The world's largest coffee purveyor, Starbucks (NAS: SBUX) , has for some time now been looking to expand its global footprint. With emerging markets at the forefront of its expansion strategy, Starbucks plans to nearly triple its store base in China by 2015.
Now, the coffee brewer is looking to make its presence felt in India, too. India's organized cafe market is estimated to be worth roughly $185 million and expected to grow annually at a compounded rate of 25%. For Starbucks, it could be the most opportune time to make a foray into the growing Indian cafe market. Let's delve a little deeper.
India's cafe market
India is an ideal market for Starbucks to explore, with the country's growing middle class and their increasing purchasing power, India is quickly adding to Starbuck's target market. Reports suggest the company is close to entering into a joint venture with India's Tata Coffee, a unit of salt-to-software conglomerate Tata Group, in an effort to open coffee shops in India. Starbucks will get a 51% stake in the venture, in accordance with India's foreign direct investment regulations. In all probability, Starbucks will target opening outlets in retail stores and Tata Group hotels.
According to Technopak Advisors Research, in the last five years, around 1,000 cafes have been opened in India, and the total count now sits at 1,500. This points to the growing popularity of coffee hubs in India. The cafe market has the potential to make nearly $900 million by 2015 with a cafe count of nearly 5,000, Technopak estimates. That is nearly five times the market now.
The major advantage here is that India's youth market is growing. Every second. Nearly half of India's billion citizens are below 25, and this age group contributes to most of the retail coffee consumption. Though the scenario seems rosy, Starbucks will have to play its cards strategically to capture the Indian market. The market is currently dominated by Cafe Coffee Day followed by International chains such as Costa Coffee and Lavazza. Starbucks may be looking to emulate the success enjoyed by fellow American companies such as McDonald's (NYS: MCD) and Yum! Brands (NYS: YUM) in India, but it could be a tough task if they don't effectively integrate cultural norms as well as these other companies have.
India's foreign ownership laws only allow a foreign single brand retailer to hold up to 51% in a joint venture. Once the deal is done, Starbucks will have to work hard to capture the cafe market and compete with the likes of Cafe Coffee Day and Lavazza's Barista.
The Foolish bottom line
The Indian coffee market certainly offers a lot of potential. Starbucks will look to capitalize on the growing demand for coffee in the country while at the same time driving its top-line growth. Currently, it earns nearly 22% of its overall revenues from abroad. A foray into India may well drive up this number.
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At the time thisarticle was published Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Starbucks and Yum! Brands. Motley Fool newsletter services have recommended buying shares of Yum! Brands, Starbucks, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.
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