PROBABLE ENTRY MODES FOR STARBUCKS COFFEE IN INDIA

Shahrukh Soheil Rahman Section- F, V Semester Jain University-Center for Management Studies September 2011

STARBUCKS COFFEE AT A GLANCE

HISTORY OF STARBUCKS

Starbucks Corporation is an international coffee and coffeehouse chain based in Seattle, Washington. Starbucks is the largest coffeehouse company in the world, with 17,009 stores in 50 countries, including over 11,000 in the United States, over 1,000 in Canada, over 700 in the United Kingdom, and over 150 in Turkey. Starbucks sells drip brewed coffee, espresso-based hot drinks, other hot and cold drinks, coffee beans, salads, hot and cold sandwiches and Panini, pastries, snacks, and items such as mugs and tumblers. Through the Starbucks Entertainment division and Hear Music brand, the company also markets books, music, and film. Many of the company's products are seasonal or specific to the locality of the store. Starbucks-brand ice cream and coffee are also offered at grocery stores. From Starbucks' founding in later forms in Seattle as a local coffee bean roaster and retailer, the company has expanded rapidly. In the 1990s, Starbucks was opening a new store every workday, a pace that continued into the 2000s. The first store outside the United States or Canada opened in the mid-1990s, and overseas stores now constitute almost one third of Starbucks' stores. The company planned to open a net of 900 new stores outside of the United States in 2009, but has announced 900 store closures in the United States since 2008. Starbucks has been a target of protests on issues such as fair-trade policies, labour relations, environmental impact, political views, and anti-competitive practices.

The first Starbucks was opened in Seattle, Washington, on March 30, 1971 by three partners: English teacher Jerry Baldwin, history teacher Zev Siegl, and writer Gordon Bowker. The three were inspired by entrepreneur Alfred Peet (whom they knew personally) to sell high-quality coffee beans and equipment. The name is taken from Moby-Dick; after Pequod was rejected by one of the cofounders, the company was named for the first mate on the Pequod, Starbuck. From 1971–1975, the first Starbucks was at 2000 Western Avenue; it then was relocated to 1912 Pike Place, where it remains to this day. During their first year of operation, they purchased green coffee beans from Peet's, then began buying directly from growers. Entrepreneur Howard Schultz joined the company in 1982 as Director of Retail Operations and Marketing, and after a trip to Milan, advised that the company should sell coffee and espresso drinks as well as beans. Seattle had become home to a thriving countercultural coffeehouse scene since the opening of the Last Exit on Brooklyn in 1967, the owners rejected this idea, believing that getting into the beverage business would distract the company from its primary focus. To them, coffee was something to be prepared in the home, but they did give away free samples of pre-made drinks. Certain that there was money to be made selling pre-made drinks, Schultz started the Il Giornale coffee bar chain in April 1986.

INTERNATIONAL PRESENCE OF STARBUCKS COFFEE

The first Starbucks location outside North America opened in Tokyo, Japan, in 1996. Starbucks entered the U.K. market in 1998 with the $83 million acquisition of the then 60-outlet, UK-based Seattle Coffee Company, rebranding all the stores as Starbucks. In September 2002 Starbucks opened its first store in Latin America, in Mexico City. In August 2003 Starbucks opened its first store in South America in Lima, Peru. In November 2010, Starbucks opened the first Central American store in El Salvador's capital, San Salvador. On March 17, 2011 Starbucks opened its third restaurant in Central America and its first in Guatemala City, Guatemala.

WHAT ARE ENTRY MODES According to Root, an international market entry mode is to create the possibility by arranging company’s products, technology, human skills, management or other resources to enter into a foreign country. He regards that entry modes help companies to determine goals, resources and policy in order to channel their international activities toward a sustainable international expansion. When a firm is going to explore a foreign market, the choice of the best mode of entry will arise in the firm’s expansion strategy. There are six essentially different entry modes, generally named as exporting, turnkey projects, licensing, franchising, joint venture with a host country firm, and setting up a wholly-owned subsidiary in the host country. All of them have their advantages for the firm to explore as well as disadvantages which must be considered by the firm’s top management. In other words, the managers should make the choice carefully because it directly affects whether the firm will succeed or not in its foreign expansion. Regarding the choice of entry for a service company, licensing, franchising, jointventure with a host country firm or setting up a wholly-owned subsidiary are more suitable for these types of firms.

LICENSING: Licensing involves a licensee and licensor tied together by a certain agreement which stands to benefit both sides. The licensor will sell its know-how right to the licensee, usually for a period of time. The knowhow refers to intangible properties such as patents, inventions, formulas, processes, designs, copyrights and trademarks. The licensee needs to pay the royalty fee in order to have the agreement with the licensor.

FRANCHISING: Franchising is a similar entry mode to licensing. By the payment of a royalty fee, the franchisee will obtain the major business know-how via an agreement with the franchiser. The know-how also includes such intangible properties as patents, trademarks and so on. The difference from the licensing mode of entry is that the franchisee must obey certain rules given by franchiser. Franchising is most commonly used in service industries, such as McDonald’s to cite an example. However the licensing entry mode is frequently used by manufacturing firms.

