With the rich aroma of freshly baked croissants and coffee beans being roasted wafting within its bright, inviting interiors, this is Starbucks’ first experiential store. It boasts of a unique menu that fuses locally inspired drinks, such as a Malabar Coconut Cream Latte and a Black Palm Jaggery Cinnamon Latte, with global coffee favourites. The outlet features more than a dozen coffee blends not available at Starbucks’ other outlets, as well as freshly prepared food, which comprises more than half of its menu.
While the right side on each page of that menu will set you back by a pretty penny, underscoring Starbucks’ position as a premium coffee shop for the well-heeled, it may prove to be too much even for some of them. Internationally, Starbucks has seen foot traffic decline, with consumers rejecting its high-priced wares.
Part of the reason customers may choose to go elsewhere is because of the plethora of affordable options, both old and new, that coffee drinkers have today. Starbucks, which has 452 stores in India, has to battle with nearly a dozen other chains, including veterans Cafe Coffee Day (448 stores) and Barista (450).
In particular, the Seattle-headquartered company faces stiff competition from rapidly expanding specialty coffee chains such as Blue Tokai (130 cafes) and Third Wave (108), which sell their food and beverages at lower prices. Many well-travelled Indian consumers are now turning to these smaller, boutique cafes, where they can get quality coffee at a more affordable rate. On the horizon is Canadian chain Tim Hortons, which entered India a couple of years ago and currently has 33 stores. And Reliance Industries-backed Pret A Manger, which currently has 19 stores.
Cup half full
Starbucks, which entered India in 2012 through a 50-50 joint venture with the Tata Consumer Products Ltd, is still deep in the red here, and it may be a while before the company turns a profit. The company’s loss widened to ₹82 crore in 2023-24 from ₹24 crore in 2022-23. Revenue from operations increased to ₹1,218 crore, aided by 95 new stores.
The Indian subsidiary has had four CEOs in 12 years, closely mirroring a trend at its global parent, which has had four since 2017. Avani Davda was the first, in 2012, and helmed the business for four years before exiting. She was replaced by Sumi Ghosh, who came from Seattle for a three-year stint. Navin Gurnaney was then appointed CEO until Sushant Dash took over on 1 May 2021.
In a Zoom call with Mint from Mumbai, Dash, dressed casually in a white t-shirt, said he would not comment on the company’s financials, but asserted that he was not worried about the surge in competition. “We are not trying to gain share from others but trying to create a category. There is enough headroom for everyone,” he insisted, noting that the company has been expanding its footprint.
While there are no reliable figures, in 2023 one research company estimated that India’s coffee market was worth ₹5,000 crore ($600 million). Data and business intelligence platform Statista, on the other hand, pegged the size of the specialty coffee market alone at $500 million, and projected that it would grow at a compound annual growth rate of 9.04% until 2028.
“The reason we have doubled (our stores) in the last three years is because we believe that we now have a model and offerings that are accepted by consumers. We think we can expand profitably and can make a business that is successful. That is why we’re expanding at the rate at which we are,” said Dash.
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Last year, Starbucks announced a 1,000-store target for India by 2028. The company is well on track to achieve that number. But the explosion in store count alone may not be enough to help the world’s largest coffee chain entrench itself firmly in a market, as it is learning to its detriment in China.
Still a young market
India’s cafe culture began three decades ago. Starting out with a single café in Bengaluru’s Brigade Road in 1996, Cafe Coffee Day, better known by its sobriquet, CCD, is credited with challenging India’s tea drinking culture and ushering in cafes, which appealed to younger audiences. Started by the late V.G. Siddhartha, chairman and managing director of Coffee Day Enterprises, the chain was once visible throughout India. At its peak, it had almost as many organized cafes as all of India does today. But the chain’s fortunes began fading in 2019, after Siddhartha’s death.
Riddled with debt, the chain was forced to slash its store count by a third. In 2019 it had 1,752 stores. Today it operates 448 outlets across the country, just seven more than Starbucks. CCD left a vacuum in the market for other retailers to snap up. In those same years, prompted by CCD’s success, several large global chains, including Costa Coffee and Gloria Jeans, entered India.
