StarbucksTATAAllianceMarketingStrategy

ByMartinaKancheva UniversityofBath

AccordingtotheHarvardBusinessSchool,after Starbucksfirstenteredoneofthemosttea lovingcountries(England)in1998,teasalesfellevenascoffeesalesroserapidly.By2008, annualsalesofcoffeeinBritainhadexceededsalesoftea.India,whereStarbucksplansto penetratethisyear,isalsonotahabitualcoffeedrinkingnation.Thecurrentpaperaimsto proposeastrategyforenteringtheIndianmarketwhilethetakingintoaccountlocaltastes andlifestyle. The analysis begin with an overview of the Indian Coffee Retail Market; continues with examiningthestrengthsofthe Starbucksbrandandthebenefitsofajointventurewiththe India's largest coffee producer and exporter. The report will finally propose the most effectivemarketingstrategyforStarbuckstoentertheIndiancoffeeindustryandgetapiece ofthe'marketpie'. 1.SituationAnalysisoftheIndianCoffeeRetailMarket As coffee shops may be nearing saturation point in the US and Europe, Starbucks has identified the potential to expand in emerging markets like China and India. The coffee industryisexpectedtocontinuegrowingthroughatleasttheyear2015andevenlongerin emergingmarkets(Lingle2007). As there no framework that provides a full picture of the dynamics within a particular market, a more holistic approach will be adopted. Economic, Legal and Sociocultural factorswillbeexaminedfromaPESTELanalysis and the Power of Suppliers, the Threat of CompetitorsandtheThreatofSubstitutesfrom thePorterFiveModel. Picture1:PortersFiveForcesModel 1.1.EconomicFactors

TheIndianeconomywillexpandanestimated6.5percentthisyear,thefastestpaceamong developingAsianeconomiesexcludingChina,accordingtoJanuaryestimatesfromtheWorld Bank (Agrawal and Sharma, Bloomberg 2012). TheReserve Bankof India projects seven percent growth for the twelve months ending March. As sales contribution in the US has declinedinthepastdecadetolessthan70%inthelastfiscalyear, Starbucksisexpandingin fastdevelopingmarketslikeChinaandIndia. India is one of the emerging markets throughout the world that is becoming a spending orientedcountry.ThepersonaldisposableincomepercapitainIndiahasdoubledbetween 200001 and 200910 resulting in improved purchasing power (Deloitte 2011). Thus, its upperandmiddleclassesaremoreabletospendmoneyoncoffee,beveragesandfoodin coffeehousesthatmightnothavebeenthoughofasanecessityinthepast. 1.2.LegalFactors Indias government on January the 10th raised the ownership limit to 100% for foreign retailers selling a single brand, a decision benefiting companies including Starbucks (Passport,Euromonitor2011).However,StarbucksandTATAwillpossessequalsharesinthe ventureasbothcompanieswillbothbenefitfromsuchanalliance. 1.3.SocioCulturalFactors Indiaisatraditionalteadrinkingnation(Vasudha2011,pp.2)whichisprovenbythefact that69.9%ofthehotdrinksmarketisdominatedbytheteaindustry(Figure1).

 Figure1.IndiaHotDrinksMarketSegmentation EventhoughinIndiateawasthecommonbeveragefortheupperandmiddleclasses,now coffeeisbecomingastatementofwealthandprosperityamongthetraditionalsectorofthe Indian population, i.e. people more resistant to changes (aged above 30) (Bose, Reuters 2012).Thisphenomenonmightbeexplainedbythefactthatasmoreandmoreeconomies head towards industrialization, those economies also begin to be influenced by westernization. Westernization is also easily adopted by the younger generation in India (1825 years). Researchshowsthat72%ofcoffeeshopscustomersarestudentsandyoungprofessionals (Euromonitor 2011). The popularity of specialist coffee shops among youths as a place to socialiseregistered18%growthin2010;withaveragetimespentonatablehigherthatin other countries. Spending capacity of youth of India is increasing, as well as their brand consciousness.60%ofIndiaspopulationisbelowtheageof30leadingtopopularizationof brandsandproducts(Deloitte2011). As illustrated above, there is a market potential subject to dual economies, i.e. targeting boththemodernsector(youths)andthetraditionalsector(nationalisticindividualsresistant tochanges)(Nuttall2011).

