Is India Ready for Starbucks?

Looking at Starbucks and potential international expansion into India.

Jason Moser
Jason Moser
Feb 4, 2011 at 12:00AM

This article is part of our Rising Star Portfolios series.

Brands and logos can be powerful things. In fact, I'd say a globally recognizable brand is a bit of a competitive advantage. That's why I think Starbucks' (Nasdaq: SBUX) decision to change its logo is sheer genius. By simply removing the words, they have made their brand recognizable and understandable in any language.

While we in the U.S. may be used to having a Starbucks inside a Starbucks, there are still countries in the world that have yet to experience the phenomenon. Sure, emerging markets are witnessing the wonder of McDonald's (NYSE: MCD) Golden Arches and the mystery of Yum! Brands' (NYSE: YUM) Taco Bell tacos -- both are expanding rapidly in Asia. Heck, people in Kazakhstan know the Nike (NYSE: NKE) swoosh. But is India ready for Starbucks?

The great wall of java
Starbucks always had plans to go international. This was obvious the moment Starbucks Coffee International was born in 1995. Today, Starbucks has about 800 company-operated and licensed stores around the greater China region, and CEO Howard Schultz thinks the best is yet to come, as he predicts China will be the company's biggest growth market in two years.

But what about India?
But China isn't really news, is it? Investors have been talking about the potential of the great emerging market for years now. But they're starting to take note of the company's plans for India. As it stands, Starbucks is present in more than 50 countries worldwide. But there's not one single store in India. That's right, not a Starbucks to be found. But that's getting ready to change.

A joint venture with Tata Coffee Limited will give Starbucks access to the second most populated country in the world, and the company plans to open its first store sometime in late 2011 if all goes according to plan. From there, it's still early to tell how many stores they plan to open, but we can get a better idea by looking at the current coffee state of affairs in India.

Presently, Cafe Coffee Day is India's largest coffee retailer with 1,050 stores in 175 cities across the country. What's more, the company has plans to open another 1,000 stores over the next three years. On the one hand, this is obvious competition for Starbucks. On the other hand (and this is how I like to look at it), it also indicates that there is still share to be had.

The relationship with Tata shouldn't be underestimated. Starbucks plans to use Tata's existing roasting infrastructure as it begins establishing itself in India. As Starbucks continues to build out stores, some will be stand-alone locations and some will be in Tata-owned establishments, including the well-known Taj hotels as well as numerous Croma retail stores around the country. This will give Starbucks exposure not only to India's growing middle class but higher earners as well.

Consider this
Currently, about one-fifth of Starbucks' sales come from outside the U.S., and I'm looking for that number to grow much, much bigger over time. According to McKinsey Global Institute, "By 2025, nearly 2.5 billion Asians will live in cities, accounting for almost 54 percent of the world's urban population. India and China alone will account for more than 62 percent of Asian urban population growth and 40 percent of global urban population growth from 2005 to 2025."

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Now think about this: Coffee consumption in India doubled between 1998 and 2008, and today domestic coffee consumption is increasing 5%-6% annually. Based on these trends, Starbucks can't afford not to enter the subcontinent.

Make it a trenta!
This isn't Starbucks' first flirtation with India, so it's not like this is all a done deal and things can't go wrong; they can. But the fact that Starbucks has signed a memorandum of understanding with Tata tells me that both parties are looking at this as a genuine opportunity. Given Starbucks' global notoriety and mass appeal (not to mention sporty new logo), investors might want to consider it a genuine opportunity as well. Agree? Don't agree? Swing on by my discussion board and let's talk. You can also follow me on Twitter.