Hello, can someone help me to answer these questions? Evaluate Tata Starbucks' corporate-level and international strategy using concepts and tools from material that explains the Importance of the Internal Environment, External environment, five forces, what strategy Starbucks uses (differentiation, low-cost strategy, etc.).

What is Starbucks ' comparative advantage?

How have the entries into new geographical markets created value for the company?

What critical environmental factors need to be considered and analyzed before entering a new geographical market?

How does the company respond to any liability of foreignness?

Tata Starbucks

In January 2019, Tata Starbucks appointed new CEO, Navin Gurnaney, who replaced Sumitro Ghosh who had been CEO for the previous three years. Speaking on the an- nouncement, Ajoy Misra, Managing Director and CEO, Tata Global Beverages Limited praised Ghosh for establishing a strong foundation. Misra then shifted focus to the future saying, "We are pleased to bring on a seasoned leader like Navin, who is focused on operations excellence, relevant innovation and developing high-performing teams, and look forward to continued brand and business growth for Tata Starbucks in India."1

Ghosh replaced the menu-as-usual approach with his India-specific strategic vision.2As a result, Tata Starbucks narrowed its ongoing losses from above $7.51 million to $6.01 million, increasing sales by 39 percent. Ghosh said, "we are focused on a long-term, disciplined, and focused approach to building our brand in this dynamic market, earning the trust and respect of Indian consumers."3

Tata Starbucks Pvt. Ltd in India is a joint venture of U.S. beverage company, Starbucks, and Tata Global Beverages. Begun in October 2012, at first Tata Starbucks, under founding CEO Avani Davda, offered the usual Starbucks coffee menu in India, which was not successful. By early 2019, Tata Starbucks had refined the India-specific strategy, as a more promising path for future growth and success among Indian customers. One of the first things they did was to introduce Starbucks Teavana with 18 diverse varieties of tea to serve the Indian market.

Although the start of the venture had been disastrous, Tata Starbucks became EBITDA (earnings before interest, tax, depreciation, and amortization) positive this year after its sales doubled in fiscal year 2018. In the annual report of Tata Global Beverages, it said Tata Starbucks had boosted sales by 28 percent in FY18 and posted Rs. 272 croresain sales during FY17.4Due to recent success, the company an- nounced to open more than 25 stores across India in 2019.

Starbucks had had its eye on the large Indian market for some time before the joint venture was initiated. An at- tempt to enter the market several years earlier had failed due to complications with the Indian government and oreign direct investment (FDI) restrictions.bThe company had withdrawn its application then, but when India's es- teemed Tata Group knocked on its door with a partnership opportunity, Starbucks eagerly responded. A 50-50 joint venture was formed, and Starbucks coffee was introduced to the Indian market in October 2012 with a generous initial investment of $80 million.5The Tata Global Beverages board of directors expressed excitement about the potential of the newly formed joint venture between the company and Starbucks.c"Through Tata Starbucks, your company offers the legendary Starbucks coffee experience, backed by the trust of the Tata name, to the Indian consumer," announced Cyrus P. Mistry, chairman of Tata Global Beverages.6

The Indian cafe market certainly seemed to offer a lot of potential for the new Tata Starbucks alliance. While India was a nation known for tea drinkers, sipping coffee and so- cializing at coffee shops was becoming increasingly popu- lar. Domestic consumption of coffee had risen 80 percent in the past decade. Given these encouraging trends, Star- bucks CEO Howard Schultz believed that India could one day rival the company's successful venture in China.

In 2019, the Tata Starbucks joint venture had clearly come a long way since it was kicked off in 2012, but it was much too early to celebrate, since the company was just recovering from losses. Success in the Indian cafe market would require over- coming the usual two key challenges of competition and prof- itability. In July 2018, Starbucks recorded its first year of positive EBITDA. Its latest annual report said Tata Starbucks, improved sales by 28 percent in FY 2018 with robust in-store performance and new stores added during the year.

The market in India is intensely competitive, with multi- ple domestic and foreign players. The most formidable com- petitor of the Tata Starbucks venture is domestic giant Cafe Coffee Day (CCD), with its strategy of flooding the market with its cafes, closely mimicking what Starbucks has done in the United States. At the same time, high real estate costs and rental rates, along with competitive pricing pres- sures and India-specific cultural preferences, make it ex- tremely difficult for new coffee companies in India to recover their initial investments.