Intheprocessassessingthegrowthopportunitiesinthespecialtycoffeeindustry,onemust alsoexaminethecompetitivelandscape. 1.4.BargainingPowerofSuppliers Themajorthreatinthespecialtycoffeeindustryisthepowerthatsuppliershaveoverthe priceofcoffee.Arabicacoffeepricessoared77%in2010whichcausedconcernstocoffee retailers (Murphy 2011). Arabica coffee is one of the most sold brands of coffee in the specialtycoffeeindustry.Withpricesforthattypeofcoffeeskyrocketing,ithurtthebottom lineofcompetitors,especiallythosethatthriveonalowcoststrategy.However, Starbucks strategy can be regarded as charging premium price for premium product; and it is supplyingcoffeeformtheirpartner,sothepowerofsupplierscanberegardedasweak. 1.5.CompetitiveRivalrywithintheIndustry The second threat is from specialty coffee competitors that Starbucks will face when it enters the Indian market. Wellestablished coffee shops chains, such as Caf Coffee Day (CCD)andBarista,enhancedtheirpanIndiapresencein2011.In2010,CCDandBaristahad 970and200stores,respectively,andtheyaimtocontinueexpandinginthenextfewyears (Datamonitor2010).Meanwhile,severalrelativelynewplayers,suchasCostaCoffee,Coffee Bean, Gloria Jeans and Java Coffee, are trying to get a piece of the pie in Indian coffee retailing.Boththesefactorsdroveontradeconsumptionoffreshcoffeebeansin2010,with volumesgrowingby12%(Datamonitor2010).Ontradesaleshaveemergedastheprimary sales channel for fresh coffee beans, in the absence of any substantial offtrade consumption.However,thepopularopinionwasthatwithonlyabout1500cafestheINR 20billionmarketprovidedenoughroomforgrowthandcouldaccommodatemoreplayers. (Vasudha 2011) Even that major players started expanding, there is potential for further growthintheIndianCoffeeRetailMarket.

1.6.ThreatofSubstituteProducts A third relevant threat in the case of Starbucks entering India is the threat of substitute goods. For instance, consumers may opt to reduce their caffeine intake due to health concerns,whichwillinfluencecoffeeconsumptionsomewhat.Insuchcase,herbalteaand functional drinks can be potential substitutes. However, considering the increased consumption of coffee in recent years, it is unlikely that such substitution would substantiallyimpactuponsales.Overall,thethreatofsubstitutesintheIndiancoffeemarket mightbeconsideredasmoderate. 2.Starbucks Thissectionaimstoexaminethestrengthsofthe Starbucksbrandandcriticallyevaluatethe rationalebehindtheiralliancewithTATA. 2.1.SWOTAnalysis SWOT analysis will be used to evaluate Starbuckss Strengths, Weaknesses, Opportunities andThreats. Strengths Leading retailer and roaster for brand specialtycoffeeintheworld; Brand image with the motto The StarbucksExperience; 17000storesacross57countries;1500 inChinaalone; Strongbalancesheet; One of the strongest franchises in the world with more than 6 500 licenses afford; Starbucksrefusestoguaranteethatmilk, beverages, chocolate, ice cream, and bakedgoodssoldinthecompanysstores are free of geneticallymodified ingredients; FocusedmoreonUSdomesticmarket; Starbucks Workers Union was made Weaknesses High pricing which not everyone can

shopsintheworld; Starbucksisknownforprovidingsuperior productsandservices; Have loyal customers in every country thathasentered; Sophisticated atmosphere, music, interiordesignandartwork; Havealotofflavoursvariation; Limitednumberofstrongcompetitors; Highmarketshareandmarketgrowth. Opportunities Highconsumerisminemergingmarkets; Easier to penetrate market because Starbucks is selling as experience, not justasimpleproduct; Many of Starbucks coffee are using organicbeans; SomeofStarbuckssbeansareharvested in Indonesia island of Sumatra and Sulawesi. Starbucks are purchasing at premium prices to support local community and sustainable production. Starbuckspaysanaveragepriceof$1.20 per pound against the commodity averagepriceof$0.400.50perpound; Table1:StarbucksSWOTAnalysis FairTradeProductscanbeoffered.

because some employees complain about the management style within the company; NoexperienceincountrieslikeIndia.

