Thanks for the insight Ashish. It sounds like Starbucks has a formidable task ahead, even with its in-country partner to guide it.
Re: Maybe longer than you think
back2basicz
3/29/2012 8:31:50 AM
Street,
I can understand that Coffee is a neccesity for you;but is Starbucks over-priced fare a neccessity???
I don't think so.
This is precisely why McDonalds and Dunkin Donuts(which have both launched Cut-prices Coffees) are doing so well at Starbucks expense.
For those who want their daily fill of Coffee but are forced to downgrade because of the uncertain economy;those choices work just as well...
Ashish.
Re: Maybe longer than you think
ProfR
3/29/2012 8:31:13 AM
Energy drinks is one of the fastest growing drink markets. Not sure how this has effected coffee but it does effect the carbonated soft drink market. That is why Coke, Pepsi and others have products in this market. These drinks are big among 18-24 year olds who must be trying to stay awake while studying for exams.
Re: Maybe longer than you think
back2basicz
3/29/2012 8:25:22 AM
Noreen,
Starbucks entry into India is coming at a Difficult time for the Country's Economy-India is visibly slowing after having been hit by Double Digit Inflation,High Interest rates,Stagnant Income Growth,Tax Hikes and policy inaction especially with respect to the Crucial Infrastructure Sector.
I am hoping Starbucks succeeds in India and I had written about this here
http://www.investoruprising.com/messages.asp?piddl_msgthreadid=247562&piddl_msgid=598637#msg_598637
The thing is Starbucks is in such a market(High Priced Coffees) that its really not a neccessity for anybody.
So you have to look at who the prospective market is and what Issues they face today.
Starbucks is hoping to capture the Young,Urban Consumer with Disposable Income(or Cash to Burn in the case of High-School or College Going Kids).
However,what seems to have missed most people/Investors sold on the India story is that there are Two Indias.
The Urban India which grew at 9% rates Annually from 2001-2008 (as India opened up to the world ,becoming a manufacturing powerhouse as well as Back Office for the World) and then again from 2009-2011
and
Rural India which did not benefit much from this Boom.More than 60% of India's population lives in this India.And it grew at maybe 3% per Year between 2001-2008.
And though they may not be very important economically ,they are very,very powerful Politically.
Consequently the Indian Government has been forced to tailor Govt policies to suit Rural India (by expanding Rural Aid,Farm Subsidies,Fertilizer Subsidies,Foodgrain subsidies, Education spending,Healthcare Spending,Infrastructure Spending, Tax-Breaks,etc) .
Also,another important fact is that India is an Energy and Nutrient Deficient nation.
Basically India needs to import more than half of its Crude Oil,Natural Gas, Coal,Uranium ,Urea, Phosphates,etc because Indian production is not enough to meet demand.
And then they are forced to sell these items below cost(except in the case of Gasoline) so as to ensure that rural India(who benefit the most from these subsidies today) keeps supporting them.
This has basically given the Government a Massive Budget Deficit(over 5% in the last Fiscal Year).
Now India cannot afford to Print Money the way America can to Finance its Deficit(it does not have the World Reserve Currency);so if it does have a massive Budget Deficit ,the Government sees massive Pressure on its Finances(as Borrowing Costs shoot up) and the Indian Currency(The Rupee) loses value.This is why in 2011,the Indian Rupee and Stock Market were amongst the worst performers globally.
So they have to raise Taxes.
And this is what they have done since 2011.The Govt has moved to decisively raise Taxes on Consumption(called Service Taxes) in India.
This year,The Govt raised Service Taxes from 10% to 12%.You pay these Taxes anytime you eat out anywhere,buy Electronics,Buy Branded Clothes,rent a place to host an event,Buy a Car,Buy a Bike,Buy Gasoline,etc,etc.
And this is the Central Govt.;Various State Governments have their own Taxes.
Consequently,on something like a Cup of Coffee from Starbucks(or any other competitive retail chain) you have to pay anywhere between 15%-17% in Taxes today in India.
Plus,most Foriegn Observers are unaware that India has some of the most expensive Gasoline & Diesel in the World today.
Gasoline costs $ 5.50/Gallon and Diesel costs $ 3.42 /Gallon in India today.
Gasoline prices have risen by 35% in the last 18 months alone!!! Diesel similarly is up by over 10%.
And the Govt. is not done.If you listen to this Year's Budget then They are pushing for a further raise in Gasoline Prices to about $5.90/Gallon and Diesel to $3.64/Gallon respectively.
Now those prices are high on their own(Only Europe has much higher Gasoline and Diesel Prices on an nominal basis),but when you realise that Incomes in India are a fraction of what they are in Europe(so you need to account for PPP);India today has the World's Most Expensive Gasoline and Diesel.
In addition to This rise from Gasoline and Diesel ,Electricity prices have been raised at Double Digit Rates for the last two years straight.Again the Govt. is not done here,To account for Higher Global Coal Prices,Electricity rates are scheduled to rise again this year.
