Will Global Coffee Giant Starbucks Conquer India?

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Aijaz Rahi / AP

Customers at a Café Coffee Day outlet in Bangalore, India, on Jan. 31, 2012. Starbucks aims to open 50 outlets in India by year's end, through a joint venture with the Tata Group, the companies said a day earlier

The exact definition of a Frappuccino, or which size is bigger, grande or venti, may not be common knowledge in India, but that might be about to change. Starbucks’ long-rumored arrival in India just got one step closer to reality with the coffee company’s announcement on Monday that it’s officially teaming up with the Indian megaconglomerate, the Tata Group. The companies’ joint venture aims to have the coffee brewing in its first outlets in Mumbai and New Delhi by the summer, and a total of 50 cafés in the country by the end of the year.

Starbucks’ arrival in India may put the country’s coffee market on the map, but Indian’s growing taste for coffee has been years in the making. In coffee-producing southern India, coffee has long trumped tea as the drink of choice, but the industry has thrived on exports, rather than cultivating and deepening local consumption. Over the past decade, coffee consumption in the country has almost doubled. Coffee chains have sprouted nationwide from urban centers to highway rest stops. One thousand of them have opened in just the past 5 years — a number expected to grow five times over the next several years — catering to a coffee-drinking market that is growing by 25% each year, says the Indian consulting firm Technopak.

The growth of coffee houses, as well as coffee consumption in India, however, hasn’t always been about the coffee itself, if at all. When Café Coffee Day, India’s largest coffee chain, opened its first outlets in the mid-1990s, their coffee shops more closely resembled Internet cafés. To lure patrons, the stores offered free cappuccinos as an add-on for customers who bought Internet time. It was all part of a strategy of convincing customers not that they liked coffee, but that they liked getting coffee.

“We realized unless you made it hip, the immediate conversion might not come through, so we felt the best way of increasing the consumption was through the experience route, rather than through the product route,” says Venu Madhav, chief operating officer of Café Coffee Day. “Once people started coming in out of curiosity, started tasting the cappuccinos and lattes, they started accepting and liking them, and [that] has started becoming habit forming now.”

In a country known for its tea drinking, the coffee itch has taken hold among India’s youth, and Café Coffee Day has gone from several dozen cafés in India’s biggest metropolis, to over 1,200 outlets in 175 cities. The growth has already lured other foreign coffee brands, such as Italy’s Lavazza, which opened Barista cafés, and the California-based Coffee Bean & Tea Leaf.

Aditi Gupta, 22, sits with three other twentysomething friends nursing an iced vanilla latte late on a weekday night at a Coffee Bean & Tea Leaf outlet in a New Delhi market. Two doors down is a Café Coffee Day, and across the square is a Barista coffee shop. She and her friends go for coffee sometimes several times a week. “When you don’t want to drink, when you just want to chill, you come here,” says Gupta. “In today’s time, the youth doesn’t mind spending 150 rupees [about $3] for a cup of coffee because they know it will cost them that much to be out of the house anyway.” What would test their loyalty? “I think if our parents came here, we would definitely prefer some other place to go to — that’s the point,” says Vikrant Rai, a 21-year-old working at a marketing company.

In a country where hanging around bars or pubs as a social outlet is still frowned upon for young adults, particularly women, the rise in coffee consumption is as much a cultural shift, as well as one of taste. “In India, until the café came through we didn’t have a place for youngsters to really hang out,” says Anil Kumar Bhandari, president of India Coffee Trust, an industry trade organization.

Starbucks is entering a coffee culture that is on the rise, thanks, in part, to Starbucks itself, says Bhandari. “The growth didn’t only come because Café Coffee Day set up cafés, the growth came because [of] the lifestyle that Starbucks has started in the U.S. and other places,” he says.

Even if foreign brands like Starbucks have been a catalyst for homegrown industries in India, the country hasn’t allowed them to actually open stores in the past. Strict limits on foreign ownership across a wide range of industries have long kept foreign competitors at bay. The Indian government’s most recent attempt to loosen restrictions on the likes of big global retailers like Walmart was met with popular disapproval and political outrage. Single-brand retailers like Starbucks however had an easier time and this month gained approval to retain 100% ownership of their retail outlets, with the requirement that they source a percentage of their products locally. Starbucks’ Indian partner, Tata, is not only the country’s biggest coffee producer but also operates a high-end hotel chain and runs an in-flight food business — instantly giving Starbucks additional retail potential.

With it’s own homegrown café market in full swing, however, does the prospect of a Starbucks on every street corner pose a foreign threat? Starbucks’ arrival in India is actually a positive step, says Madhav of Café Coffee Day. “There are a lot of foreign brands already available in India, and still it hasn’t made any difference from a competition point of view,” he says. “But what helps when companies like Starbucks come in, the awareness levels go up tremendously high — because of that the overall market size grows.”

India’s growing economy and its billion-plus population means there’s plenty of room for Starbucks and others, says Arvind Singhal, head of the Indian consulting firm Technopak. “Even if you were to target the top 20% of this population, you’re looking at a population which is potentially the same size as the entire U.S. It’s a long-term bet, but I see no reason India, like China, would not be able to support 5,000 Starbucks stores down the line.”

How exactly Starbucks will cater its products to the Indian market, which has different tastes in coffee and food remains to be seen. “Bringing concepts to countries like this, there’s a lot of work that has to go into figuring how to modify it without changing the brand,” says Thomas Mitchell, president of Strategic Coffee Concepts. “There are certain things that different cultures never accept, so you have to work around those.”

As the Coffee Bean & Tea Leaf inches toward closing time, Gupta and her friends agree that Starbucks might not have to change much. “Starbucks certainly seems cool to the youth,” she says. “I like marble cake of Starbucks, so I’m waiting for that to come, more than their coffee.”