Threats Globalfinancialcrisismadepeoplespend less on good that are not regarded as necessities; Increasinghealthconcernofthenegative effectofcoffee; Starbucks domination is driving small cafesoutofthebusiness; Threat of substitute products in cultures where there is a strong preference for tea, like China, India and UK.

Afterexaminingthestrengthofthe Starbucks company,oneshouldexaminethestrengths ofthejointventurethatStarbuckswillenterwithTATAGlobalBeveragesGroup.

2.2.TheJointVenturewithTata StarbucksenteringintotheIndianmarketwillbeintheformof50/50jointventurewiththe TATA Global Beverages Group. Share prices of both companies soared following the announcement of the pact. (Vasudha 2011, pp. 10) This is the first time Starbucks is enteringthemarketwithalocalpartnerandwillbecobrandingtheirstoresandproducts with their counterpart. The Indian outlets will be called Starbucks TATA Alliance. The partnershipwillenableanexpandedrangeofbeverageofferingsforIndianconsumers.One of these being the Starbuckss premium tea product Tazo that will be available in Indian outletsrenamedasTATATazoTea. Themajoradvantageofthealliancewillbethattheknowledgeandunderstandingofthe Indianmarketcanbebroughtby TATAGlobalBeverages.(Vasudha2011,pp.10)Entering intoastrategicpactwiththeworldslargestintegratedcoffeeplantationcompanyshould enable Starbucks to ensure sustainable profit growth in India. Also, TATA Tea is the tea market leader with 18.4% share. Starbucks will also benefit from TATAs experience in the Indianmarketregardingdifferenttastesindifferentregions;thusmakingsureitoffersthe mostpreferableblendofbothteaandcoffeetocustomers. Apartfromproductandlocalpreferencesknowledge,StarbuckswillbenefitfromTATA Globalsinfrastructure.InIndia,thereisthechallengeofbalancinghigherrentalsand profitabilitygiventhelackofinfrastructureinIndiaalongwithinflatingrealestateprices. StarbucksisastepaheadofcompetitorsduetotheiralliancewithTATAGlobalGroup.TATA hasalocalknowledgeontherealestatemarketandtheyhaveopportunitiestoleverage theircapabilitiesinthisarea.StarbuckswillbeabletouseTATAscurrentinfrastructureto effectivelygrowthebusiness. TATAGroupwillalsobenefitfromthepact.TATAsexperienceinretailingisnotsufficientto openacoffeeretailshopontheirown;so,byenteringinsuchalliancetheywillgainavast amountofknowledge.Also,TATAGlobalBeveragesproducesbottledHimalayanwater whichmightbeofferedinStarbucksstoresaroundtheworld.

Starbucks should also consider the possible disadvantages of such joint venture. After gainingenoughknowledgeinretailingindustryandknowingtheIndianmarketbetter, TATA mightdecidetocompetewithStarbucksinsteadofworkingwiththem.Inaddition,potential conflict might occur regarding the strategy of the alliance and how it should be managed. Suchjointventuresmightalsoaccruesignificantcostsofcontrolandcoordination;andon topofthat,profitissharedwithapartner. 3.MarketingStrategy TheHarvardBusinessSchoolFramework(Figure2)(Comrie2012)willbeusedasamodelto explainthemarketingstrategyinthecurrentproposal.

Figure2.HarvardBusinessSchoolFramework ThemarketinganalysiswasconductedinSection1.

