PESTEL and SWOT Analysis: Starbucks in India

Starbucks is the number one specialty coffee retailer in the world. The company wants to deliver the finest coffee products and offers handcrafted beverages. Starbucks is not only about drinking coffee but about a unique experience. The company follows an international expansion strategy through strategic alliances. Starbucks wants to prevent competitors from having a head start, build upon the growing interest for Western brands and take advantage of the higher coffee consumption rates. After building a successful brand in Japan and China Starbucks wants to enter the Indian market. Starbucks found a local supplier for their coffee, Tata. However, the company has not yet found a partner to enter the Indian market with.

In this report we will give an outline of some of the challenges Starbucks might face when entering the Indian market. We will give an analysis of the external environment in India. Later we will describe the strengths and weaknesses of the company and the opportunities and threats the Indian market offers. We will combine the internal and external analysis to propose four possible strategies to target the Indian market.

PEST(LE) Analysis

The PESTLE analysis is a tool which provides insight of the external environment in which organizations operate or will operate and aids the strategy formulation of those organizations. Considering the fact that Starbucks is planning to enter the market in India, the PESTLE analysis is going to evaluate favorable and unfavorable conditions in the country’s political, economic, social, technological, legal and environmental setting.

• Political factors

The political factors have strong influence upon the regulation and controlling of business and the spending power of consumers and other businesses. We must consider those factors as very important and even crucial depending on the political system of the country we are operating in and the political condition of the country as a whole.

The Indian economy has been subject to series of positive economic reforms since 1991 which had created a better working environment for foreign companies and has made it possible for foreign investors to operate in the country more easily. The reforms have also resulted in higher growth rates, lower inflation and increase and ease of the foreign investments. The current Indian government – United Parties Alliance (UPA), headed by the Indian National Congress party (INC) has shown more tolerance towards foreign countries in general and towards FDI in numerous economic sectors. These reforms have placed India in a favorable position in the world economic stage.

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Taking into consideration the political environment in India as a whole, the bureaucracy complications and the regulatory FDI controls and regulations, it is safer for Starbucks to enter India via a joint venture or a strategic alliance with an Indian company that can provide a buffer from possible political tension. Furthermore, Starbucks can face some opposition from the existing competitors (CCD, Barista, etc.) through the use of political influence and delaying tactics. Although situations like these are possible to happen, the chance is low taking into account that the Indian market is large enough to hold more companies and the leaders in the Indian gourmet coffee industry will not be strongly affected by Starbucks’ entry.

• Economic factors

In economic terms India is experiencing growing GDP with levels reaching 7.4% for 2009 and 8.3% for 2010. The GDP per capita has also been estimated to have stable growth in the last few years, reaching $ 3 500 in 2010. [1] Additionally, the high levels of inflation, which peaked at 11% in the beginning of 2010, reached stable one digit figures by the end of the year as a result of the India’s central bank interest levels adjustment.

Favorable environment for Starbuck’s entry are provided by the big cities in the country. Mumbai is regarded as the country’s financial center and accommodates many foreign financial organizations as well as many IT companies. Delhi and Bangalore, other major cities with population totaling just below 20 million, are centers of call-center hubs and international IT companies.

Apart from that, The Indian Government is still working on improving unfavorable factors such as widespread poverty, inadequate physical and social infrastructure, bureaucracy, limited non-agricultural employment opportunities, regulatory and foreign direct investment controls, insufficient access to quality basic and higher education, and the imbalance of rural-to-urban migration. Furthermore, the government strives to reduce its fiscal deficit in 2011 to 5.5% of GDP from 6.8% in previous years.

• Socio-Cultural factors

As one of the main characteristics of the company, the ethical approach towards internal and external stakeholders is almost a trademark for Starbucks. The company is widely known for its humane approach towards sourcing its coffee and related products and towards converting its employees to skilled baristas and dedicated brand ambassadors. In addition to that the company plays an important role as sustainable leader on the market and conveys all through its consistent business strategy.

This positioning as sustainable business player is important facet for the Indian market and its many socio-cultural dimensions. It gives Starbucks position with regard to an important cultural trend that with the growing employment rate of young people, their disposable income also grows and they become a very profitable target audience. According to sources the population of the country consists of more than 60% of the people between the age of 15-59. Also with the westernization of the social trends more and more young people trust western brands and prefer foreign goods. They also go for the same trends and try to mimic the same status of exclusivity young people in the US and Europe look for. This places Starbucks at a very dynamic position, where it has a good opportunity and much possibility to capture quick customers. The only problem is that they will not be the first on the market with specialty coffee offering and their otherwise leadership position could strongly be undermined and only sustained by their brand image.