Basic Food and Medicine prices are also up at Double Digit rates in the last two years.
Plus,Interest rates in India have risen sharply(causing Housing Mortgages based on Floating Interest rates) to rise.
Its not just housing but if you have bought a Car or Consumer Electronics on a Bank Loan then the Monthly installment has risen.
What about if you sent your Child abroad for education(very common amongst Urban Indians today) ?
Indians send their Kids to the US,the UK, Canada, Australia, Singapore ,Dubai and New Zealand today for University level education.Their costs have risen by 14% over the last one year[The Rupee has lost 14% against the US Dollar in one year].
Even if you don't have a Housing Loan and Rent a place-Rents too have risen at close to 8% per annum.
Because of all these factors (& the fact that Incomes in the Private sector have failed to keep pace)Urban Disposable Income has fallen very,very sharply since 2009.
And this is precisely the market which Starbucks is hoping to target.
As for this thought of going after kids who have Parents Money to spend( Kids in High School and University),even here-Kids are seeing that their pocket money has not risen to keep pace with Inflation so they are forced to prioritize where they spend their cash.In the same price if they can get two cups of Coffee elsewhere(particularly in the Home grown brands-Barista and Cafe Coffee Day);they would rather go there.
After all,for them its a question of finding a cool place to hang out.
Starbucks if it wants to capture this crowd will have to basically innovate and think dramatically out of the box.And be prepared to see much lower margins than back in America(if they want Mass-market appeal) else they stay on as a Niche product with High Margins(which will never gain acceptance from the many Middle Class Indians).
Regards
Ashish.
Re: I am hopeful Starbucks plays its cards right in India..
Noreen Seebacher
3/29/2012 7:42:09 AM
Ashish,
How has Coffee Bean and Tea Leaf handled its entry into the market in India? Is it doing well? What about its public perception?
I am hopeful Starbucks plays its cards right in India..
back2basicz
3/29/2012 4:29:44 AM
Phoenix,
India is a very-very tricky market to enter for a First-timer especially in the Food& Retail Business.
The Bueracratic wrangles,Red Tape,Poor Infrastructure,Double-Digit Inflation,local Sourcing Mandates and Expensive Retail locations are the main problems.
In this respect Starbucks is very,very lucky that they have gone in with the right Joint Venture partner-The TATA Group(one of the Largest Global Conglomerates,who own Jaguar,Land Rover and Corus Steel amongst other interests).
The Tata Group will help sort out most of the issues I talk about previously.
Still its not a slam dunk. The Market for High-Priced Coffees(which cost more than $ 5 per Cup) remains Small in India(albleit its growing very fast).
If Starbucks goes about it aggressively(expanding Too fast and going on a massive advertising blitz to promote their Products);Competitors (both Foriegn and Homegrown varieties) including Barista's and Cafe Coffee Day will Eat their lunch forcing them to beat a hasty retreat.
Hopefully they won't make that mistake ( The 150 Year old Tata Group should hopefully prevent that). I am hoping they start small,build a Brand in each of the 6 Metropolitan Cities in India(Mumbai,New Delhi,Kolkata, Chennai, Bangalore, Hyderabad) with niche products before adding more shops in those cities.
Then there remains the question of Margins.They have to be prepared(atleast initially) to accept lower margins than in the West (given how expensive everything in India is excluding Labor). If they are prepared to do this and be there for the Long Haul(atleast 5 years without profts) then their returns will be massive.
I want Starbucks to succeed because India needs all the Foriegn Investment it can get its hands on today.
Regards
Ashish.
Re: Maybe longer than you think
Edward Klink
3/28/2012 11:31:08 PM
>>>>>Anybody have the figures on how much energy drinks have hurt coffee? Red Bull and its ilk have been around for a while now, so their effects, if any, should be measurable.
Hi Broadway, I'm not sure they are *direct* competitors. An energy drink doesn't compete with hot coffee on a chilly day...there's more there than just the caffeine. Also people don't tend to go to their local convenience store to socialize over an energy drink as they do over a Caffe-Latte at Starbucks. However, I'd be interested in the direct answer to your question. I would think if energy drinks were a real threat, we'd see Starbucks/DD branded energy drinks.
Re: Maybe longer than you think
Broadway
3/28/2012 10:23:39 PM
Anybody have the figures on how much energy drinks have hurt coffee? Red Bull and its ilk have been around for a while now, so their effects, if any, should be measurable. I'd be particularly interested in the impact of 6-hour energy, which purposefully markets itself as the anti-coffee pick-me-up.
Re: Maybe longer than you think
Phoenix
3/28/2012 9:39:51 PM
@Noreen You are right about the younger generation wanting to spend some time together hanging out in coffee shops and ice cream palors. During my last visit to Sri Lanka I saw an increase in up market coffee shops. You can of course get a coffee in any of the small shops around for a fraction of the price you have to pay at the high end shops. But you can't get a cappuccino in roadside small shops.
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