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Strategic Issues Facing Starbuck’s Entry Into India Essay Sample

Strategic Issues Facing Starbuck’s Entry Into India Pages
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The Global Coffee Bean Company (GCB) decided that the Indian Hot Drinks Industry did not represent an attractive market. Following a recent announcement by Starbucks that they intend to enter the market we were commissioned to perform an initial analysis into the likelihood of Starbucks success. This report concludes that Starbucks initiative is sufficiently interesting to warrant a full scale investigation into whether GCB should also enter the Indian market. Introduction

This report is divided into a number of sections:
* Analysis
* Conclusions
* Recommendations
In the analysis section we look at a number of aspects affecting the likely success of Starbucks and GCB. These aspects are: * An identification of the strategic issues facing Starbucks as a company * A PESTLE analysis of trends in India

* A 5 Forces analysis of the Indian Hot Drinks Industry
* An analysis of the consistency of the Starbucks decision with their existing strategy * An examination of the pressures facing the Starbucks/Tata alliance over the next 10 years In the conclusions we consider the likely success of the Starbucks initiative and whether it could be replicated by GCB. Analysis

The strategic issues facing Starbucks
Porter (Porter, 1996) sees strategy as being about making choices about what you do, whereas operations is about doing those things better. Strategic issues are developments inside or outside an organisation likely to have an important impact on its ability to meet or determine its purposes and objectives. Starbucks mission statement can be summarised as creating shareholder value by serving ethically sourced, great tasting coffee in welcoming stores (Starbucks, 2012). Starbucks’ does not always live up to its aspirations but the stated objectives represent a good basis for analysis. We have conducted a brief analysis of recent publicly available data and consider the following to be the main strategic issues affecting Starbucks’ sustainability. * Domestic Market Saturation

* Supply Concerns
* Product Quality
* Threat of Substitutes
* CSR Issues, especially relating to employment in the USA Domestic Market Saturation
Key figures (Datamonitor, 2011, p24):
68.7% of the total revenues during FY2011 were from the US
US growth has slowed to 6.3%, international growth is at 14.7%. Supply Concerns
South American coffee bean production is down and expected to decline further (Datamonitor, 2011, p31). Prices are likely to escalate, especially for premium and Fare Trade beans. Product Quality

Starbucks has been registering increasing instances of product recalls lately (Datamonitor, 2011, p28) Threat of Substitutes
A major substitute for visiting a café is to drink more coffee at home or in the office. In the US Nestlé and Green Mountain are major proponents of this substitute. Starbucks is addressing the market too with its Via Ready Brew, K-cups and Verismo products (Datamonitor, 2011, p30) but these and the competitors’ products risk eroding the core store proposition. CSR Issues, especially relating to employment in the USA

Starbucks’ home page shows that the company currently considers many CSR issues to be of urgent strategic importance. The most visible of these is a focus on jobs in the USA. Trends in India

In this section we analyse the macro-environmental trends in India over the next 10 years and their likely impact upon the long-term profitability of Starbucks’ joint venture with Tata. The PESTLE (OU 2012a) framework represents a simple categorisation which can be used to identify positive trends (opportunities or tailwinds) and negative trends (threats or headwinds). The principle source for our analysis is the latest BMI report (BMI 2012) but we have also referenced additional sociological data (Varman & Belk, 2009). The findings are summarised in Figure 1 and detailed
below.

Figure 1 PESTLE Analysis
References on Figure:
1 BMI Page 7
2 BMI Page 10
3 BMI Page 45
4 BMI Page 15
5 BMI Page 46
6 VARMAN & BELK, 2009
7 BMI Page 31

The impact of these trends is principally positive. The strong and continuing demographic changes in India are especially favourable to a premium brand targeting an educated urban market sector. The risk to economic growth is a global one, rather than specific to India and is not therefore considered to be a disincentive. The local issues of terrorism and anti-consumption do represent issues which any entrant to the market needs to take into account. The anti-consumption and legal issues in particular are ones which would be likely to affect Starbucks or GCB more severely were they to enter the market without a strong local partner and co-branding. The position taken by Starbucks to jointly venture with Tata in a 50/50 partnership reduces the impact of legal restrictions where companies with more than 50% foreign ownership must source 30% of their goods from Indian cottage industries (Clasislaw 2012). However, the total scale of the Indian coffee market is likely to remain small.

