Starbucks Corp. (SBUX) looks to establishing a strong foothold in India with Tata Coffee Ltd, Asia’s largest publicly traded coffee grower. Seattle based Starbucks announced on March 31, 2011 that it is turning the partnership with Tata Coffee for sourcing and roasting premium coffee beans in India into a full fledged joint venture where Starbucks will hold a 26% stake. Once the process is finally over the partners would open outlets in all major cities of India.
Later, after reviewing its market share in the premium coffee segment and level of acceptance in the Indian market, the US company may raise its stake up to 51%. 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. After the stake is increased, the company is likely to open more outlets in the country.
Starbucks entered India in January this year holding Tata Coffee’ hands whereby the two coffee giants had signed a non-binding MOU under which Starbucks decided to set up stores in the Tata group’s retail outlets and hotels, besides sourcing and roasting coffee beans at Tata Coffee’s Kodagu facility.
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 Seattle based company plans to open 400 outlets outside the U.S. in 2011, in addition to many new stores opened in China. The retail giant already has 16,800 stores in more than 50 countries. A major portion of the revenues comes from non U.S. locations.
The alliance in India comes as a replication of the success achieved last year in China, which is termed as the company’s major growth market. Starbucks profit per store in China is reportedly higher than that in the U.S. Management revealed that the company plans to increase the number of stores to 1500 from the existing 400 by 2015.
Starbucks wants 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. New coffee chains are emerging with attractive outlets and they are mainly targeting the elite youth and the country’s growing middle class as they are increasingly getting glued to Western tastes.
Café 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 by India shot up by 56% last year.
The joint venture will help Starbucks to nurture its aggressive plans for the Asian region. Again it 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.
Moreover, Starbucks has a significant presence in the international market. The company’s international division sells coffee and other beverages, complementary food, whole bean coffees and coffee brewing equipment and merchandise through company-operated retail stores in Canada, the UK and several other markets.
However, the presence of strong competitors like McDonald’s Corp. (MCD) and Nestle and Starbucks’ great dependence on information technology for its operations as well as fluctuating currency rates concern us.
Currently, we maintain a Neutral rating on the stock. Further, Starbucks holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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