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Post-covid, India’s cafe coffee market is seeing a shift. Rising disposable incomes, younger consumers, and exposure to global trends have boosted demand for coffee beyond mass-produced varieties. And a small group of consumers is flirting with other coffee chains, seeking better brews, gourmet food and more value-driven options.
Though coffee consumption is well-established in southern India, today consumers nationwide are becoming more discerning, and increasingly asking for specific brews and roast profiles. A coffee roast profile indicates what kind of roasting process a coffee bean went through. “Even in a market like west Delhi, consumers of coffee are familiar with home brewing,” said Vibhor Mishra, coffee ambassador, APAC (Asia Pacific) and China, Tata Starbucks.
International challenges
Starbucks was founded in Seattle in 1971 by Gordon Bowker, Jerry Baldwin and Zev Siegl as a store selling coffee beans and equipment. They named it after Starbuck, the first mate on Captain Ahab’s ship, the Pequod, in Herman Melville’s novel Moby Dick.
In 1981, Howard Schultz, who worked for a Swedish kitchenware company supplying drip-coffee makers to Starbucks at the time, decided to check out the company for himself, as it was an important client. A year later, he joined Starbucks to drive its marketing efforts. But he quit in 1985, after his efforts to convince Bowker and Baldwin (Siegl had left) to move beyond beans and turn Starbucks into a nationwide café chain fell on deaf ears.
A couple of years later, however, Bowker and Baldwin decided to sell the company. Schultz, who had found investors to back his cafe plans, quickly bought the founders out. By the end of the millennium, Starbucks had gone beyond the US and had close to 3,000 outlets in more than 10 countries. Today, that number has grown to more than 38,000 cafes, including subsidiaries, in 83 countries.
While Starbucks has enjoyed explosive growth for the better part of the last three-and-a-half decades, things aren’t looking so good for the coffee chain globally or in its home market today.
However, while it has enjoyed explosive growth for the better part of the last three-and-a-half decades, things aren’t looking so good for Starbucks globally or in its home market today. In the last 18 months, the chain has suffered a decline of 3% in same-store or comparable sales as opposed to 10% growth in the same period a year earlier. In the quarter ended June, the total number of transactions at North American stores open at least a year fell 6% as customers turned away from its high-priced food and beverages. The quarter saw the second straight sales decline for the company.
In China, its second biggest market, where it is a premium brand, Starbucks faces bigger problems amid sluggish economic growth and fierce competition from local rivals, especially homegrown Luckin Coffee. The company has poured huge sums of money to more than double its store count in China to over 7,000, but lost almost half its market share there, according to The Financial Times, with revenue falling 11% to $738.8 million, and same-store sales plunging 14%.
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Amid the footfall decline, sales erosion, and pressure from activist investors, Laxman Narasimhan, the company’s Indian-origin CEO, was sent packing. He had been in the job less than a year. Laxman was replaced by Brian Niccol, the man credited with turning struggling American restaurant chain Chipotle around. In an open letter, Niccol said that he would focus on “re-establishing Starbucks as the community coffee house”, and once again make the stores “inviting places to linger”, alluding to the fact that much of Starbucks’ business in the US comes from takeaway orders.
A pricing problem
If consumers in the US, who have more disposable income than their counterparts in India, are turning away from Starbucks’ high-priced wares, how well can it perform here with its expensive food and beverages? A cappuccino—arguably the most-sold drink in most coffee chains—is far more expensive at a Starbucks than at many other chains. A small cappuccino of 237ml costs 25% more or about ₹290-300 at Starbucks as compared to other specialty chains. Domestic counterparts price it between ₹230 and ₹265.
Blue Tokai, for instance, prices its 230ml cappuccino at ₹230 including tax in Delhi, while Third Wave Coffee offers its 240ml version for ₹245, including tax. At Pret A Manger, the pricing is similar to Starbucks with a 236ml drink working out to around ₹300.