JOINT VENTURES: A joint venture is a typical entry mode used world-wide. Literally, it means two or more individual and independent firms join together in an alliance in order to achieve better position in the market. Often the joint ventures are a 50/50 venture. It is a method that both sides hold relatively the same percentage of shares in the venture. The joint venture’s operation is separate from both companies, and often the same role is shared by both managerial teams. It could be possible that one firm invests more in order to gain the larger percentage of shares and hold tighter control of the joint venture’s operations. Likewise, a lower investment percentage will usually lead to less control.

WHOLLY OWNED SUBSIDIARY: The entry mode of wholly-owned subsidiaries means the firm owns 100% of the overseas entity. There are two major ways to establish foreign wholly-owned subsidiaries. First is a Greenfield venture. That means the firm will enter the new international market by establishing a completely new operation and legal entity. The second method is acquisition; whereby the firm acquires another firm in that international market in order to directly enter. The other firm could be an established and wellbuilt firm in that particular industry. Thus the firm could gain a lot of advantages and promote its own products by using the acquisition strategy.

THE ADVANTAGES AND DISADVANTAGES OF THESE ENTRY MODES

From a quick analysis, it can be seen that from all of these above mentioned entry mode options, Joint Venture seems to be a feasible and constructive option, as such; Starbucks Coffee should opt for this method for entering India. In fact, Starbucks Coffee has tied up with Tata Coffee to enter India on a Joint Venture Model. Let’s move on with a quick history of Tata Coffee.

HISTORY OF TATA COFFEE

Tata Coffee is Asia’s largest coffee plantation company and the 3rd largest exporter of instant coffee in the country. The Company produces more than 10,000 MT of shade grown Arabica and Robusta coffees at its 19 estates in South India and its two Instant Coffee manufacturing facilities have a combined installed capacity of 6000 metric tonnes. It exports green coffee to countries in Europe, Asia, Middle East and North America. In 2006, Tata Coffee acquired Eight 'O Clock Coffee Co., a segment leader in the US coffee retail market for US$ 220 million. Tata Coffee’s other areas of business include tea, pepper, timber and hospitality in the form of ‘Plantation Trails’ – which recreates the plantation lifestyle of yesteryears. Tata Coffee’s farms are triple certified: Utz, Rainforest Alliance and SA8000 reinforcing its commitment to the people and the environment.

STARBUCK’S PREVIOUS ATTEMPTS TO ENTER INDIA Starbucks, famous for making coffee drinking fashionable in the US, had tried to enter India by striking an alliance with Kishore Biyani's Future Group three years ago, but these plans were rejected by the Foreign Investment Promotion Board, or FIPB, the government body that regulates inflow of foreign money into India's factories, shops and mines. Organised coffee retailing is a niche but growing segment in India. Industry officials said the size of the segment, which is dominated by unlisted companies, is around Rs 500-600 crore Until a year ago, Starbucks were reviving its plans for India and began talks with Shyam and Hari Bhartia-controlled Jubilant Group for a possible alliance. Jubilant Foodworks, part of Delhi-based Jubilant Group, is the India franchisee for Domino's, the pizza chain. The group's flagship is Jubilant Organosys, a leading contract manufacturer of pharmaceutical products. However this too also did not work out and finally Starbucks Coffee signed a Memorandum of Understanding with Tata Coffee in January 2011.

WHAT IS A JOINT VENTURE? A joint venture has a lot of advantages. Firstly, both of the firms share the costs as well as the benefits. Both sides share the risk as well. By investing into and joining a local firm, the international firm could successfully explore the foreign market with their assisting jointed firm. The international firm could thereby gain market knowledge from the local firm. Especially considering the political and economic issues in the International market today, it is an overwhelmingly popular way to enter foreign markets. The local firm might have a way to influence the local government, which will smooth the market entry for its joint partner. The disadvantage is obvious in that the firm might have major conflicts with its partner. Regarding the shareholding of the firms, it is often difficult to maintain a balanced relationship. Once one firm’s expansion strategy is in conflict with the other party, it will by all means bargain about the relative share ownership in order to have more control of the firm. Thus the partner with stronger bargaining power will continue to lead an unsteady joint venture. As for the firm’s international expansion, giving up control of technology could be very risky for the firm. A joint venture is a typical entry mode used world-wide. Literally, it means two or more individual and independent firms join together in an alliance in order to achieve better position in the market. Often the joint ventures are a 50/50 venture. It is a method that both sides hold relatively the same percentage of shares in the venture

WHY JOINT VENTURE? Joint ventures normally tend to work out fine because of many reasons. Basically when an international company enters a new country, it has many apprehensions and tensions as well as a complete uncertain future. Many companies might enter a new country with a very positive and optimistic attitude but fail at the end. Besides, each and every country is different and dynamic demographics, mobile classes of people and ever changing world trade makes it even more prone to undetermined changes. Joint venture is considered to be the safest way, because there will be a partner from the host country and that very partner will be fully aware of the market conditions, demographics, expectations etc. As such, all that the entering company needs to do is give their talents, their technology, know how, expertise etc. and the host partner will leverage their sound knowledge of domestic market as well as their own indigenous technology and together will work out on a very prospective and collaborative model of business as well as Partnering with a business that has complementary abilities and resources, such as finance, distribution channels, or technology.