Next to that, the culture and cuisine of India poses a very interesting challenge. The mix of traditional tea-drinking population together with the various differences between Muslim and Hindu and the growing difference among various regions of the country, make it extremely to divide and place is concrete consumer groups. Still the most obvious separation with regard to coffee consumption is visible in the city versus rural areas separation with the urban population having distinctly higher preferences for coffee. Still the numbers of coffee consumers remains low with slow negative growth figure between 2000 and 2005 – 6.7% and 2.0% respectively.

• Technological factors

In 2004 Starbucks entered into a strategic alliance with Tata Coffee LTD., the largest coffee producer in India. With signing this agreement, Starbucks finally found the partner it needed. A company which met all the conditions and standards followed by Starbucks. Tata proofed its quality standard by winning a gold medal for the best Robusta coffee in the world.

The factor of quality is very important at the Indian market as high quality coffee beans are easily available. With this strategic relation with the Tata Group, the company, Starbucks, might be able to succeed with competitive pricing in India.

Another important technological factor is the lack of infrastructure in India. However, having such an experienced local partner, Starbucks does not face any problems with this issue.

• Legal factors

The legal environment in India might not be viewed as positive as the one in USA or Europe in the eyes of global business. Corruption in the country is high and it raises concerns.

Starbucks has already experienced some drawbacks from the legal environment in India. The case of “Starstruck” is being mentioned as an example of weak copyright and trademark protection in the country.

Even though, the business opportunities still remain attractive since India has shown significant improvement in reforms towards international business and investment. Due to these improvements the country’s has attracted FDI’s. Lower tariffs and lower barriers to enter have made the Indian market extremely promising and willing to change.

• Environmental factors

The Starbucks coffee is for a large part dependent on the quality of coffee beans. Several environmental factures must be taking into account for growing coffee. Sufficient water and trees and a diverse flora and fauna are important for growing coffee beans.

The rapid growth of the population and economic development will lead to a number of environmental issues like uncontrolled growth, urbanization, industrialization, intensification of the agriculture and destruction of the forest. The growing population has an adverse effect on natural resources and the environment. Therefore, it is very important that India grows in a sustainable way.

External factors

• Opportunities

Following India’s economic liberalization in 1990 the country experiences accelerated growth which reaches an average of 7% in the years after 1997. This, alongside with the increasing levels of GDP, results in growing disposable income of consumers. In a country where cultural trends play important role in society growing income and standards of living creates demand for western goods.

In recent years there has been a growing number of department stores. They accommodate mainly the high-income and the upper-middle segment, which happens to be the target group of Starbucks. Placing coffee-bars in such places is a big opportunity for achieving high profits and is definitely something that Starbucks has experience with.

Another opportunity on the Indian market is the growing size of Starbucks’ target group. In 2006 the middle class in India was estimated at around 250 million and it is growing in urban areas. All, these factors show that Starbucks has a large enough target group which is willing and able to pay premium price for a high quality western brand. Starbucks has the potential to skim the Indian market, because of its positioning and brand image.

• Threats

The coffee retail market in India consists of mainly homegrown brands. The biggest ones are Coffee Café Day (CCD), followed by Qwiky’s and Barista Coffee. These companies are considered as threats to Starbuck’s entry in the Indian market because they are offering similar and sometimes identical products.

CCD, for instance, the company which pioneered the concept of specialty coffee in India, has wide range of café formats with almost identical concept used by Starbucks. Besides, CCD has presence all around the India. The same company also sells merchandise and is involved in heavy marketing, such as establishing relations with the Indian movie and television series industry. Furthermore, CCD’s best-seller – the cold Frappe – is a direct competition to Starbuck’s Frappuccino.

It is also mentioned that the infrastructure in India is weakly developed, which might result difficulties or larger amounts of costs incurred in the business operations of Starbucks. In addition the retail environment in India is largely unorganized and dominated by small and individually owned businesses.

The threat from substitute goods in India should also be considered. The Indian population is still heavy tea drinkers. The consumption of tea per person in 2000 was reported to 44 liters in comparison to 1.2 liters of coffee. Another good, which is considered a substitute, is the instant coffee. It is reported that 65 % of households bought instant coffee and only 18 % bought filter coffee.

Internal factors

• Strengths

Taking into consideration the size and market power of Starbucks as a leader in specialty coffee retailing, the brand equity of the company is one of the most valuable assets they have (Interbrand Top 100 Most Valuable Brands – N 97 estimated brand value $ 3.339 m). This strength also has the highest rate in the strengths section because through its consistent and innovative marketing strategy and exclusive product positioning Starbucks managed to maintain throughout the years its brand integrity and kept on its very consistent mission and vision. The strong joint ventures and strategic alliances that the company has establish all over the word made it possible for them to create and develop a sustainable supply chain of high quality.