Former Tata Starbucks CEO Avani Davda admits that the initial consumer experience was a humbling one. Tata Starbucks opened its first store with a lot of fanfare in the trendy Horniman Circle area of Mumbai. Despite having a high-profile local partner, Starbucks was unable to use its

name to secure any discounted rates in renting real estate. The first store was located in a Tata Group-owned 4,000-square-foot site that had been vacant for a while.

As of February 2019, Tata Starbucks had expanded to over 145 locations across the country in major metropolises such as Mumbai, Delhi, Pune, and Bengaluru.7Yet this was still well short of initial expectations. Clearly, something had changed in management's expectations of the size and pace of the venture's growth. Quarterly earnings presenta- tions boasted of robust store profitability, but with no num- bers provided, possibly pointing to a slower and more selective approach to expansion.8In its first full year in the Indian market (12 months ending March 2014), Tata Star- bucks reported losses of $7.8 million more than half its to- tal sales of $14.34 million during the same period.9

The joint venture appeared to be at the crossroads of an important strategic decision. It could revert to a plan to grow its store count aggressively, much like Starbucks did in the United States. It is possible that this was the original intent. After all, the initial launch pricing had been set to be com- petitive with CCD's pricing (coffee drinks available for as low as Rs 100). This approach would have put it in direct price competition with CCD, the domestic cafe market leader.

Gaining market share among the youth of the country was critical for Tata Starbucks to tap into a large demo- graphic segment. India's population showed a pronounced skew to younger age brackets (see Exhibit 1) and lower in- comes when compared to countries like Japan and the United States. Building a presence within these segments as CCD had done was critical for success in the long term.

Alternatively, instead of trying to saturate the country with stores at once, the venture could choose a premium- priced, niche approach similar to the one Starbucks had used successfully in other Asian countries, like Japan and China. The premium offering would cater to an older business elite with higher spending power. This would result in less rapid growth, with a cherry-picked list of high- profile, business-friendly locations, allowing the venture to build a premium brand with premium pricing.

Would Starbucks and Tata under Gurnaney's leadership be able to crack the code for sustained success in the com- petitive and complex Indian market? Though at first Star- bucks appeared optimistic about the success of Teavana as the company focused on offering products exclusively ac- cording to the taste of the Indian customer, some critical strategic choices would need to be made to ensure the long- term success of Starbucks in India.

Schultz and StarbucksCultivating a Company from an Idea Starbucks started out in 1971 with a single coffee roaster and retail store in the Pike Place Market in Seattle. Since then the company had expanded its global footprint might- ily, with over 17,000 coffee stores in more than 50 coun- tries.10The visionary behind this international success story was CEO Howard Schultz.

Schultz joined the company in 1981 and quickly assessed its growth potential after visiting coffeehouses in Italy. He envisioned his coffeehouses offering much more than just a cup of coffee. They were to become a third place, in addition to home and work, for people to meet and socialize. In addi- tion to serving coffee, the coffeehouses would help people connect with other people and their local communities. Employees would be trained on coffee, company products, and customer service to deliver a positive "Starbucks Experi- ence" to each and every customer.

Starbucks quickly acquired a reputation for being an employer of choice and a socially responsible player:

• When the company went public in 1992, all employ- ees were made "partners" in the company and given a share of Starbucks equity (commonly known as "bean stock"). Comprehensive health care coverage was also provided to both full-time and part-time employees.
• Efforts were made to ethically source products and establish strong relationships with coffee-producing farmers all over the world. In later years, the company began to utilize reusable and recyclable cups in its stores. Its employee partners contributed many hours of volunteer work to help with community causes.
• After the 2008-2009 recession and the introduction of the Affordable Care Act in 2010, several companies began to cut employee benefits to manage costs. Schultz refused to reduce benefits for his partners, arguing that this was a short-term reaction and not

in the interests of a company in the long term.

• In 2019, to help provide employment opportunities for refugees and military veterans in the United States, Starbucks announced a goal to hire 10,000 refugees by 2022, and 25,000 military veterans by 2025.

