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November 4, 2011

Starbucks to Enter India – Product Line-up Provides Competitive Advantage

Coffee5Starbucks move to enter the Indian market appears to be well-timed and bodes well for coffee consumption in a tea dominated market. While India is dominated by a tea drinking culture, coffee specialist chains have been making in-roads. This is helping to create a taste for coffee in the Indian market. This shows-up as opportunity for coffee chains as well as retail sales.

Starbucks is not the first coffee chain in India but the market may be poised for rapid growth and could easily benefit from a new competitor. In addition to the foodservice channel, Starbucks may be able to take advantage of a retail opportunity. Starbucks Via Ready Brew provides an entry in the rapidly growing instant coffee category that other multi-national cafes cannot match.

Starbucks' Foodservice opportunity

Specialist coffee shop chains outlet growth is growing at an increasing rate. In 2009 the number of outlets increase by 12% over 2008 and the growth rate accelerated to 21% in 2010. Coffee shops are becoming a popular outlet for increasingly affluent young adults to socialize. The on-trade channel has helped popularise coffee among the rapidly growing and increasingly prosperous young adult population of India.

Well-established coffee shop chains, such as Cafe Coffee Day (CCD) and Barista, enhanced their pan-India presence over the last three years. In 2010, Cafe Coffee Day and Barista had 970 and 200 stores, respectively, and they aim to continue expanding in the next few years.

As a result of these factors, foodservice volume of fresh coffee has grown by over 40% since 2005. To 2015, foodservice fresh coffee is expected to maintain this rapid volume growth.

Recognizing the growth opportunities for coffee in India, in January 2011, Starbucks signed an agreement with Tata Coffee Ltd to source coffee beans in India. The deal could also lead to opening retail locations in the near future, particularly within Tata's existing hotel holdings across the country. New outlets could open in the next few months, now that the problem of acquiring real estate and local supply is being addressed.

Starbucks is not the only international chain to see the opportunity in India. In February 2011, rival Dunkin' Donuts partnered with fast food operator Jubilant Foodworks Ltd, operator of Domino's Pizza in India. Dunkin' Donuts expects to open its first outlet in India in early 2012, making this country a likely key battleground in the near future for international on-trade coffee manufacturers.

While Starbucks cafes face much competition, a sufficiently large portion of the population appears to be adopting a café culture to support the new players.

A unique retail advantage

Increasing incomes are not only providing opportunity for a developing café culture in India, but are also helping to drive growth of nascent retail volume. Many purchasing decisions, especially in urban locations, are based on convenience. As such, instant coffee is finding a following among urban working consumers. While fresh coffee is a format which is becoming popular in South India, instant coffee is likely to continue to increase its appeal in North, West and East India.

Emphasizing the desire for convenience in retail products, fresh coffee retail volume has only grown by 19% from 2005-2010 (as opposed to the 42% gain in foodservice) while instant coffee has grown an impressive 66%. These same patterns are projected for the future with instant coffee volume growth rate accelerating to 87% from 2010 to 2015.

Instant coffee is well on its way moving from a niche product in India to more mainstream. In 2005 instant coffee retail value was only 12% the size of tea retail value but by 2015 it will have grown to almost one fifth the size of tea.

Starbucks VIA Ready Brew may present opportunities in the rapidly expanding instant coffee category in India. It was first introduced in the US in 2009 where it rapidly gained share. Starbucks introduced VIA Ready Brew to China in April 2011. India seems to be a likely to follow-on opportunity market.

In a market where instant coffee is growing much faster than fresh coffee, Starbucks may have a unique advantage over other multi-national chained coffee shops to get its products in front of consumers in both a retail and foodservice environment in the preferred local format. 

 


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