staff.

Location: Upon entry to the Indian market, Starbucks set up the first 11 stores in Mumbai and New Delhi in highly commercialized areas.

In order for Starbucks to continue its’ expansion into India and become a true market leader, there must be some adjustments to the current strategy. In addition to what Starbucks is currently doing in India, it is suggested that they focus on expanding the employee partnership, lowering costs and lowering pricing. To continue the employee partnership Starbucks should consider offering strong benefits just like Starbucks does in the U.S. by offering healthcare, stock options, and tuition programs. The main area of concern for Starbucks in India is the pricing model, even though Starbucks is known for high quality and premium coffee, it is almost 50% more expensive than the largest Indian competitor CCD. India is in the process of building infrastructure, Starbucks should invest early in infrastructure projects and developments to gain an early movers advantage in future real estate prices which will pay off once the projects are completed. Additionally, Starbucks is known for exceptional employee compensation, as they pay double than that of CCD. It is important that Starbucks continues to put emphasis on their employees, but it is suggested that compensation should only be between 20%-35% more than the largest competitor.