3.1.CaptureValue In this section, tools and techniques will be used to explain how Starbucks can create and capturevaluefortheirproducts. 3.1.1.MarketSegmentation Apartfromthedemographiccharacteristicspresentedinpartoneoftheanalysis,marketers should also consider psychographic variables such as interests and lifestyles. In general, IndiascoffeeculturehaschangedthewayyoungIndianssocialise.Inacountrywherethere isalimitedbarculture,andwheredrinkingalcoholisstillnotallowedinmanycircles,ithas provided an acceptable and safe outlet for people, particularly young Indians, to share a drink(Vaidyananthan,BBC2012). As mentioned earlier, coffee is becoming a statement of wealth and prosperity among peoplewithhighdisposalincome,i.e.individualsinemployment. 3.1.2.TargetMarketSelection Themarketingstrategywillfocusontargetingbothgroupscollegeanduniversitystudents (aged1825)intheshorttermandworkingprofessionals(2540)inthemediumtolongrun. Also,touristandfrequentflyerswillbeatargetaudienceinthelongrun. 3.1.3.ProductandServicePositioning It is essential to have a unique selling point to position Starbucks above competitors (Pickton 2005). In TATAStarbucks customers will be able to rely on genuine service, an invitingatmosphereandasuperbcupofpremiumcoffeeorteaeverytime.

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3.2.SetMarketingObjectives In order to make the marketing communications objectives as comprehensive as possible, the SMART approach has been used, to ensure the objectives are specific, measurable, achievable,realistic,timedandtargeted: The proposed strategy provides a plan for TATAStarbucks to open 50 stores by the end of 2012inmajormetrocitiesandsecondtiertownsofferingpremiumcoffeeexperiencetothe primarytargetgroupofstudents(aged1825)andworkingprofessionals(aged2540). 3.3.MarketingMix(4Ps) ThemarketingmixwillbeexaminedtodetermineStarbucksTATAuniquesellingpoints,i.e. theuniquequalitiesthatwilldifferentiatetheirproductsandservicesfromthoseof competitors. 3.3.1.Product AnilDharker(2012),aMumbiancolumnistandsocialcommentatorinIndia,pointsoutthat whenaforeignplayerseesacommercialopportunityandentersthenewmarket;andthen itadaptsgiving McDonaldsasanexample(Vaidyanathan,BBC2012).However,thisshould notbethecaseandStarbucksshouldhaveaclearstrategyabouttheirproductrange(both drinksandfood)itisgoingtoofferpriorenteringtheIndianmarket. CostaCoffeeShopsin India, for instance, offers products like Apple Pie Latte, Latte Caramellato, Coconut Hot Chocolate, etc.suitedforIndiantaste(CostaCoffeeIndiaonline2012).Therefore, Starbucks should adapt their drinks in order to cater local preferences. Ice coffees should also be includedin StarbuckssmenuasIndianshaveastrongpreferenceforthembecauseofhigh temperaturesduringsummer. However, one should not ignore the fact that India is a tea loving country even though people prefer to consume tea at home because finding a perfect cup of chai outside is

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really tough," said Smiti Singh, a Bangalorebased software engineer, who drinks at least four cups of tea a day (Madhok, Reuters 2012). TATA Tea (a unit of the softwaretosteel TATA conglomerate)istheworldssecondlargestbrandedteacompany,sotheirpremium teaproductsshouldbealsoofferedtocustomersapartformtheTazoTea. ThebiggestdistinctionisnorthIndia'spreferenceforbread,meat,andchai(tea),compared to the south's preference for rice, pulses, and coffee. Foodwise, paninis, sandwiches and wrapswithmeatbutnotwithbeef.ThecowisconsideredsacredbymostHindusandhence beef is considered taboo in the majority of Indian states. Predominant food option in the southshouldbethebistroboxeswithriceandpulses. 3.3.2.Place The first Starbucks locations are scheduled to open in August in New Delhi and Mumbai. TATA Starbucks might consider the option of opening on the 15th of August, Indias IndependenceDay.StarbucksTATApartnershipisexpectedtoopen50storesinthecountry by the end of 2012. Starbucks also plan to explore the retail properties of Croma, Star Bazaar, Trent and Indian Hotels belonging to the TATA Group to open stores and also to rope in another franchisee for standalone cafes in the future. (Vasudha 2011) This is an efficientwayoftargetingindividualsonbusinesstripsinNewDelhi,forinstance,whoprefer to go to a place which is familiar for a cup of coffee; or tourists, who do not want to experiencethelocalculture.Asaninternationalbrand, Starbucksshouldalsoopenkiosksat airports; thus, not depending solely on Indian tastes and preferences as airports are occupiedwithpeoplefromallovertheworld,whowillrecognisetheStarbuckslogo. In Mumbai (most populous city in India) Starbucks should position the stores mainly in shopping centres, cinemas, near universities or cultural venues as it is commercial and entertainmentcapitalofIndia. Coffeeshopsnormallyclosearoundelevenoclockatnight,soStarbucksshouldconsiderthe option of closing at midnight or even one oclock in the morning; thus, becoming the

