Starbucks Hopes India Will Be Another China

Starbucks (NAS: SBUX) is on another tear along the Silk Road.

After years of waiting, the global coffee purveyor is finally entering India, by some measures the world's third-largest economy. Starbucks has formed a joint venture, a requirement of foreign enterprises in India, with Tata Global Beverages, a conglomerate that is India's largest company. The venture could produce 50 Starbucks outlets by the end of the year, and eventually 3,000 stores, according to a Tata exec.

With coffeehouses in over 50 countries, Starbucks appears to have found the last major international market it can enter. Management is hoping to strike gold like it did in China, a country much like India with its fast-growing economy and over a billion people. Skeptics believed Starbucks would struggle in the traditionally tea-drinking country, but the coffee chain has been overwhelmingly successful, playing into the growing Chinese middle class's love of American brands and conspicuous consumption.

Strong growth
In the last quarter, Starbucks surpassed 500 stores in mainland China, and its China-Asia Pacific region is by far the fastest growing of its three international regions. Last quarter, revenue grew by 38%. Same-store sales were a blistering 20%. Best of all, operating margins in the Far East clocked in at 34.6%, an impressive margin in the restaurant industry.

Starbucks products don't come cheap in China. A recent increase bumped up the price of a small latte to $4.20, and small cup of coffee in Beijing costs $3. Most Starbucks in China charge 50% to 75% more than its stores in the U.S. do. The chain's Chinese customers took to the Internet recently to protest the latest price increase, but the fact that they're willing to pay such steep amounts in the first place says something about Starbucks' brand strength and its reputation as a status symbol.

The question, then, for Starbucks is if it can cast the same spell over India. Though the two countries share many similarities, like a large population, rapid growth, and a history as a tea culture, India's per capita net income is less than half of China's.

The subcontinent
India's coffee market is booming, growing at 25% a year, but retail prices are much lower. At Cafe Coffee Day, India's largest coffee chain, a cup of coffee goes for between $1.20 and $1.80. Starbucks Asia president John Culver insisted that his company would not be competing with other chains, because Starbucks would be selling premium coffee. The success of newer chains like Cafe Coffee Day bodes well for Starbucks, as the youth of the country have made it clear that they're willing pay a premium to visit the hip, new coffeehouses instead of older, cheaper ones that their parents' generation prefers.

Other coffee shops have adjusted their menu to cater to the Indians' taste for sweets. As other American brands have learned, customization is vital to international success. McDonald's (NYS: MCD) struggled in this beef-shunning country initially, and even found itself the victim of a lawsuit over beef tallow used to make french fries. Since then, the ubiquitous fast food chain has found its footing, offering unique menu items, many of which are vegetarian, and now has over 200 stores operating in the country. Yum! Brands (NYS: YUM) and Domino's Pizza (NYS: DPZ) are both eyeing growth in India as well. Yum hopes to have 1,000 restaurants in the subcontinent by 2015, and Domino's has over 300 locations there with same-store sales growing for 64 straight quarters.

Foolish takeaway
After saturating the U.S. market a few years ago, which led to store closures and a nosediving stock price, Starbucks has done a remarkable job of finding new growth opportunities. Its consumer products segment, for example, which includes new offerings like Via instant coffee and Keurig K-cups, grew by a whopping 72% last quarter. Given the success of other American food chains in India, the exploding coffee market, and the company's track record in China, Starbucks' venture with Tata looks to be the next in line of winning growth opportunities for the coffee kings.

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At the time thisarticle was published Fool ContributorJeremy Bowmanholds no positions in the companies above.The Motley Fool owns shares of Starbucks, Domino's Pizza, and Yum! Brands.Motley Fool newsletter serviceshave recommended buying shares of McDonald's, Yum! Brands, and Starbucks. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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