A Grande Excursion to India
India, the land of 1.21 billion people, may soon be getting its first Starbucks (NAS: SBUX) , thanks to a possible joint venture with Tata Coffee. A final deal is expected to be announced within the next three weeks, and if it goes through, it could mean great things for Starbucks shareholders.
Although Indians are traditionally considered to be tea drinkers, according to a recent poll, overall domestic coffee consumption rose to an estimated 108,000 metric tons in 2010, which represents an 80% growth in the past decade -- and with numbers like this, you'd better believe Starbucks is sitting up and taking notice.
Moreover, India is considered to be one of the fastest-growing economies in the world, and with U.S. consumer spending still on shaky ground, moving into countries such as India and China is one way Starbucks can continue to increase profits.
India is by no means the first global expansion project Starbucks has undertaken. In 1998, Starbucks opened a location in Taipei, and in 1999, Starbucks opened its first location in Beijing through a licensing agreement with Mei Da Coffee. Since these initial openings, Chinese consumers have responded favorably to Starbucks, and as of the end of 2010, there were more than 750 Starbucks locations throughout Greater China, which includes Hong Kong, Macau, and Taiwan.
In addition, Starbucks Chairman Howard Schultz said in January that in the next five years, Starbucks plans to triple its outlets in Mainland China to 1,500. Clearly, business is going well both in China and internationally in general -- according to Starbucks' Q3 report for 2011, the company had record-breaking third-quarter sales thanks to an 8% increase in global comparable-store sales, and in Q3 FY11, international net revenue come to more than $658 million, which is a 20% increase over Q3 FY10.
Not without peril
Starbucks' expansion into India seems like a golden opportunity, but it does carry a certain degree of risk. Starbucks will have to compete with already established companies like Cafe Coffee Day, a unit of Amalgamated Bean Coffee Trading, which runs the largest chain of coffee retailers in India, and Whitbread, which operates Costa Coffee Stores.
Still, if companies such as Coca-Cola (NYS: KO) , Chipotle Mexican Grill (NYS: CMG) , and Wal-Mart (NYS: WMT) have taught us anything, it's that international growth can mean good things for the company. Coke's total net revenue for Europe alone came to $1.6 billion for its most recent 10-Q; Chipotle headed across the pond to England in 2010 and this year opened its second location, because, as Chairman and co-CEO Steve Ells said, "We think the prospects are very good for Chipotle in London and around Europe." Wal-Mart, whose international ambitions are a major contributor to sales growth, realized 26% of its total revenue internationally.
Other coffee titans have also jumped on the potential for an international java boost. Sara Lee (NYS: SLE) has announced plans to spin off its international coffee and tea business and has a track record of gobbling up smaller foreign coffee companies. Kraft (NYS: KFT) has announced a similar plan to split into two more focused companies, with its Maxwell House brand making a new bed in the house of North American Grocery.
A perky future
The joint venture between Starbucks and Tata Coffee still has to be completed, but if it does get done, I believe the future of Starbucks in India will mean increased profits for Starbucks shareholders. Starbucks traded up 1% following the news of a possible joint venture on Tuesday. And with the Dow Jones Industrial Average (INDEX: ^DJI) being a more negative than positive yo-yo these days, a 1% increase in a company's stock price is nothing to scoff at.
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At the time this article was published Fool contributor Katie Spence loves to drink coffee morning, noon, and night. She owns no shares of any company mentioned above. Follower her on Twitter, where she goes by @TMFKSpence.The Motley Fool owns shares of Starbucks, Wal-Mart Stores, Coca-Cola, and Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Starbucks, Chipotle Mexican Grill, Wal-Mart Stores, and Coca-Cola, as well as creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.