Starbucks Corp unveiled a deal that sets the stage for the world's largest coffee company to bring its iconic cafes to India, where Western-style coffee shops are increasingly popular.
The Seattle-based chain signed a pact with India's Tata Coffee Ltd, part of the Tata group conglomerate, to buy coffee from India and explore opening retail stores in the country, the companies said in a statement on Thursday.
Starbucks will likely open its first store in Asia's third-largest economy in July or August this year, R.K. Krishnakumar, chairman of Tata Coffee, told Reuters.
Acquiring real estate is currently a challenge in India, but Starbucks will hopefully overcome that, Krishnakumar said.
The companies said they would also explore opening cafes at retail outlets and hotels associated with the Tata group.
In India, where tea has long been the beverage of choice, an increasingly affluent and urban population with westernized tastes is embracing cafes, paying much more for a cup of coffee than at traditional restaurants.
A cup of plain coffee typically costs about 10 rupees (about 22 U.S. cents) at a basic restaurant in India, compared with 50 to 60 rupees at one of the Western-style cafe chains that began sprouting up about 10 years ago.
People in this country are spend-oriented and not frugality-oriented as is the case in many Western markets these day, said Harish Bijoor, an industry expert and independent consultant who previously worked at Tata Coffee.
If they had entered five to six years ago, they would have had to reduce prices. Now ... they can afford to sell a frappuccino at 180 rupees ($4).
Under the terms of the agreement, Starbucks and Tata Coffee will consider jointly investing in additional facilities and roasting green coffee for export to other markets.
India, the world's fifth-biggest coffee producer, exports 70 to 80 percent of its coffee output.
We believe India can be an important source for coffee in the domestic market, as well as across the many regions globally where Starbucks has operations, Starbucks Chairman Howard Schultz said.
Margins of global coffee retailers like Starbucks were under pressure in 2010 after coffee prices rose 77 percent during the year due to supply constraints. The alliance with Tata Coffee could help ensure steady supplies.
The organized coffee market in India -- which reflects consumption mainly through cafes -- accounts for about $140 million of the country's total domestic consumption of $667 million.
I think it's an untapped market and potentially a very lucrative market for them, Morningstar analyst R.J. Hottovy said.
It's a dense population and they probably have more confidence going into India, given the success they've had in China breaching these traditional tea-drinking nations, he said.
Starbucks, which opened its first store in China in 1999, has more than 400 stores across mainland China.
The chain has more than 5,500 coffeehouses in more than 50 countries outside the United States. That is about half the number it has at home, where it underwent a severe restructuring that shuttered hundreds of units but returned the company to growth.
For Starbucks, the international part of the story is really where the unit growth is going to be, said Edward Jones analyst Jack Russo. This market (India) is a big one, along with China and others.
Russo said it was smart for Starbucks to find an Indian partner to share the risk and teach the company about local culture and business practices.
A burgeoning middle class in an economy growing at nearly 9 percent a year has lured many U.S. companies to India in recent years. Several chains, including Domino's Pizza, McDonald's and YUM Brands with its KFC, Pizza Hut and Taco Bell units, have entered the Indian market, adapting their menus to the Indian palate.
Tata Coffee acquired a 34 percent stake in Indian cafe chain Barista in 2001 and sold its holding to the Sterling Group in 2004. Sterling sold the chain to Lavazza, Italy's largest coffee company, in 2007.
Starbucks shares were up 22 cents to $32.42 in late-morning trading on the Nasdaq. Tata Coffee shares were down 1 percent at 463.10 rupees.