Starbucks Corporation (SBUX) is set to open its first outlet in India jointly with Tata Global Beverages by the second half of this year.
A year back, Seattle based Starbucks, the major player in coffee retail, entered into an agreement with Asia’s largest publicly traded coffee grower, Tata Coffee Ltd. As per the agreement, Starbucks got the right to procure coffee beans from India and engage in sourcing and roasting of beans while exploring the possibility of opening outlets in the country.
Tata Coffee, owned by Tata Global Beverages Ltd., retails coffee brands like Mr. Bean Coffee Junction and Tata’s Coorg Filter Coffee in the south Indian states. It produces Arabica and Robusta coffees at its 19 estates in south India. Its two instant coffee manufacturing facilities have a combined installed capacity of 6,000 tons.
The agreement with Starbucks would help Tata Coffee to tap the opportunity in the domestic market with a partner like Starbucks. Currently, almost 65% of Tata Coffee’s sales come from its Eight O’Clock Coffee Co. unit in the U.S.
Following the agreement in January 2011, Starbucks, with a view to increase its foothold on Indian soil, strengthened its Starbucks-Tata partnership in March 2011. The full fledged joint venture (JV) allows the coffee veteran to hold 26% stake upon finalization. Eventually, it intends to increase its stake in the JV to 51.9%.
This move will be in tune with the Indian government’s policy of allowing up to 51% foreign direct investment (FDI) in single-brand retail.
However, India command abandoned the rule against the foreign single-brand retailers, who are operating stores without a local partner, paving the way for global companies including Starbucks and Ikea.
In its cabinet decision on November 24, the company revealed its plan to raise single brand’s ownership limit to 100% from 51%. The new rules will take effect immediately and will require the companies to use smaller Indian companies for at least 30% of procurement.
This was like a floodgate opening for multinationals like Wal-Mart Stores (WMT) and Starbucks, who were eyeing for long to invest in India, the second most populous country in the world.
Starbucks plans to tap the Indian market on the back of soaring demand for cappuccinos in India. The demand for coffee beans has more than doubled in a period of ten years. Besides, new coffee chains are emerging with attractive outlets and they are mainly targeting the elite youth and the country’s growing middle class as both of these groups are increasingly getting glued to Western tastes.
Caf? Coffee Day, a local chain dominates the Indian market. Barista, owned by an Italian company Lavazza Spa also has numerous outlets in the fast growing coffee market of India. Coffee export to India shot up by 56% last year.
The joint venture will help Starbucks to nurture its aggressive plans for the Asian region.
Currently, we prefer to be Neutral on Starbucks’ stock. Starbucks holds a Zacks #2 Rank, which translates into a short-term Buy rating.
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