The company's mission was to inspire and nurture the human spirit, one person, one cup, and one neighborhood at a time. The company planned on doing this not just in the United States but across the globe. The Starbucks name had been taken from a character in Herman Melville's clas- sic adventure novel Moby Dick.It was felt that the history of the coffee trade and Seattle had a strong association with the sea. In keeping with the sea theme, the image of a Norse twin-tailed siren was adopted as the company logo.11

The company under Schultz's leadership performed re- markably well financially over time. Performance in 2016 showed total revenues of $21.3 billion, and $2.8 billion in net earnings. On April 3, 2017, former Chief Operating Of- ficer and member of Starbucks board of directors Kevin Johnson became the successor of Howard Schultz as the new CEO, with a vision similar to Schultz's. Under Johnson, performance in 2018 rose to $24.7 billion in revenues and net earnings of $4.5 billion.12

1. Initial Expansion into AsiaTargeting the Westernized and the Wealthy The first Starbucks store outside North America opened in the fashionable Ginza district in Japan in 1996. Within the next few years, Starbucks became a well-known brand name in Japan. Like Starbucks shops in the United States, those in Japan featured comfy sofas with American music playing in the background. Unlike most Japanese kisaten,or local cof- fee shops, Starbucks did not allow smoking. The policy proved popular with women, who did not smoke as much

as men in Japan. Men eventually followed the women to Starbucks locations, and business started humming. Given the strong performance, the stock of Starbucks Coffee Japan Ltd. made its debut on the NASDAQ Japan exchange and performed strongly. "Any way you measure it, we've exceeded our wildest expectations," CEO Howard Schultz announced jubilantly at the initial public offering in Tokyo, October 2001.

Tea-drinking Japan was not a total stranger to coffee. Dutch traders first brought coffee to Japan in the 17th cen- tury, but the shogun prohibited them from traveling freely in Japan, so very few Japanese were exposed to coffee and those who were lived mainly in port cities like Nagasaki. Coffee penetrated Japan further in the 1850s with the ar- rival of American ships. Soon after, Japanese started to travel overseas and brought back elements of the European coffee culture.

The first coffee shop opened in the 1880s in Tokyo's Ueno district, and drinking the brew became associated with the wealthy classes. Over the next few decades, coffee increased in popularity within Japan, and a number of cof- fee chains entered the market. As business flourished be- tween the United States and Japan, many Japanese traveled to the United States. West Coast cities like Seattle were popular destinations. So when Starbucks finally entered Japan in 1996, many Japanese were already familiar with the brand. Starbucks soon cultivated a loyal clientele of wealthy Japanese, who considered it to be the original gourmet cof- fee shop and aspired to emulate the Western lifestyle.

Starbucks Coffee Japan turned its first profit in 2000, nearly four years after its initial launch. Clearly, Starbucks entered markets with a commitment to win them over the long haul. Starbucks grew to over 1,000 stores in the coun- try. For a while, sales volume per store in Japan was twice as high as that in the United States.13

Between 1996 and 1999, Starbucks expanded to addi- tional markets in other countries that had a high number of international travelers and a growing segment of western- ized and wealthy locals. These were countries with high or growing per capita incomes (see Exhibit 2).

Starbucks Singapore opened its first store in December 1996 at Liat Towers, strategically located along the nation's renowned Orchard Road shopping belt.

Starbucks then entered the Philippines (1997), Taiwan, Thailand, and Malaysia (1998), and South Korea (1999), once again selecting premium locations frequented by the country's growing westernized, affluent classes and international travelers.14

Happy with its initial successes, Starbucks began planning expansions into countries with more entrenched cultures and large, diverse populations.

Next Expansion WaveCracking the Cultural Codes Unlike Japan, tea-drinking China had little prior experience with coffee. In addition, the emerging superpower had deeply entrenched cultural traditions with regard to food and drink. Succeeding in China would be a critical chal- lenge and opportunity for Starbucks. Cracking the cultural code there could facilitate conquering other emerging markets like India.

Starbucks opened its first store in Beijing in 1999. The company recognized there was a universal need among indi- viduals to be respected for their differences and to feel con- nected with others. Starbucks catered to this need by applying its own culture and values in a way that was yet conducive to local values and tastes.

In China, instant coffee accounted for upward of 80 per- cent of all coffee consumption. Given the average Chinese consumer's limited prior exposure to coffee, instant coffee had proved to be a highly effective and affordable way of expanding consumption. Starbucks took a different ap- proach and targeted affluent Chinese consumers with bev- erages priced up to 50 percent higher than the prices at its U.S. stores. Most Starbucks beverages in China cost upward of 30 renminbi (RMB), or about US$5. In contrast, Nestle's Nescafe instant coffee could cost as little as RMB1.5 (US$0.10) per packet.

