Starbucks to enter smaller Indian cities from next fiscal

Will the expansion plans workout for Starbucks?

Tata Starbucks Pvt. Ltd, the joint venture between Tata Global Beverages and Starbucks Corp., is eyeing smaller Indian cities with population of less than 5 million to open outlets next fiscal year. This comes as part of the Starbuck’s long-term goal of making India among its top five markets, in terms of number of stores. In India, Starbucks has 120 stores which is fewer than most of the 27 countries where it operates.

Starbucks has a commendable story in India where it managed to grow to 120 stores in a span of 5 and half years. With India being such a wide market, Starbucks now aims to target smaller Indian cities for its next leg of growth.

Why is this important

  • At present, Starbucks has a maximum number of outlets in the US, its home country, followed by China, Canada, Japan and the UK. In India, it has a long way to go from present 120 stores to achieve its dream of making India one of its top 5 markets, considering the fact the fact that the company operates more than 900 outlets in the UK, its fifth largest market in terms of number of stores.
  • India’s coffee retail chain market, which was estimated at $107 million in 2015, is projected to touch $855 million by 2025, according to a report by San Francisco-headquartered consulting firm Grand Research Inc.
  • However, India is a largely different market where consumers are price sensitive and competition is intense. India’s largest coffee chain Coffee Day Enterprises Ltd, which operates Café Coffee Day (CCD) outlets, has more than 1,550 stores across the country and is well established with competitive pricing.
  • Hence, to establish its footing in this market, Starbucks needs to carefully work out its strategy.

Story till now

  • With 40 stores in 17 months and another 80 stores in 4 years, Starbucks established its footing in metro cities.
  • As per Tata Global Beverages latest annual report, sales at Tata Starbucks rose by 28% in the year ended 31 March 2018. Besides, for the first time since inception, the company recorded a positive Ebitda (earnings before interest, tax, depreciation and amortization). The growth was an outcome of the company’s decision to halt aggressive expansion and focus on profitability during fiscal year ended 31 March 2017 when it reported sales at ₹272 crore with a loss of ₹32 crore.
  • Last fiscal year, Starbucks opened 25 new stores in India.

How will the stock be impacted

Starbucks aggressive expansion plans did not work out in the past. However, going forward the management intends to add stores meticulously which seems to be the right way. However, strategy to expand into tier 2 cities will be difficult on account of 3 reasons: expensive product pricing, real estate cost and lack of infrastructure.

On the other hand, Starbucks commands a strong brand value which should make it easier to establish. Hence, whether the strategy works out should be watched out for.

Tata Global Beverages ( CMP: 241, Mcap: Rs 15,217 crores, FY20E P/E 21.3x)

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