Others in the quick-service restaurant (QSR) game have followed a very different market strategy in India. For instance, India is among the six cheapest countries for a McDonald’s Big Mac burger. In fact, the fast food chain, too, is now smelling success with coffee—it has over 400 McCafe stores built into its outlets, with coffee starting at ₹149.
Over the last couple of years, Starbucks, too, has been bringing about changes at its stores, including introducing more beverages beyond coffee, such as milkshakes, masala teas and filter coffee, apart from a more affordable size of coffee in some stores (‘Picco’).
Jostling for space
Last month, Blue Tokai raised a Series C round with participation from A91, Anicut Partners, and Verinvest, valuing the company at ₹1,500 crore. The company started out soon after Starbucks in 2013 as a roastery serving artisanal coffee seekers, and initially sourced beans from single estates in Karnataka and Tamil Nadu, grinding and packaging them for customers. The chain opened its first cafe in 2015 and raised ₹500 crore so far.
Cafes or coffee chains are 30% of the overall food service industry globally, but in India, its share is still in single digits. Matt Chitharanjan, co-founder and CEO of Blue Tokai, says the proliferation of home deliveries, especially post-covid, has helped consumers enjoy specialty coffees at home, too, helping boost profitability per store.
In global markets coffee-on-the-go is a pretty large part of a consumer’s coffee repertoire; a feature that’s missing in India. “Prior to covid, delivery was something we didn’t really pay much attention to and we were only earning single-digit revenues from deliveries. Today, that number is over 35%,” he said.
Manvitha Janagam, senior principal at Verlinvest, which led the $35 million investment in Blue Tokai, says India’s large market will have space for multiple coffee chains. “Starbucks did lay the ground for at least out-of-home coffee consumption but it cannot solve all the use cases and differences in target groups, consumers etc. alone. It brings in a global offering and atmosphere in its outlets, but Blue Tokai predominantly focuses on locally-sourced specialty coffee with artisanal bakery products,” said Janagam. “People will go to Starbucks for a quick office meeting, but a lot of them would still prefer to go to Blue Tokai to meet friends or for a date. In a sector like coffee, there will be two to three players, who will emerge as winners and each will find their own niche.”
While Starbucks doesn’t have it easy, neither do the others. Third Wave has had massive teething troubles, too. The Nikhil Kamath-backed chain shuttered many doors and fired about 120 employees last December, soon after its $35 million fundraise. The founders were not available for an interview with Mint.
Still a cut above
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Starbucks’ losses could just be a short-term blip, say market observers. Even with evolving tastes, no rival has managed to beat the global chain in creating a feel-good space for socialization, personalized cups and a successful loyalty programme.
“Right now, Starbucks faces fierce competition from at least 10 serious coffee chains in India—not to mention countless restaurants offering a decent cup of coffee. Yet, despite this, I see no reason why Starbucks will lose its claim to success in India,” said Nitin Saluja, founder of 200-outlet tea chain Chaayos.
Many customers are in the early evolutionary journey of consumption and want to be seen at a Starbucks, said Saluja, because it is synonymous with status and luxury. “It gives them brag value and ‘social value’, that they have moved up in the societal value chain,” he added. “If it continues to appeal to the younger customer, people will continue to frequent it. Be it the US, China, Korea, or Japan, it built a loyal base in each of these countries,” said Saluja. “What has worked is that it has become that ‘third place’ for social congregation and also a habit for many users and subsequently their next generation.”
CEO Dash believes the Indian market still has huge potential. “The headroom in terms of growth for coffee is still very high. Even when we look at the affluent segment, the coffee penetration is 25% as compared to tea, which is 94-95%,” said Dash. “At an overall level, coffee penetration is lower at 14-15%. The job for us is not so much to gain share from others or convert the unorganised to organised, but to create demand,” he said.
Without disagreeing, Abhinav Mathur, founder of Kaapi Machines, a company that supplies coffee equipment to many large chains in India, said that Indians would follow their own path: “Cafe chains will have to accept that India will not emulate the West and become a country where everyone will wake up and grab a coffee and croissant on the go. We will create our own coffee culture.”
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