Fueled by Starbucks, the wealthy commercial capital Shanghai quickly became the coffee culture capital of China. The owner of Shanghai-based Cafe del Volcan, one of Shanghai's popular coffee retail outlets, had noticed an interesting phenomenon in the initial days after opening his cafe. The prices had not yet been displayed, yet most cus- tomers ordered their beverages without inquiring about prices. Clearly, the Shanghai elite were not price-sensitive. Much like Starbucks, the cafe then began to focus primarily on achieving the highest level of quality and service.

In 2018, Starbucks generated an annual revenue of $4.5 billion from its business in China. Starbucks' Chinese outlets had become more profitable than those in the U.S. market. Although Starbucks' Americas revenue grew by 7 percent, its China/Asia Pacific revenue grew by 38 per- cent in 2018. To capitalize further on the Chinese market, Starbucks announced 1,400 additional stores in China to be built by 2019, bringing the total store count in China to 3,400.15

While Nestle and Starbucks had radically different methods for getting the Chinese to drink coffee, both suc- ceeded. This success in part can be attributed to segment- ing the market and recognizing the Chinese as unique consumers with different tastes and habits than those of American consumers. For instance, Chinese consumers do not like the bitter taste associated with black coffee or espresso, so both players tailored their beverages accord- ingly. Nestle's Nescafe packets included sugar and pow- dered milk, while Starbucks emphasized milk-based drinks like Frappuccinos, lattes, and mochas in its stores. Star- bucks' Chinese menus also added some local flavor, with customized choices like green tea tiramisu and Chinese moon cakes.

In addition, Starbucks localized its outlets by offering large seating areas, since Chinese tend not to like to take their drinks off-site. Local Chinese customers began to enjoy the "Starbucks Experience" while sitting with friends and having something to munch on along with their coffee. Further, "family forums" were introduced to explain to par- ents the merits of having their children work at Starbucks. Large lounges with couches were provided at stores to ac- commodate working customers' need to relax for a bit dur- ing afternoons. Menus were modified to include foods that were tailored to local tastes, for example, a Hainan Chicken sandwich and a Thai-style Prawn wrap.16

By the end of 2019, Starbucks had opened about 3,521 stores in China and expected to take the total store count in China to 5,000 by 2021. In terms of Starbucks' expansion in China, it meant opening more than one store per day.17It was this success in China that made Schultz particularly eager to venture into India. Like China, India was another large market with culturally entrenched tastes.18

In a press interview, Howard Schultz later reminisced:

Our stores, domestically and around the world, have become the third place for customers between home and work. The environment, the store design, the free Wi-Fi - everything we've been able to do has created this primary destination. That is the same in Honshu (China), in Beijing, in Shanghai, in Spain, in Tokyo or in New York City. We've cracked the code on universal relevance.19

Conquering Unfamiliar MarketsSeeking the Magic Formula With Starbucks' stellar performance in its initial expansion into Asia, numerous industry analysts speculated on the best practices that could be used by the company to pene- trate other markets, or that could be emulated by other companies.20Three key themes emerged:

1. Be tactful in marketing the brand:

• Once Starbucks decided to enter China, it imple-

mented a smart market-entry strategy. It did not use any advertising and promotions that could be perceived by the Chinese as an American intrusion into the local tea-drinking culture. It just quietly focused on carefully selecting premium locations to build its brand image.

• Starbucks capitalized on the tea-drinking culture of Chinese consumers by introducing beverages using popular local ingredients such as green tea. It also added more milk-based beverages, such as Frappuc- cinos, since the Chinese did not like the taste of bitter coffee.

2. Find a good local partner:

• Working with the right partners could be an

effective way to reach local customers and expand quickly without going through a significant learn- ing curve.