BMI estimate a total market of $US1.5bn by 2016, which represents less than 20% of the 2011 US revenue. For India to be the growth engine it would need revenues of around $400M in 2013, representing more than 50% of the expected country total. This is unlikely given the expected activity of Costa and indigenous competitors. Also, Starbucks and Tata will share the profits. But there are as many middle class Indians as there are citizens of the US. The small market size is due to the difference in purchasing power between the US dollar and the Rupee, and to the disparity between coffee and tea consumption. If India follows the UK and converts from a tea to a coffee drinking society and if the disparity in currency were reduced, the picture would be different. Industry Analysis

In this section we analyse the relative attractiveness of the Indian hot drinks industry based upon an analysis of its industry structure. Porter’s 5 forces represent a way of structuring the information about an industry. When using this approach it is important to define the industry under analysis. For example, this enables one to differentiate between new entrants and competition. We follow the brief here and identify the industry as the Indian Hot Drinks industry. In this context both cafés and grocery stores in India are inside the market representing competitors whereas foreign competitors who have yet to enter the Indian market are new entrants. The suppliers to the Indian Hot Drinks industry are global so this distinction cannot be made for suppliers. Porter’s framework is intended to help measure the overall profitability of the modelled industry. Where the forces are weak, the industry can be profitable. Where the forces are strong, profitability will be low. The Indian host drinks industry exhibits moderately strong forces in all of Porter’s five dimensions. Suppliers and buyers have alternatives with low costs to change. Rivals can compete on equal terms and substitutes are, in fact, dominant. This suggests that the overall industry profitability should be quite low. This analysis is summarised in Figure 2

Figure 2 – Industry Analysis
The basis for the above summary is provided below. Each of the 5 forces are examined and assessed in terms of the threat to profitability they represent. Threat of new entrants

The threat of competition from new entrants tends to squeeze margins, promoting quality of product and service, advertising expenditure and keeping prices low. If new entrants face high barriers to entry then this force will be weak. If incumbents have clear operational benefits over new entrants then this force will be weak. For the Indian Hot Drinks industry barriers to entry are low for established outlets such as hotels which are in a related industry and can decide to promote their facilities to non-residents. Local entrepreneurs wanting to start a single outlet face some barriers to entry in terms of establishing supply, acquiring trained staff, premises and licences. Bureaucracy represents a moderately strong barrier to entry. Foreign companies face strong barriers to entry from bureaucracy, legal rules, etc (BMI 2012 p31). On the other hand, there are few clear operational benefits to incumbents.

Local distribution costs are likely to dominate long distance costs due to the low perishability of the product, low cost of freight by sea and poor transport infrastructure within India. The local nature of the costs therefore hits incumbents and new entrants alike. Demand side benefits of scale are limited by the capacity of an individual outlet. Customer switching cost is insignificant. Capital requirements scale fairly linearly on a per outlet basis. There are some incumbency advantages independent of scale, for example customer loyalty to a brand and early access to prime locations. In this initial analysis we have not found evidence of retaliation by incumbents although this could provide a mechanism for reducing the forces. In aggregate, we assess the threat of new entrants as high, although it is clearly easier for Indian new entrants than for foreign ones. The Power of Suppliers

Where suppliers can demand high prices there will be a strong pressure on profitability. This will be true where demand exceeds supply or the suppliers are not dependent on the industry for their income. The coffee bean market is global with most beans coming from South America. Considering the industry being modelled as the Indian Hot Drinks market means that the suppliers have the rest of the world as an alternative market. A succession of bad harvests has put supply at risk. The power of coffee bean suppliers is therefore considered to be high. Conversely, the other primary supplier group is labour. Indian labour is cheap, plentiful and well educated. The power of this group is considered to be low. Other considerations are the cost of changing suppliers and the threat of forward integration. Changing suppliers is relatively easy with a mature global trade in beans although labour laws make sacking staff difficult. The JV with Tata can be seen as an instance of forward integration, since Tata are historically a raw material supplier now entering the industry. In summary, Supplier Power is considered to be low to medium. The Power of Buyers

Powerful buyers force down prices and demand high quality products and services. Buyer power is strongest when there are few large buyers or strong consumer activist organisations. This is not the case in the Indian Hot Drinks Industry so the overall potential for buyer power is relatively small. However, the cost of switching is very low for buyers and word of mouth and other social networking can create a powerful lobby in favour or against a particular brand. Buyer power is therefore considered weak to medium.

