Enter the Frappuccino Wallahs: Starbucks Comes to India

Can Howard Schultz sell lattes in the land of tea?

Struggling to find areas for growth, Starbucks (SBUX) is looking to create a coffee market where one hardly exists: India.

The Seattle-based café chain is entering into a 50-50 joint venture with India's Tata conglomerate to open its first stores on the subcontinent. According to the Hindu Business Line, the stores will be branded as "Starbucks Coffee ‘A Tata Alliance'." Starbucks admits that the reason for the joint venture with Tata is the sky-high real estate costs in India.

The two companies will be investing an initial 400 billion rupees ($80 million), and they hope to open 50 stores by the end of the year.

Though Starbucks is successfully increasing same-store sales and outperforming the NASDAQ (^IXIC) over the past year, the company is facing a problem that every American urbanite is familiar with: market saturation. It isn't uncommon for a single city block to host more than one competing Starbucks franchise. Now Starbucks is hoping to bring in more customers by introducing alcohol to its menus in a few stores. Clearly, the low-hanging fruits are gone.

Moving into new markets seems to be a better recipe for growth than mixing Wi-Fi and craft beers. Starbucks is already established in China with 400 locations. According to regulatory filings, the company expects to expand to 1,500 stores in China by 2015. Even without a presence in India, Starbucks still pulled in 21% of its earnings in 2010 from Asia.

So moving into that other enormous country with a rapidly growing middle class makes sense. Culturally, India is not a natural market for Starbucks. Indians are famous tea drinkers, and when they buy coffee, it's usually a cheap cup at a mom-and-pop joint for 10 rupees, or about $0.20.

In fact, pricing might become a point of contention. A Starbucks latte might seem expensive in the US, but in terms of purchasing power parity (or PPP), Chinese customers pay far more than Americans. If an American Starbucks charged as much as a Chinese Starbucks in PPP terms, we would be shelling out $10 to $15 for a coffee. If this trend is repeated in India, demand for Starbucks could be severely limited.

India does have a nascent market for more up-market caffeine, however. There's a small and growing market for Western-style coffee shops in India. The local Café Coffee Day is hoping to open one new store every three days, according to Reuters. Chains like that are charging 60 to 80 rupees ($1.20 to $1.80) for a cup of coffee. Starbucks hasn't yet set prices for future stores in India.

In this joint venture deal, Starbucks gets a foothold into Indian real estate, and a readymade network of malls, hotels, office buildings, airports, and train stations from the Tata conglomerate. Tata is hoping to use future Starbucks locations to push new brands such as Tata Tazo tea and some of their less popular brands, such as Himalaya water.

US Starbucks stores usually offer a variety of beans from several continents. Another perk to working in India is that coffee grows there. John Culver, president of Starbucks Coffee China and Asia Pacific, told reporters in Mumbai that the coffee served in Indian Starbucks stores will be 100% locally sourced in India. For food and other beverages, Starbucks will look into sourcing those locally as well.

"There are challenges in importing coffee," Culver said. "This also helps us to be locally relevant. Indian consumers want to do business with companies that support Indian communities and Indian farmers, and we have a commitment to do that."

Will Indian customers bite? Similar retail ventures into Asia have been successful. Americans, somewhat inured to the omnipresent nippleless mermaid, don't get the same enjoyment out of designer lattes that they used to. For the newly minted urban Indian bourgeoisie, Starbucks can be a status symbol like a European fashion label. A classier, less played-out place to meet for a date, perhaps.

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