A TATA Alliance Starbucks: Foreign direct investment in India

Starbucks has finally come to India. More importantly, it has finally come to Powai. Located just around the corner from my flat, the newest coffee shop has created much interest and buzz. But, what is all this buzz really about, anyway? Powai has at least three good coffee shops already. Gloria Jean’s is just a few doors down from the new Starbucks. Did we really need another coffee shop on Central Avenue? Probably not. But, this is Starbucks, and that makes this opening newsworthy.

Starbucks in Powai

The Powai Starbucks outlet at 7 am on a Saturday. We were the only customers.

For American expats, no brand epitomizes coffee better than Starbucks. Its ubiquitous presence in the US around every corner, in grocery stores, and at airports makes Starbucks a powerful symbol of brand USA. But, something is different about the Starbucks outlets in India. The signage outside the shop is not like other Starbucks coffee shops.

Starbucks sign in Hindi

On the left is the Hindi transliteration of the English. On the right is the English.

First, the name is written in Hindi on the left and English on the right. In Maharashtra, English business signs must also display the Hindi or Marathi equivalent. Often, these equivalents are smaller than the English names. Occasionally, however, the English and Hindi signs appear equal size. That Starbucks chose to give the Hindi name equal footing with the English one speaks volumes about its approach to wooing the Indian market. Because, let’s face it, even though many expats will be excited to have another familiar brand in India, we are not the target market. That market is middle- and upper-class Indians who want what America has to offer, whether shoes, clothing, or coffee. Consequently, Starbucks has modified its price structure to remain competitive with other Indian coffee chains like Cafe Coffee Day. A large latte that would have cost about $5 in the US costs less than $3 in India. The coffee prices max out at about Rs. 200 or $4.

Second, the name on either side of the door reads vertically from top to bottom: A TATA Alliance Starbucks. Few Indian brands pack a more powerful punch than TATA. The name is everywhere from the back of goods carriers to the front of retail outlets. Even the storied Taj Mahal Palace Hotel is part of the TATA brand. TATA Global Beverages, Starbucks’ partner, is a multinational powerhouse of brands that includes Tetley tea and Himalayan water. TATA already has the infrastructure and supply-chain connections that would make such an alliance profitable to both parties. By partnering with TATA, Starbucks has a local supplier for coffee and tea. An alliance between Starbucks and TATA seems logical.

But, why was this alliance necessary? Three little letters: FDI. Indian regulations about foreign direct investment (or FDI) in retail outlets have been the source of tremendous debate over the last year. Before the Delhi rape case knocked the story off the front page, the debate over FDI was the biggest news story of 2012. Retail FDI is split into two categories: single-brand retailers that sell their own products (Nike, Apple) or multi-brand retailers that sell other companies’ products (Wal-Mart, Lowe’s). Up to 51 percent single-brand FDI has been allowed since 2006. Last year, the percentage was increased to 100 percent, thus no longer requiring an Indian partner. So why did Starbucks bother partnering with TATA? Because, it makes good business sense. TATA understands the Indian palette, and food is a major part of the Starbucks experience.

Muffins at Starbucks

These muffins, which are like those served in the US, sit in the same case as a potato and pepper sandwich, a unique India option.

Single-brand FDI seems to have had an easier political road than multi-brand retail because it is not seen as a threat. After all, why shouldn’t Nike be allowed to sell its own shoes? Multi-brand retail, however, is another story. Wal-Mart particularly is seen as the Evil Empire—cue the Imperial March—the harbinger of death for Indian small businesses and farmers. Because of Wal-Mart’s emphasis on efficiency and delivering every day low prices, these sectors fear their profits dwindling and their businesses dying. As an American who grew up with Wal-Mart and whose brother worked for them, I understand these fears, and I think they have some merit. But, evidently, the economic studies tend to indicate otherwise. Wal-Mart creates jobs. Of course, whether those jobs are higher or lower paying is debatable and part of the Wal-Mart controversy.

Expats seem to crave Wal-Marts. Maybe it’s the familiarity. Maybe it’s the wide, clean aisles. Maybe it’s the lure that the same brands will be available here that are available in the US. But, the truth is that the Wal-Mart of Mumbai will not be the Wal-Mart of Magnolia. Because real estate is a premium commodity in Mumbai, Wal-Mart will adapt its business model to fit the space constraints. It plans a multi-format approach that includes smaller stores. The Wal-Mart of India may more closely resemble D-Mart than a Super Center. One thing Wal-Mart can bring is its knowledge of logistics, particularly cold storage, which is not efficient in India. If you have ever seen a dudhwalla with milk jugs strapped to his bicycle, you have seen why there is room for improvement.

It may be that everyone is getting all worked up about Wal-Mart for nothing. Opening the market to multi-brand retail has its conditions. Among them that 30% of the goods be sourced from small businesses and that the foreign retailer invest US$ 100 million. Those restrictions have meant that even Wal-Mart, which has been anticipating this opportunity, is not necessarily jumping at the chance to take it right now—much to the government’s frustration. For me, it is Lowe’s, not Wal-Mart, that presents the most intriguing multi-brand possibility. By making low-cost building supplies available at a single location, Lowe’s has the power to transform how the new India is built.

But, this is all speculation. For now, I will just sit here and sip my Starbucks coffee.

5 thoughts on “A TATA Alliance Starbucks: Foreign direct investment in India

  1. I think Ikea is also potentially very interesting. Having seen the quality of furniture at HyperCity and Reliance, I think there’s a real opportunity for them to eat their lunch. People who want nice stuff will still go to craftsmen, but if you just need a simple item, Ikea’s a much better choice.

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  2. Funny it both the times I visited the Powai outlet the coffee (latte) was not piping hot. Also music was too loud for a coffee shop. But the service staff is much mannered compared to a CCD.

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    • Hi Ajit. Ask for the coffee extra hot. Starbucks’ standard in the US is too serve the coffee hot, but not piping hot. My husband always asks for it extra hot.

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  3. Pingback: O is for Oath of the Vayuputras | Magnolia2Mumbai!

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