BUSINESS ANALYSIS OF COFFEE RETAIL IN INDIA 1

Business Analysis of Coffee Retail in India

Submission II

Coffee industry in India is growing rapidly in the past few years, mainly due to the entry

of big chains like Café Coffee Day, Tata Starbucks, Costa Coffee, Coffee by Di Bella, etc. The

coffee retail market was valued at INR 70 billion in 2015 and is expected to double by 2020. India

has primarily been a tea drinking nation, although coffee has been a predominant drink in the south.

Many factors are involved in huge rise of this industry: the rise of middle class, increasing

westernization, the rise of experience economy and heavy marketing of coffee places as a place to

hang out with friends. This report will mainly use Tata Starbucks as focal points for analysis of

coffee retail as a business.

Exhibit 1:

Source: https://www.grandviewresearch.com/industry-analysis/india-coffee-retail-chains-market
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3C Analysis of Coffee Retail Industry

To understand the basic business model of the company the 3C model is being used, i.e.

The customer, competitor and corporation.

Customer

Affordability plays a major role in the choice of target customers. For these chains, the target

customers can be broadly differentiated into the following segments based on their demographics.

College Students: These are the young demographic, open to experiences and not particularly

cost conscious. To target this audience, cafes are usually located near colleges and malls. Their

main idea is to become a frequent haunt for these people.

Young Professionals: People who have just started working and need caffeine to continue focus

on their projects and work long hours. Many industrial parks have cafes inside their campus.

Artists: The cafes usually have a policy to let their customers sit for a long stretch of time. This

helps the groups to bond with each other over coffee and ample time and space for the artist

Tourists: The major chains usually have a standardized offering over regions. This aids the tourists

in the way that they get the same taste of coffee everywhere and hence they prefer to go to their

choice café for familiarity in foreign land.

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Competitor

In the Indian market, the major players in coffee retail are: Starbucks, Costa Coffee, Barista, Café

Coffee Day, Coffee by Di Bella, Aroma’s Coffee, Theobroma. Also, since majority of the

population in India prefers to drink tea over coffee, the emergence of the tea lounges also poses a

threat to the coffee retail chains.

Corporation

To study corporation, the following key metrics will be analysed.

A. Operations

Most coffee retails follow either of two business models:

1. Standard retail model: there is a headquarter and various branches in different regions

2. Franchisee model: the main company licenses out the retail outlets in a certain region

to a smaller company and both the companies share the profits.

3. Joint Venture: An alliance between two corporations to jointly own and operate in a

certain location and both the companies share the profit.

Starbucks operates in India under the umbrella of Tata Beverages in a Joint Venture and sharing

50-50 of the profits. India as a whole comes under the CAP (China Asia Pacific) operations for

Starbucks, along with China, Vietnam, Singapore, etc.

B. Logistics

For efficient operations in Starbucks, India is divided into three major sections, North (which

handles operations in North and East, East through a semi dependant remote warehouse), West and

South region. Each of these regions are operated independently using a hub and spoke model. Each
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of these regions have a single warehouse, and materials are transported from here to other cities,

and from one city to the other. Interconnections within the channel have been maintained in a way

to ease out transport material, not just from warehouse but also from one city to another in case of

stores from one city facing stockout. One major logistics team specific to India oversees the inter-

region and intra-region operations.

C. Coffee Value Chain

Mainly two types of coffee beans are widely consumed: Arabica and Robusta. Arabica has a milder

and smoother taste whereas Robusta is used for making more bitter coffee. Coffee retails claim to

use the better-quality Arabica beans. Raw unroasted coffee beans from Asia, Africa and Latin

America are washed at the origin and sourced to a central distribution centre where they are custom

roasted and then sourced all over the world to regional distribution centres, via sea or land, and

then transported to retail outlets.

Starbucks, at the time of entering Indian markets used to ship roasted coffee to India, shipping time

of which ranged from 65 to 80 days decreasing the already limited shelf life of coffee, that is

around 8 months. Starbucks generally sources coffee from Sumatra, Kenya and Italy. They have

also added Indian variants of coffee to their product mix. In 2012, Starbucks and Tata Beverages

operationalised a coffee roasting and packaging plant in Kushalnagara, near Coorg.

This eases out the operation as the green coffee beans are much easier to transport, and the extra

time gives the coffee bean to develop more complexity in their flavour.
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Products and packaging material are imported from their headquarters. Tata Beverages also owns

a syrup factory in Bangalore which allows the company to locally source beverage and some other

food products. As of now, around only 30% of their products are imported and the rest 70% are

locally sourced.