 Moreover, Starbucks has also placed great attention to the well-being and satisfaction of their employees. The company ranks at N 98 Fortune`s 100 Best Companies To Work For. Another very important strength of Starbucks is their financial stability. Taking into account that the company`s total net revenues for 2010 increased 17.2%, compared to 2009, to $2.8 billion, the capital availability that Starbucks has is making it easier for them to manage their expansion in other new markets like India.

• Weaknesses

Because of the high – quality exclusive products that Starbucks is offering their price range is also very high compared to their competitors. It is a weakness of the company but at the same time it is not addressed heavily because it is part of their exclusive image.

Entering the Indian market, Starbucks are not the first movers in the coffee retail industry; there are already established leaders on the market and thus Starbucks are market followers. Because of this high competition Starbucks is also facing a problem regarding their suppliers. They signed a supply deal with Tata Coffee which is actually co-owner of the main competitor on the market.

Strategic factors

• TOWS Matrix

The TOWS matrix, serves as a framework for organizations to assess the combination of external and internal factors. The matrix helps companies to decide on approaches depending on the opportunities and threats the business environment has to offer and how the company is going to take advantage on them depending on their internal capabilities.

• Maxi-maxi strategy

The growing Indian economy provides attractive opportunities for a company such as Starbucks. These favorable economic conditions create an environment in which exclusive and luxury products such as Starbuck coffee will be in growing demand. The international popularity of the Starbucks brand will help the company to position itself on the Indian market. Starbucks in one of the best known American brands in the world and it is also connected with positive affiliations on the market. With its strong and distinctive brand image the company is able to take advantage of the growing demand for branded, western and luxury products.

On the other hand, in order to gain market share, Starbucks can reduce the prices, but not below the competition’s levels and by maintaining healthy profit margins. This is possible since Starbucks has at its disposal coffee from a local supplier.

One way the firm could protect its position involves developing a marketing campaign emphasizing its superior customer service in comparison to its competitors.

• Maxi-mini strategy

The high brand equity and recognition of Starbucks` products is definitely the biggest advantage they have over their competitors. Taking into account the size of their Indian competitors and the size of the market as a whole, Starbucks has to put more emphasis on its marketing strategy and try to stress on the promotion of its exclusiveness and premium product portfolio in order to differentiate its brand in the consumer`s mind.

In order to grow and outperform its already existing competitors Starbucks must also emphasize on the company`s points of difference, which include the brand experience as a whole, the brand quality that they are offering and also the convenient access to their locations.

Starbucks is well known for its high quality and distinctive products, so substitute products can`t deliver to the customer the same exclusive level of high quality and cannot satisfy the customers` needs and wants as Starbucks does. In order to create and retain a position in the customers` mind Starbucks must extend their product portfolio so that it can match the local preferences. For example, they can offer special Indian tea and other typical for the region herbal mixes.

• Mini-maxi strategy

As a company that offers specialty coffee the limited portfolio of Starbucks, in terms of non-coffee products, can be considered as exclusive offering. Therefore, the company is in a good position to take advantage of the growing opportunity that the cultural “westernization” is offering and minimize the impact of their weakness. As exclusive product, Starbucks` specialty coffee can give the targeted consumers the desired social status.

• Mini-mini strategy

Starbucks should keep its prices high as the alternative can undermine the exclusivity and top quality image of the coffee. Thus, Starbucks has the ability to minimize the impact of their high price weakness on the India market and deal the pressure from competition which is a definite threat. Even though, the main competitors have similar, and even more extensive product portfolios, Starbucks has the competitive advantage of its exclusive brand image.

Moreover, Starbucks should slightly try to extend their product line portfolio in order to answer the consumers` existing demand for instant coffee.

Summary

The Indian market offers a future entry possibility for Starbucks. The economy and the population are increasing and there is a growing interest for western brands. Some recent government reforms have been undertaken which made investing in India easier for foreign companies. However, India still has some FDI restrictions and there is a lot of bureaucracy.

Starbucks has three main competitors in India of which Barista and CCD are the biggest. They offer the same type and quality of products as Starbucks does. Also, India is a tea drinking country which presents a challenge for companies that mostly sell coffee. Furthermore, retailing is unorganized and underdeveloped in India.

Looking at external and internal factors various strategies can be identified for possible entry in the Indian market.

There will be a growing demand for Western products. Starbucks can use this trend to successfully introduce its product. The company should make use of its strong brand name and recognition as a Western product.

The products Starbucks is offering are in line with the growing westernization and coffee culture. Also, growing GDP per capita will lead to the ability to pay more for a premium product. Starbucks should market themselves as a high quality Western brand.

The exclusive product Starbucks is offering and the Western brand name is in line with the trend of “westernization” and a growing coffee culture. Starbucks should use their exclusivity and their brand name to target the specialty coffee market.

By keeping prices high Starbucks will keep its image of being an exclusive brand. By slightly altering its product offering Starbucks can serve local preferences.