The Big Starbucks Deal You Probably Missed
You've probably already heard that Starbucks (NAS: SBUX) inked a deal with Tata Group to open Starbucks cafes across India. Getting a foot in the beverage door of the world's second most populous country and 10th largest economy, in a joint venture with one of India's best-known companies, is a no-brainer, epic deal for the Seattle-based boutique-coffee purveyor.
But there's another part to the deal, one perhaps not quite as epic but still not getting the attention it deserves. Let's dive deep into the agreement and see exactly what it all means for you the investor and for the competition.
Coffee, tea, or steel?
The deal is technically with Tata Global Beverages, a subsidiary of Tata Group. Tata Group is an Indian conglomerate best known in this country for the automobile badge Tata Motors, but known throughout India and the rest of the world for products as varied as hotels, communications, steel, power, and beverages. Tata Global Beverages is, in fact, the world's second-largest branded tea company, and so it makes sense for it to do a deal with one of the world's best-known coffee brands, and certainly the most chic, in Starbucks.
The joint venture between the two companies will be 50/50, and will be called Tata Starbucks Limited. Tata Starbucks Limited will run the shops, which will be officially branded "Starbucks Coffee 'A Tata Alliance.'" The cafes will eventually open in cities across the country, but will initially open only in Mumbai and Delhi sometime in 2012.
Move over, Juan Valdez
The second part of the Starbucks/Tata deal, the one getting less press, is a sourcing and roasting agreement between the two companies. In it, Starbucks agrees to let Tata Coffee Limited roast coffee for all the joint venture's new coffee shops.
In addition, Tata Coffee Limited will roast beans for general export outside the joint venture to Starbucks. The raw beans for both ventures will be sourced from Karnataka -- a poor Indian coffee-growing region keen to raise the profile of its own "arabica" coffee.
Good for Starbucks
Since Starbucks is already up and running in China, there's probably not a growth market in the world with more raw retail potential than India. The citizens are enthusiastic capitalists in general, and the country has a growing middle class that is just as consumer-driven as America's.
Also, with the free flow of information and other commercial advantages typically associated with democracies, this India deal might potentially be better than the China one in the long term anyway. As a place to do business, India certainly has its quirks, but democratic, capitalist quirkiness always beats authoritarian, communist quirkiness. And it will be easier navigating Indian quirkiness with Tata, one of the country's most trusted brands, personally leading the way.
Finally, if the Indian-grown arabica coffee is up to snuff for the world's high-end coffee market -- which I assume has been determined -- it gives Starbucks a new, exotic coffee product to sell, even further differentiating itself from the competition.
Speaking of the competition...
As an investment, what other companies in the beverage space offer this type of continuing success and worldwide dynamic growth?
- Green Mountain Coffee Roasters (NAS: GMCR) : For the moment, the company seems content with growing its K-Cup single-serve brewing system business here in North America only, though it's actually in bed with Starbucks to the extent that Starbucks coffee is offered in the K-Cup format. Were Green Mountain to attempt any kind of foray into India, China, or the like, it would almost certainly do so in conjunction with Starbucks.
- Dunkin' Brands (NAS: DNKN) : Dunkin' isn't in India yet, but is currently in a formidable 30 countries outside the U.S., including China. Revenue growth over the past year for the doughnut maven is a very healthy 9.3%, but can't touch Starbucks' 16.4%. And with its P/E of 29, Starbucks isn't exactly on sale, but it's a lot cheaper than Dunkin' with its P/E of 47.
- McDonald's (NYS: MCD) : Food by the truckload. Coffee by the tanker-full. Revenue growth? Not quite up to Starbucks. McDonald's comes in at only 9.8%. With its P/E of 18, though, one can at least brag that McDonald's is cheaper than Starbucks.
Good for India's poor farmers
Per the press release on the deal, both Starbucks and Tata are quick to stress their commitment to "responsible business ethics, the community, sustainable practices, and advanced agronomy solutions." As part of this deal, in fact, Starbucks will work with Tata to support a school in Karnataka for children with special needs.
And if Indian arabica-bean coffee takes off in the world market thanks to this partnership with the world's coolest coffee company, India's coffee-growing community could get a truly meaningful boost.
Good for you, the investor
Starbucks' share price has been on the rise ever since last August. And fiscal first-quarter 2012 results look good, too, with global comps up a big 9%, total net revenue up a more-than-healthy 16% for a record $3.4 billion, and earnings up 11% to a record $0.50 per share.
This two-part deal is yet another confident step on the green mermaid's path to world beverage domination. You really have to look for reasons not to be bullish on Starbucks these days. Read about another company and stock you can get confidently bullish on, one The Motley Fool is calling its top stock pick for 2012, in a special free report, aptly titled "The Motley Fool's Top Stock for 2012." Read all about it while the stock is still hot by clicking here now.
At the time this article was published Fool contributorJohn Grgurichwill go out of his way to check out some Indian arabica bean coffee the next time he's at Starbucks, along with a good old-fashioned glazed doughnut, but he owns no shares of any of the companies mentioned in this column.The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of McDonald's, Green Mountain Coffee Roasters, and Starbucks, as well as creating a lurking gator position in Green Mountain Coffee Roasters. 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 a scintillatingdisclosure policy.
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