The threat of substitutes
For the Indian Hot Drinks industry, there are many possible substitutes. Defining the industry boundary in this area is complex. Should home drinking or office drinking be considered industry rivalry or a substitute? We treat it as a substitute but it could equally be considered to be part of the industry. Soft and alcoholic drinks represent clear and active substitutes with competing outlets offering much of the same experience as visiting a café. The cost to the buyer of switching to substitutes is low and buyers may switch just part of their purchasing behaviour. However, coffee ‘culture’ is considered aspirational by the rapidly growing middle class in India. The threat of substitutes is considered high.

Rivalry among existing competitors
There is significant opportunity for rivalry within the Indian Hot Drinks industry. The market is segmented by product (tea, coffee, etc.) and between premium and basic brands, as well as between chains and boutique outlets. There may be fruitful rivalry between the premium and basic market segments. There is a significant element of zero-sum competition between tea and coffee and between premium brands. The industry contains major global and Indian chains and the tea segment is five times bigger than the coffee segment (BMI 2012 p46). Rivalry is therefore considered to be a strong force.

Is Starbucks’ decision to enter India consistent?
The following quotation from the Starbucks 2011 annual report (Starbucks 2011p2) provides a useful statement of its pre-existing international strategy: “Our objective is to maintain Starbucks standing as one of the most recognized and respected brands in the world. To achieve this goal, we are continuing the disciplined expansion of our store base, primarily focused on growth in countries outside of the US.” Starbucks stores in the US and abroad offer the same experience. In terms of Ansoff’s model (Ansoff 1957) (Figure 3), Starbucks can be seen as pursuing a market development strategy.

Figure 3 – Ansoff’s Matrix
The Starbucks entry into India can be seen as consistent with this strategy. But, by offering Tata tea products Starbucks is taking the strategy further into diversification. Also, by partnering with Tata, with Tata owning the stores, Starbucks may have to work hard to maintain the brand identity and values in the Indian market.

Strategic Pressures over the next 10 years
In this section we analyse the possible relative impact of the following ‘pressures’ (OU, 2012b) on the joint venture over the coming ten years * industry dynamics
* globalisation
* risk
* ethics

Industry dynamics
The Indian Hot Drinks Industry is likely to change significantly over the next 10 years. The major vectors influencing change are the slow tendency to liberalisation of the legal framework for doing business, the Indian and global financial outlook and the continuing urbanisation of the population and rising middle class. These vectors could push the Hot Drinks Industry in a number of directions. Recognised premium global brands are likely to find a healthy segment in the market, alongside boutique and ‘heritage’ outlets. One interesting question is whether India will follow the UK in moving from a very tea dominated market to one where coffee is preferred. Increasing liberalisation, urbanisation and a growing middle class all tend to suggest that the overall industry will see noticeable growth over the next 10 years. Within this overall positive trend, there may be an even larger growth in coffee drinking. If this trend does not happen, the coffee market will see 6-8% growth. If there is a large movement from tea to coffee, the growth could be as large as 40%. This is unlikely, but some optimism is called for. Starbucks/Tata is well placed to exploit and direct this trend. Globalisation

The Hot Drinks industry is already a very global one. Even more diversification of supply is likely but there are anti-globalisation pressures in India which may continue to provide advantages to Indian companies. The joint venture is capable of exploiting some of these advantages but this also represents a risk as discussed below. Risk

The culture of ‘swadeshi’ (Varman & Belk, 2009) is likely to have an influence and will prevent total domination of the market by global brands. Swadeshi is a term used by Mohandas Ghandi to promote cottage industry in India as a means of wealth creation. Any global brand such as Starbucks is both ‘cool’ as a product to be seen in foreign movies and consumed by celebrities – and a dangerous example of foreign cultural and economic imperialism. The role of Tata is interesting. Whilst not eliminating either the positive or negative connotations of the Starbucks brand, Tata bring an additional element of credibility. As a global company with Indian roots they can be seen as a successful counter to foreign expansion. As an industrial conglomerate they can be seen as part of the problem to lobbyists for cottage industries. A significant risk to Starbucks is that the Tata brand might become dominant. Looked at from an Indian perspective, this looks more like a Tata product development than a Starbucks market initiative. If Tata find that their cafés sell more Tata tea than Starbucks coffee, there may be no benefit in continuing the joint venture. The fact that the joint venture also makes Starbucks into a market for Tata makes this even more attractive to Tata, but at least from Starbucks perspective makes Tata more likely to remain in the JV. Ethics.

