Starbucks Plans India Expansion

In a continued bid to expand its international presence, Starbucks SBUX has announced that it will open its first cafés in India by September. The company had planned to begin its Indian operations a year ago, but high property prices and administrative issues kept them away. Now, the company believes those problems are in the past. However, investors might be wise to wait and see if Starbucks follows through. According to Starbucks China president John Culver, the company is "in the process of looking at real estate opportunities" but has not formally invested any of the $81 million that the company plans to invest in a joint venture with Tata, the largest Indian conglomorate by market capitalization. The success of Starbucks in India will be driven by two factors. Firstly, India is a tea-drinking nation. While coffee consumption has exploded in the past decade, the company still exports more coffee than it consumes. However, this might benefit Starbucks, because coffee is perceived as a western, cosmopolitan affectation in many parts of India, so coffee drinkers might naturally gravitate to the most iconic name in the western coffee world as soon as it becomes available. This brings us to the second factor: India's growing middle class. The increasingly cosmopolitan (or globalized, if you prefer) Indian middle class has been seeking foreign goods as a sign of prosperity as both the nation's GDP and median salary rise. The option to sip a latté in Starbucks may complement the interest in foreign brands in India, allowing the coffeemaker to expand its presence rapidly in the country to meet the demands of the growing middle class. Such a story has already played out in several East Asian markets. In China, demand for coffee in supermarkets remains pitiful compared to the demand for coffee in cafés, which has exploded in the past decade as the Chinese middle class grows and seeks exotic tastes. Thanks to the urban appeal of the brand, Starbucks has grown to 450 retail shops in mainland China, and that number is expected to more than triple by 2015. At the same time, China averages three cups of coffee consumed per person per year. This is microscopic compared to Americans, who drink just over 3 cups of coffee per person per day. Those figures don't matter much to Starbucks, who depends more on "lifestyle coffee drinking" for its Asian growth. Its expansion in India might help it tap into the lucrative market, and its expansion may be a repeat of what happened in China. On the other hand, the company still hasn't acquired any property and it may be put off by high prices and bureaucratic problems again. Even if it does enter the Indian market, it may be plagued by knock-offs, as it has been in China. Copies may not be necessary, however, as Indian consumers can already choose from several coffee chains already in India, such as Barista Lavazza, the Italian-owned chain has been in India since 2000 and has over 200 locations in India and others in Sri Lanka, Bangladesh, and the Middle East. Looking forward, Starbucks may not have it so easy in India as it did in China, so it will need to tread carefully if it succeeds in entering the market. With real estate prices staying firm, there is no guarantee that Starbucks will ink a deal this time around. If it does, it will only be a growth opportunity if the company can market itself successfully to the growing Indian middle class.