• China was not one homogeneous market. There were many Chinas. The culture of northern China
• was very different from that of the east. Consumer spending power inland was not on par with that in coastal cities. To address this complexity of the Chinese market, Starbucks collaborated with three regional partners as part of its expansion plans.
• In the north, Starbucks entered a joint venture with Beijing Mei Da coffee company. In the east, Starbucks collaborated with the Taiwan-based Uni-President. In the south, Starbucks worked with Hong Kong-based Maxim's Caterers. Each partner brought different strengths and local expertise that helped Starbucks gain insights into the tastes and preferences of local Chinese consumers.
• 3. Make a long-term commitment: Long-term commitment required patience. It took
• Starbucks time to educate the market and gain customer loyalty. Starbucks also did an excellent job in recruiting and training its employees. This turned out to be a win-win strategy because em- ployees were, after all, the face of the Starbucks brand and were at the heart of delivering the "Starbucks Experience" to customers.
• This knowledge armed Starbucks as it prepared to pene- trate an even more complex and competitive market of India.
• Passage to IndiaTata Group a Worthy Partner Founded by Jamsetji Tata in 1868, Tata's early years were inspired by the spirit of nationalism. Tata pioneered several industries of national importance in India: steel, power, hospitality, and airlines. In more recent times, its pioneer- ing spirit was showcased by companies such as TCS, India's first software company, and Tata Motors, which made India's first indigenously developed car, the Tata Indica, and the world's most affordable car, the Tata Nano.
• The Tata Group comprised over 100 operating compa- nies in seven business sectorscommunications and infor- mation technology, engineering, materials, services, energy, consumer products, and chemicals. The group had operations in more than 100 countries across six conti- nents, and its companies exported products and services to 150 countries.
• Along with the increasing global footprint of Tata companies, the Tata brand was also gaining international recognition. Tata ranked 131st among Forbes' list of the Top Regarded companies, as of 2018.21Brand Finance, a UK-based consultancy firm, valued the Tata brand at $19.5 billion and ranked it 86th among the top 500 most valuable global brands in its Brand Finance Global 500 2019 report.

Like Starbucks, Tata had a strong belief in social respon- sibility. The company created national institutions for science and technology, medical research, social studies, and the performing arts. Its trusts provided aid and assistance to nongovernment organizations (NGOs) work- ing in the areas of education, health care, and livelihoods. Individual Tata companies were known to extend social welfare activities to communities around their industrial units. The Tata name had been respected in India for more than 140 years because of the company's adherence to strong values and business ethics.

The total revenue of Tata companies was $110.7 billion in 2018, with nearly two-thirds coming from business out- side India. Tata companies employed over half a million people worldwide. Every Tata company or enterprise oper- ated independently. Each of these companies had its own board of directors and shareholders. The major Tata com- panies were Tata Steel, Tata Motors, Tata Consultancy Services (TCS), Tata Power, Tata Chemicals, Tata Tele- services, Titan Watches, Tata Communications, Indian Hotels, and Tata Global Beverages.

Much like Starbucks, the Tata Global Beverages unit was looking for a retail partner to sell its coffee products. Its broad product portfolio also included tea and bottled water. As with its Tata Group parents and Starbucks, Tata Global Beverages was proud of having strong values and purpose as a company. Thus, a promising partnership was formed, and Starbucks was ready to make a grand entry into the market.22

Coffee in IndiaAn Existing but Lesser-Known Tradition Unlike China, tea-drinking parts of south India did have some historical experience with coffee. The crop was first cultivated in Ethiopia, and by the 1600s, it was hugely popu- lar throughout the Ottoman Empire. According to coffee historian and author Mark Pendergrast, the Turks boiled or roasted coffee beans before they left the Yemeni port of Mocha to keep them from being grown elsewhere. That is why, according to legend, a 17th-century Muslim pilgrim named Baba Budan taped seven coffee beans to his stom- ach and smuggled them to India. The hills where he planted those beans are now known as the Bababudan Giris.

When the British arrived in the 1600s, intending to break a Dutch monopoly on the spice trade, tea and coffee were "backyard crops" in India. Over the centuries, the British installed plantations and established more organized pro- duction processes. Tea, which was a much larger crop than coffee, was grown mostly in the north, while coffee was grown mostly in the south.

For decades, the Coorg (also called Kodavu) region in south India had been home to coffee plantations. The British began planting coffee there in the 19th century. When India gained independence in 1947, the original British planters sold their estates to the locals (known as Kodavas) and other southern Indians. Since the mid-1990s, when the Indian government changed its policies and allowed farmers to take control of their own sales, India's coffee industry has experienced a boost in quality and profits and taken a seat in gourmet coffee circles.23