D. Location Planning

Traffic volume and convenience play a major factor in deciding of location for retail outlets. The

same is seen in many of the cafes. For this purpose, competing cafes usually tend to locate its

stores next to each other for higher traffic volume, high visibility and greater convenience for

customers, a phenomenon referred to as clustering. Starbucks is specifically prone to locate its

stores near competing stores, in streets with high traffic.

E. Inventory Management

A business involved in dealing with the finished goods inventory like Coffee can be perishable in

nature. Economic Order Quantity system and P-system are used by the Starbucks for managing

inventory at the store level. Waste and obsolete inventory can be reduced by substantial amount

by the usage of the above two methods:

Starbucks operates in varied ways for its ordering of the inventory and subsequent shipping of it:

1. The first way deals with the usage of Economic Order Quantity (EOQ) for maintaining the

daily activities of the store.

2. The second way deals with management of retail aspects of the store using P-system.

Roasting plants or warehouses of the Starbucks use two systems namely P-system and Q-system

at a corporate level for its activities.

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One of the important responsibilities of Operations is Inventory management which can affect the

goods delivery to the customers and has huge capital requirement. Management of Inventory can

have a substantial effect on business activities like operations, accounting and finance. Inventory

management decisions improvement can be done by the usage of basic tools like Ratio-frequency

identification (RFID) and bar coding.

Starbucks uses analytics to forecast demand of inventory one year in advance. They use moving

averages of the past six years to create one-year plan for inventory management. At every

individual store, there is System Application Process in place for handling the inventory, in which

the number of inventory is entered at the time of stocking. All activities are recorded, be it stock

being consumed, transported to a sister outlet or being disposed. At the end of day, a manual count

of inventory is taken and tallied with the system.

F. Quality Control

The quality control is handled directly by the headquarters in USA. All the staff is sent for training

to the headquarters before being absorbed into the organisation. Starbucks uses standard quality

guidelines called QASA (Quality Assurance Safety Audit). Under the guideline, there are 2200

points to be checked within the store. For example, the food kept in the store is to be maintained

at 5.2 0C. The store manager does a weekly check of quality using a random sample of inventory

and checks for compliance of all the points under the guidelines.
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G. Wait times and Process Capability at Starbucks

A customer expects a quality service of their beverage and has an expectation to get it delivered in

under 5 minutes. According to the information given by Minitab, process capability analysis was

performed by a team and Gamma distribution model was used for evaluating the wait time. Data

analysis implied that 127,306 people out of every 1 million customers having a sip at Starbucks

will get their beverage delivered only after 5 minutes which implies that more than a quarter of

customers have to wait for longer duration than scheduled to get the beverage served.

Mean beverage time for all the scenarios that were analyzed was less than five minutes but the

probability is still high for waiting more than five minutes. This is indeed a challenge that needs

to be addressed by Starbucks in their beverage delivery mechanism which is critical for it to

increase its market share in the long-run.

H. Peak hours at Starbucks

Findings based on the analysis of “popular times” graph of Starbucks Juhu Tara road (refer Exhibit

2):

1) People typically spend 30 minutes to 1.5 hours at Juhu Tara road outlet of Starbucks. This

spending of time is greatly influenced by the location of the outlet. As Juhu Tara outlet is located

in the prime area of the city surrounded by Universities and colleges, students flock the outlet. This

indicates that location aspect is a key indicator in deciding upon the amount of inventory to be held

and also demand forecasting of the inventory.

2) The store experiences maximum rush on Saturdays and Sundays and minimum on Mondays.

On an average, between 4 P.M. to 7 P.M., it experiences maximum rush on a daily basis. So, there
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should be a dedicated group of staff for preparation, serving and cleaning activities in order to have

a prompt delivery within five minutes of ordering which is the mean delivery time expected by a

customer.

Exhibit 2: Popular Times

Sundays

Monday

Tuesday

Wednesday

Thursday
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Friday

Saturday
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References:

1) http://www.minitab.com/en-us/News/Students-Look-at-Starbucks-Wait-Times-and-Process-

Capability/

2) From bean to cup: How Starbucks transformed its supply chain, James A Cooke, Supply Chain

Quarterly

3) Behind the Scenes at Starbucks Supply Chain Operations It’s Plan, Source, Make & Deliver,

Ken Boyer, Supply Chain News

4) How Starbucks changed Management Supply Chain from Coffee Bean to Cup, Rick Leblanc,

Supply Chain Management

5) Starbucks Coffee Distribution Network, Preethi Kasireddy

6) Starbucks in India: Creating Sourcing, Quality and Pricing Synergies, THE OPERATIONS &

SUPPLY CHAIN CLUB, IIM RAIPUR

7) How Starbucks Brews Logistics Success, Morai Logistics

8) Strategic Analysis of Starbucks Corporation, Nithin Geereddy