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preferredvenueforyoungpeople.Also,providingsomeguitarforjamsessionsorkaraoke nightsonFridayorSaturdaymayattractevenmorepeople. Ascoffeechainsareseenasplacestosocialiseandpeopleaged2540willbealsoatarget group of the Indian population, Starbucks may consider opening a new type of Starbucks coffee called Starbucks Lounge, for example. The atmosphere in the lounges will be more relaxedandtheinteriormoreexpensive;thuswealthyindividualswillbeabletoshowtheir class. Ingeneral,expertsfeltthatlargestcafchainsinIndialike CCD, BaristaCoffeeand Qwikys are targeting the same locations, mainly the large cities. Geographical expansion has huge possibilities as cities are not saturated and the market is not limiting at all. Therefore, StarbucksTATA should aim to gain competitive advantage in smaller cities as well in the medium to long rum as people there are more likely to be brandloyal as opposed to customersincosmopolitancities. 3.3.3.Promotion Promotionalactivitieswillnotbeanalysedindetailsastheyshouldbeinlinewith Starbucks promotions worldwide. Besides, retailers in India rely heavily on wordofmouth (personal communication).The StarbucksCardwillbeintroducedaconvenientwaytopayforyour drinksandearnrewardsforyourpurchase.Furthermore,instorepromotionsaccompanied bynewproductssuchasdrinksandaccessoriessourcedfromtheregionsshouldbepresent inIndiaaswell(Vasudha2011). Even though it is highly unlikely for a coffee chain in India to advertise on TV, Starbucks mightconsiderthatidea.IntheUS,therearethreeplacesthattheaverageAmericanspend his time during weekdays at home, in the work place and in Starbucks. So, they should somehowshowthewesternlifestyletotheIndianandaTVadvertisementatthedayofthe launchshoulddothejob.

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Furthermore, it is the first 50/50 joint venture for Starbucks; so, both Starbucks and TATA Groupwillbenefitfromcomarketingactivities. 3.3.4.Price Historically Starbucks has retained it US pricing model in almost every market they have entered, but should they follow the same pattern in India? Starbucks should adopt their pricingbasedonthedemandformtheIndianconsumer.AfteranalysinganalysedtheIndian market for hot drinks and the price elasticity of products, probably the prices of products shouldbeatleast30%lowerthanintheUS. Conclusion If Starbucks can adapt to the peculiarities of the Indian market, coffee may soon become manyIndianscupoftea. Based on the analysis presented above, the current proposal contradicts Levitts globalisationtheorysuggestingthatcompaniesmustlearntooperateasiftheworldwere onelargemarketignoringsuperficialregionalandnationaldifferences.(Levitt1983,pp. 92)InIndiaF&Bandretailtypicallyisveryclosetolocalcultureandtaste(Vasudha2011); thus, the so adaptation or glocalisation strategy should be adopted (Robertson 1994). Glocalisation will serve as a mean of combining the successful Starbucks strategy in providingtheemotionalneedsaroundtheworld(Vasudha2011)whiletakingintoaccount localtastes. 14

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February9,2012.

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