SO, IN A NUTSHELL… Joint Venture works quite well because, • Provide companies with the opportunity to gain new capacity and expertise • Allow companies to enter related businesses or new geographic markets or gain new technological knowledge access to greater resources, including specialised staff and technology sharing of risks with a venture partner • Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure. • In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit from non-core businesses. • Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

SO WHY WILL STARBUCKS-TATA WORK?

• The MoU will create avenues of collaboration between the two companies for sourcing and roasting green coffee beans in Tata Coffee’s Coorg, India facility, a release said. Besides, Tata and Starbucks will jointly explore the development of Starbucks retail stores in associated retail outlets and hotels. • There is a strong reason why existing players and industry experts are not hung up about Starbucks entry. India is one of the fastest growing coffee markets in the world with a potential for over 5,000 coffee bars. The coffee retail market in the country is expected to grow at an annual rate of over 40%. So, there seems to be enough room for all to brew and grow. • The agreement recognizes Starbucks and Tata Coffee’s shared commitment to responsible business values. In accordance with the MoU, the two companies will collaborate on the promotion of responsible agronomy practices, including training for local farmers, technicians and agronomists to improve their coffee-growing and milling skills. Building on Tata’s demonstrated commitment to community development, the two companies also will explore social projects to positively impact communities in coffee growing regions where Tata operates

• In the areas of sourcing and roasting, Tata Coffee and Starbucks will explore procuring green coffee from Tata Coffee estates and roasting in Tata Coffee’s existing roasting facilities. At a later phase, both Tata Coffee and Starbucks will consider jointly investing in additional facilities and roasting green coffee for export to other markets.

• Tata Coffee has rich expertise in the bean-to-cup value chain, with an unyielding focus on quality. It has won global accolades for its premium coffees. Over the years, Tata Coffee has further strengthened its Arabica coffee production base by producing premium specialty coffee. The company has an internationally certified (ISO: 22000) Roast & Ground unit at Kushalnagar in the Coorg district of India, and is a dedicated supplier to cafes across the country and specialty roasters across the globe. Tata Coffee has rapidly transformed itself by adding to its portfolio through acquisitions, becoming a more vertically integrated business • Starbucks Coffee Company is the premier roaster and retailer of specialty coffee in the world, headquartered in the United States, in Seattle, Washington. The company manages over 16,000 stores and operates in more than 50 countries. Starbucks sells a wide variety of coffee and tea products with a range of complementary food items, primarily through retail stores. Starbucks has a long association with India. For the last seven years, the company has been ethically sourcing coffee beans from India and contributing to several social programs in the country. Starbucks believes in doing business responsibly to earn the trust and respect of its customers, partners and neighbours.

• Tata Coffee, with its large Arabica coffee production base spread over different growing districts of South India, has supplied premium coffee beans for Starbucks in the past and is now building a structure for a long-term relationship.

• India is one of the most dynamic markets in the world with a diverse culture and tremendous potential. This MoU is the first step in Starbucks’s entry to India. They are focused on exploring local sourcing and roasting opportunities with the thousands of coffee farmers within the Tata ecosystem. India can be an important source for coffee in the domestic market, as well as across the many regions globally where Starbucks has operations. • Tata Coffee is trading higher by 4% at Rs 987 on reports that Starbucks will soon turn its memorandum of understanding (MoU) with the company into a full-fledged joint venture (JV), in which it will initially hold a 26% stake.

• The JV will then open outlets in all major metros. Within a year, Starbucks, the American coffee maker will raise its stake up to 51%. The government allows up to 51% foreign direct investment (FDI) in single-brand retail, the newspaper report suggests.

• The stock of Tata Coffee opened at Rs 974 and touched a high of Rs 997 on the NSE. A total of 629,897 shares have changed hands on the counter in morning deals. • Given Starbucks's aggressive plans for the Asian region, the opportunity would only get bigger with time for Tata Coffee. Starbucks recently announced plans to more than triple the number of outlets to around 1,500 in five years in China.

• A partner like Starbucks would also help Tata Coffee tap the domestic market opportunity. Currently, almost 65% of Tata Coffee's sales come from its Eight O’clock Coffee Co. unit in the U.S.

• Indians, traditionally tea drinkers, now prefer ordering espressos and cappuccino at quick-service cafes as the country's growing middle class increasingly adapts to Western tastes. As a result, overall domestic consumption of coffee has risen to an estimated 94,400 metric tons in 2008, up almost 90% since 1998, according to government figures

CONCLUSION

So keeping in view all these aspects, it’s safe to declare that a Joint Venture will the most feasible and low risk option that Starbucks can adopt to enter the Indian market. However keeping in view the dynamic nature of the domestic markets and world economy, this may not be considered as the final option.

REFERENCES • Business world • Malardalen University-Sweden, Master Thesis on International Business. • Scribd

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