• With the Tata alliance, Starbucks gained access to lo- cally produced premium-quality beans from Tata-owned plantations in the Coorg region. Tata Coffee, a unit of Tata Global Beverages, produced more than 10,000 metric tons of shade-grown Arabica and Robusta coffees at its 19 es- tates in south India.24This was a strategic asset for Starbucks as it prepared to do battle with the domestic giant, Cafe Coffee Day.
• Indian Cafe MarketDominated by Cafe Coffee Day The Indian coffeehouse market was strong and growing at a robust rate of above 11 percent. While the market was crowded with international and domestic players, Starbucks main competition came from a domestic giant, Cafe Coffee Day (CCD). The presence of international coffee chains was significant, but the combined number of their outlets was only about one-third of the 1,600 outlets operated by home-grown CCD.25
• CCD had been the market leader since its beginnings as a "cyber cafe" in 1996. As the retailing arm of the nearly 150-year-old Amalgamated Bean Coffee Trading Company Limited (ABCTCL), it had the benefit of sourcing its coffee locally from a network of ABCTCL-owned coffee planta- tions and using ABCTCL-manufactured coffee-roasting ma- chines. This allowed CCD to insulate itself from global price fluctuations and serve coffee at lower prices than the competition. Most of the foreign competitors relied on im- ported coffee and foreign roasting machines.26
• ABCTCL's charismatic CEO, V. G. Siddhartha, had rap- idly expanded CCD stores across the country. The mission of the company was to provide a world-class coffeehouse experience at affordable prices. This made the stores ubiq- uitous, much like Starbucks stores in the United States. It also made CCD the destination of choice for the youth in the country who had limited money to spend and were looking for socially acceptable places to socialize. The ma- jority of India still disapproved of socializing at bars, and cafes offered a respectable alternative. An industry study showed that the CCD brand was synonymous with coffee for most coffee drinkers in India.27
• After CCD, the next-biggest player was the Barista chain, which started in 2000. From 2001 to 2004, Tata Global Beverages explored the option of partnering with Barista to sell its coffees but eventually sold its stake. In keeping with Barista's premium positioning, most of the company's products were imports and its coffee was roasted in Venice, Italy. In 2007, Barista was acquired by Italian coffee company Lavazza. However, profits proved elusive despite several years on the market and heavy investments. In 2014, Lavazza sold the Barista business to Carnation Hospitality Pvt. Ltd for an undisclosed amount.

Industry watchers said that the coffee business in India was becoming a difficult one to turn profitable even after years of operations. High rental expenses and intense com- petition had left most foreign players struggling to achieve profitability despite years of trying. According to industry estimates, rentals could account for 15 to 25 percent of the cost of running a cafe chain. Typical monthly rental market rates were 200 to 300 rupees (Rs) per square foot of real estate.28Then, there was the investment in making the stores appealing to customers, finding people to run them, and building a food and beverage menu that was hip enough to keep 18- to 24-year-olds-the target market for many coffee chains-coming back for more. CCD had found a way around this problem by entering into a revenue-sharing deal, paying 10 to 20 percent of a unit's proceeds as a fee. Coffee bars were a sit-in concept in India, where consumers generally hung around such outlets for hours, unlike the global phenomenon of grabbing coffee on the go from gen- erally tiny outlets and kiosks.29

Cafe Coffee Day's vision was to become an "experience beyond a cup of coffee.". They wanted to become the pre- mier destination for everyone who wanted to relax and so- cialize over a cup of coffee. The challenge that Cafe Coffee Day had in its initial years was that it was "just another ex- pensive coffee shop." CCD's key strategic approach is based on the 3 As: Affordability, Accessibility, and Amaz- ing Value. The brand caters as a youth meeting space with outlets near colleges and offices where people can unwind, relax, and rejuvenate over a cup of coffee.

Industry experts argued that coffee chains in India had to maintain elaborate and plush outletsnot kiosksto give Indian consumers what they were looking for from a coffee chain even if the proposition turned out to be very expen- sive, and this concept made it difficult for many companies to stay in the business and made it hard to scale up. Unlike countries such as the United States, where purchasing cof- fee was often a quick transaction at a counter or kiosk for customers on the go, the culture in India was to sit down and socialize for hours over coffee or tea.30Some frustrated customers stopped frequenting stores because it was so hard to find a free table.31This made it much harder for cof- fee retailers to turn a profit. According to Manmeet Vohra, Tata Starbucks marketing and category chief, peak hours in India were 2 p.m. to 6 p.m. (compared to 5 a.m. to 11 a.m. in the United States) and takeout orders accounted for barely 20 percent of the business in India (compared to 80 percent in the United States).32

Other international entrants like the UK's Costa Coffee, the U.S.-based Coffee Bean and Tea Leaf Company, and Australia's Gloria Jean's Coffee experienced similar profit- ability challenges.33Costa Coffee entered the market in 2005 and soon found its stores were too small to handle the peak-time crowds. The Coffee Bean and Tea Leaf Company started out in 2007 and tried to entice customers by offer- ing new menu items each month. Gloria Jean's Coffee en- tered the market in 2008 hoping it could crack the profitability code by serving coffee in more kiosks, which required a lower capital investment. However, achieving profitability continued to remain elusive for most interna- tional players.

