Starbucks in India

Why partner with Tata?

Starbuckss International Strategy

Approximately 9,400 company-controlled retail locations.
Expanding in countries with growing middle class.

China
Vietnam
India
Colombia

Tatas Dominance
Conglomerate: 100 Companies.
Major Companies: Tata Steel, Tata Motors, Tata Consultancy Services, Tata Power,
Tata Chemicals, Tata Television Services, Titan, Tata Communication, Indian Hotels,
Tata Global Beverages.
2011-2012 Revenue: 100.09 Billion Dollars.
Revenue in India: 42%.

Indian Economy
Growing middle class.
Next big spender is Indias middle class.

Population growth.
Changing demographics.
50% of population under 25.
65% of population under 35.

Indian Coffee Market

Demand shifting.
Away from tea.
Coffee consumption
increased by 80% from
2000 2010.

Starbucks as a third place.

Store design.
Meeting place.
Free Wi-Fi.

Coffee Demand in India

Price

Income

Population

Quantity
0

Why form 50:50 Joint Venture?

Advantages for Starbucks:

Incumbents Very Strong

Tata retail chain - Star Bazaar.

Tata hotel chains - Taj Hotels Resorts and Palaces.
Tata Coffee - Asia's largest coffee plantation company.
Tata Group Companies - Easy reach upper middle class (Starbuckss niche).
Tatas Planned entry into airline industry - Opportunity to offer coffee
during flight.

Starbucks gets access to best coffee grown in India, real estate in premium
locations, easy market penetration, and the Tata brand.

Heterogeneous Oligopoly
Specialty coffee retail shop industry controlled by three firms:
Barista
Mocha
Caf Coffee Day

Specialty coffee retail shops are about experience rather than coffee.
Firm Differentiation:
Barista preferred outlet for business meetings.
Mocha trendier outlet.
CCD hangout place for the youth.

Joint Venture Payoffs

Hypothetical payoffs in a normal game between Starbucks and Tata:

Partner with Starbucks

Dont Partner with

Starbucks

Partner with Tata

1000, 900

100, 300

Dont partner with Tata

150, 400

50, 50

Both firms dominant strategy is to partner with each

other.
Nash Equilibrium occurs where both firms partner with
each other.

Barriers to Entry
Relatively low barriers for private coffee restaurateur.
Medium to high barriers to achieve scale prior to market saturation.
Need for quick growth.
2,000 current cafes in 40 Indian cities.

High real estate costs.

Consumer tastes.
Brand recognition to develop scale.
Local, large scale supply network.
Local politics.
High bargaining power of coffee bean suppliers.

Supply of quality beans controlled by few, large firms.

Transaction Costs
Transaction Costs of Joint Venture

Transaction Costs of Going Alone

Contract
Legal Fees
Relationship Specific Exchange

Finding local suppliers

Bargaining with suppliers
Identifying real estate

Transaction Costs of Joint Venture < Transaction Costs of Going Alone

Costs of Not Partnering

Market Research.
Advertising.
Market loss to established competitors due to slow growth.
Asymmetric information:
Hidden actions of suppliers.

Risks of Partnering
Hostile takeover by Tata.
Tata severing ties with Starbucks once experience is gained.
Minimized profits from revenue sharing.
Rapid penetration worth the loss of revenue?
Does partnership neutralize Demand shift?

Looking Ahead
Achieve scale quickly through joint venture with Tata prior to market saturation.
Mitigates risk of quick expansion.
Protects against rivals expansion strategies.

Capitalize on Tata brand to create product differentiation.

Capitalize on non-Indian markets penetrated by Tata.
Vertically integrate by acquiring coffee plantations.
Product and market differentiation increasingly more important as lower quality
entrants such as McDonalds and Dunkin Donuts start to offer coffee.
Only consider this strategy in regions where competitive coffee is low.
Joint venture strategy useful in established markets experiencing rapid growth.