Starbucks and Tata both have strong CSR profiles at the corporate level. Tata’s fits in very strongly with Indian tradition and politics. However as the Tata family stewardship of the group is diluted by retirement it may become weaker. A cursory Google search of ‘Tata’ and ‘pollution’ does not return any significant scandals. Starbucks makes much of its attention to supporting the community where its outlets are and its Fair Trade commitments. It has in the past had a reputation for opening shops against local opposition and without planning permission. Over the next 10 years CSR is likely to become even more important. Tata and Starbucks appear to be complementary in this area and are likely to continue to weather this pressure. Conclusions

Why India for Starbucks now?
Starbucks entry into the Indian market comes at a time when it needs to further reduce its dependency on growing the domestic market. The demographic size of the market and the success of competitors such as Costa (DNA 2012) and CCD (BMI 2012) together with a very attractive risk reducing partnership with Tata make India an attractive next market to address. Why could this be a big mistake for Starbucks?

A conservative estimate of the overall size of the Indian coffee market, coupled with the market share achievable by Starbucks and the profit sharing with Tata makes it unlikely that India will provide enough growth to replace the stagnant US market. The joint venture with Tata could rebound, having a negative impact on the global brand, and/or being more of a success for Tata than for Starbucks. Indeed, it is possible to see the JV as a successful forward integration by a supplier, which would have the effect of eroding the attractiveness of the industry. Will Starbucks succeed in India?

There are several possible criteria for success
1) the joint venture is profitable
As long as the lessons learned by Costa and CCD are applied, this is very likely 2) the brand image of Starbucks is maintained, both in India and globally If Starbucks maintain a good overview of the local operations this should succeed 3) Starbucks reduces its dependency on the US domestic market. This is dependent on a major shift in drinking habits

Could the Global Coffee Bean Company Replicate the Starbucks Initiative?

GCB would have to invest significant resources building up a viable Indian management team to penetrate the Indian market on its own. However, partnering with a supplier like Tata, or with an existing brand such as CCD which was interested in the GCB brand, could be a valuable addition to global operations. Recommendations

GCB should undertake a more detailed business opportunity assessment.

References

ANSOFF, I.: Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5,Sep-Oct 1957, pp. 113-124 BMI (2012). India Business Forecast Report (May 2012) Q2 2012. Business Monitor International Ltd. clasislaw (2012) India Across Borders [online] http://www.clasislaw.com/uploads/Files/Across%20Borders_India%20Ed%20Feb%202012.pdf (Accessed 18 July 2012) CRABTREE, J., FONTANELLA-KHAN, J. and JOPSON, B., (2012). Starbucks to enter India in $80m Tata joint venture, Financial Times, January 31, 2012. DNA (2012) ‘Demand is so high we could open 4 Costa Coffee cafés at each junction’ [online] http://www.dnaindia.com/money/interview_demand-is-so-high-we-could-open-4-costa-coffee-cafs-at-each-junction_1647218 (Accessed 24 July 2012) Datamonitor (2011) Starbucks Corporation, Company Profile [online] http://search.ebscohost.com.libezproxy.open.ac.uk/login.aspx?direct=true&db=dmhls&AN=E86AFA79-07E1-4115-AA0C-0016416541FE&site=bsi-live (Accessed 18 July 2012) P.F. (2012), India’s retail reform: Prada is not Walmart The Economist [online] http://www.economist.com/blogs/schumpeter/2012/01/indias-retail-reform (Accessed 18 July 2012) PORTER, M.E. (1996) What is strategy? Harvard Business Review, November–December, pp. 61–78 STARBUCKS (2012) Mission Statement | Starbucks Coffee Company [online] http://www.starbucks.com/about-us/company-information/mission-statement (Accessed 18 July 2012). OU (2012a), PESTLE framework [online] http://learn2.open.ac.uk/mod/oucontent/view.php?id=62475&section=3, (Accessed 18 July, 2012) OU (2012b), The B835 strategy framework [online] http://learn2.open.ac.uk/mod/oucontent/view.php?id=62475, (Accessed 18 July, 2012) VARMAN, R, & BELK, R 2009, Nationalism and Ideology in an Anticonsumption Movement, Journal Of Consumer Research, 36, 4, pp. 686-700, Business Source Complete, EBSCOhost, viewed 9 July 2012. DOMINIC WALSH, (2012). Now it’s time for tea at Starbucks [online] http://infoweb.newsbank.com.libezproxy.open.ac.uk/iw-search/we/InfoWeb?p_acti

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