Starbucks appeared to be doing well in its initial stores. As mentioned previously, in quarterly investor presentations, Tata Global Beverages reported robust profitability in its stores. While the company shared no numbers, industry ex- perts corroborated the information. The 4,000-square-foot Horniman Circle store was estimated to be generating 8.5 lakhdin daily sales, which compared to 1 lakh rupees generated by the 400-square-foot CCD store at the Mumbai airport. Top Indian store revenues in U.S. dollars were com- parable to those generated by the stores in China (about $600,000 per year). Since the real estate for the first store was obtained from the Tata Group, certainly that store, at least, was brewing a healthy profit.

Quick-Service Restaurant Chains A Looming Threat In addition to traditional coffee chains, the Indian cafe mar- ket was being encroached upon by other quick-service res- taurant (QSR) options like McDonald's and Dunkin' Donuts. These players threatened to steal market share with lower-priced options for drinking coffee at existing quick- service establishments.

One of the major advantages for these chains over Starbucks and other competitors was the already-existing network of locations in the country that allowed ready ac- cess and brought down establishment costs. Further, this ubiquity and lower pricing would enable these players to tap into the larger demographic segments that made up a large section of the Indian population.

Amit Jatia, vice chairman and CEO of Hardcastle Restaurants, which is the McDonald's franchise for South Indian operations, stated: "McDonald's has the advantage as their ability to expand is better, considering that they

34have a larger footprint now."

Price was another factor by which McDonald's McCafe expected to hold an edge over Starbucks. Getting a cappuc- cino for 90 rupees for a global brand like McCafe sounded more appealing than spending more than 110 rupees for the same drink at Starbucks. Like Starbucks, McCafe was sourcing its coffee locally from Chikmagalur in Karnataka.35

The Chai Revolution

India has traditionally been a tea-drinking nation. With a domestic consumption of over 1.8 billion pounds in 2013 and 2014, the market for chai by the year 2020 is expected to grow annually by 20 to 23 percent.36For every cup of coffee, an Indian drinks 30 cups of tea.37Indians are said to drink tea 66 percent in comparison to coffee that stands at 54 percent. However, in the last decade, coffee chains have increased with big players like Starbucks and Costa Coffee entering the Indian market.

At Starbucks' inception, Howard Schultz had under- stood that the stores were more than just a cup of coffee. After walking the cobblestone streets of Milan for the first time in 1983, he returned with an idea that would change the trajectory of Starbucks Coffee Company. "The Italians had created the theatre, romance, art, and magic of experiencing espresso," Schultz recalled. "I was overwhelmed with a gut instinct that this is what we should be doing."38He wanted Starbucks to be an experi- ence where people met and socialized, and returned to do the same again and again. Although this idea brought Starbucks to new heights in the 1980s, it is hard to say the company entered the Indian market with the same thought process.

In comparison to highly expensive bottled teas of Teavana, some tea startups in India explored the possi- bilities of sophisticated varieties of Indian chai for a fairly decent price. They realized the importance of tea more than that of coffee in the previous couple of years, and combined it with Schultz's initial idea of making the ex- perience more than just a cup of chai. Chai Point is an Indian tea company and a cafe chain that focuses on tea- based beverages mostly popular in South India. Chai Point is revolutionizing the way chai is consumed in India. Beginning with the first pilot stores set up in Bangalore in April 2010, Chai Point has rapidly grown to become the go-to brand for a perfectly brewed cup of chai with over 300,000 cups sold every day.39Chai Point is present in eight citiesBangalore, Delhi, Gurgaon, Noida, Mumbai, Pune, Hyderabad, and Chennai. Chai Point's offerings include varieties of hot chai, iced chai, shakes, and bite-sized Made-For-Chai snacks perfectly accom- panying the morning and evening chai ritual. Chai Point retails its own brand of consumer-packaged goods, Made- For-Chai. These bite-sized snacks perfectly complement a cup of their chai. The recipes are developed after thor- ough research on the Indian palette.

It is tough to compete with Chai Point's reasonably priced flavored tea in the Indian tea market with consump- tion volume of more than $2 billion pounds in 2017. Their strategy revolves around catering tech parks and corporate professionals. Known to be the Silicon Valley of India, Ban- galore has a large number of tech parks, and each of these hold multiple corporations with thousands of employees mostly comprised of individuals from middle-class back- grounds. A market that would be willing to spend more than 15 cents in Indian Rupees for a cup of tea, but not live a profligate lifestyle by spending up to $3 at a Starbucks. This is where the tea startups in India intervene. The Chai Point kiosks located in tech parks consist of numerous com- panies with professionals who prefer having a small afford- able cup of chai with snacks during their lunch and breaks. This is in contrast to Starbucks Teavana that was launched in January 2017. Teavana is positioned as a premium offer- ing competing against a slew of home-grown start-ups such as Chai Point that are willing to experiment with the Indian Chai at a reasonable price to give a branded experience. Is Teavana Starbucks the right answer to these home-grown start-ups? Or does Starbucks need to alter its strategy fur- ther to gain the trust of the Indian market?

Tata StarbucksChallenging Decisions Ahead In the words of John Culver, president of Starbucks Coffee China and Asia Pacific:

We have studied and evaluated the market carefully to ensure we are entering India the most respectful way. We believe the size of the economy, the rising spending power and the growth of cafe culture hold strong potential for our growth and we are thrilled to be here and extend our high-quality coffee, handcrafted beverages, locally relevant food, legendary service, and the unique Starbucks Experience to customers here.40

The business looked simplehave a standardized decor, choose a suitable location, and offer good coffee and food but ensuring that a customer's cappuccino tasted the same as it did yesterday and that the service did justice to the iconic Starbucks brand name every single day was far more complex. Doing so required carefully selected part- ners (store managers and stewards who went through inten- sive training) and an incredibly complex planning effort. For that reason, Starbucks had avoided the franchisee route, which could have seemed like the obvious choice for rapid expansion.

In addition, Starbucks had to meet the expectations of its world-traveled customers, who were aware of the "Starbucks Experience." Many of these customers would check whether the coffee tasted the same as it did abroad and whether the store ambience was equally comfortable. If the experiences matched up, they would become regulars.

Nevertheless, for sustained success, Starbucks needed to penetrate the domestic young and middle-income markets. Starbucks laid out plans for different formats, such as "abbreviated stores" that would be smaller in size, and stores at college and school campuses. The stores in India began ex- permeating with their food menu. While Starbucks glob- ally offered blueberry and chocolate muffins, it wanted to serve local innovations at its Indian locations. Coinciding with its first anniversary in India, the company launched a new, local India Estates blend. This blend was Tata Star- bucks' special country-specific coffee, developed thought- fully with Tata for the Indian market, and it reflected the high-quality Arabica coffee available in India. The company also launched the Indian Espresso Roast, which was sourced locally through a coffee sourcing and roasting agreement between Starbucks and Tata. It was felt that the coffees captured the essence and rich heritage of the Indian coffee history. As already mentioned, to enrich the experience of Indian customers, Starbucks now unveiled a mod- ern tea experience with 18 different varieties of premium tea in its stores.

The challenge facing CEO Gurnaney and Tata Starbucks was a difficult one. How could the company maximize the long-term success of the venture in India? Doing so would mean going beyond "the westernized and the wealthy" targeting that had worked so well in relatively older and more affluent Asian markets. Former CEO Ghosh had emphasized positioning the company to be socially responsible by promoting worker rights in India, saying, "We are proud to be a progressive workplace in India and will continue to engage in discussions with our partners to determine how to make their experience better and more valuable in line with the mission and values of both Tata Global Beverages and Starbucks."41While the partnership with Tata was occasionally helping in negotiating for good real estate, Star- bucks still needed to figure out how to leverage the partnership to win over the larger young and middle-income demographic segments. Store financials needed to be man- aged to maintain profitability.

All these issues will need to be addressed quickly by Tata Starbucks as the company prepares to expand into the next tier of Indian cities. "As they move from high traffic and high spends locations, revenues, or productivity of the stores will come down. Hence, per store sales might come down over the years once they open stores in smaller locations," says Devang Shu Dutta, chief executive at the Indian retail consultancy Third Eyesight.42