In a bid to expand its presence in small towns and counter the intense competition posed by domestic startups, Starbucks is overhauling its strategy to entice Indians, even children, with a range of smaller and more economical beverages. This move comes as the company aims to solidify its position in one of its fastest-growing markets.
As one of the pioneering foreign coffee brands to venture into tea-loving India, Starbucks has achieved the milestone of opening 343 stores over a span of nearly 11 years. However, this growth rate pales in comparison to the rapid expansion of domestic chains Third Wave and Blue Tokai, backed by private equity, which have successfully launched approximately 150 stores in the last three years alone.
“As you grow in size, you need to get new consumers,” said Sushant Dash, the Chief Executive of Starbucks in India, adding that the chain’s “pricing play” would help shatter a perception that it is expensive.
As part of its strategic revamp to cater to the preferences of affluent Indians who favor smaller portions, the company has introduced a new beverage called “Picco.” This six-ounce drink is priced at $2.24, offering a more affordable option. Additionally, Starbucks has also included milkshakes on its menu, priced at $3.33, further expanding its offerings to appeal to its target audience.
According to an undisclosed industry source, Starbucks intends to expand its presence by opening additional stores in smaller towns.
The new offerings from Starbucks are exclusive to India and not available in China, Singapore, or the United States.
According to Euromonitor’s estimations, India’s specialty tea and coffee cafe market, though relatively small, is valued at $300 million and projected to grow by 12% annually. In addition to Starbucks, Tim Hortons from Canada and Pret A Manger from Britain are also expanding their presence in the market, albeit with only a few outlets.
“Excessively large portion sizes are an American phenomenon,” said Devangshu Dutta, head of retail consultancy Third Eyesight.
“Indian consumers are value-conscious. If adjusting portion sizes down to what is more normal helps make prices accessible, that’s a double win.”
As an analyst, he was among those who believed that the move by Starbucks, operating in India through a joint venture with Tata Group, had the potential to enhance its sales further. In the fiscal year 2022/23, Starbucks achieved a record-breaking sales figure of $132 million.
While Starbucks continues to maintain its dominance in India, competition is brewing in the capital city of New Delhi and the technology hub of Bengaluru. In these areas, numerous Third Wave cafes are frequently packed with customers, rivaling the popularity of Starbucks outlets.
“We’ve lost 30 cups a day to them,” said a barista at a Starbucks shop in Delhi that sells 7,500 drinks a month, referring to a Third Wave that opened nearby months ago, but already sells 3,700.
In various regions, Starbucks has encountered competition from local contenders, with China being the most prominent example. With 6,200 stores, Starbucks caters to the largest market outside of the United States in China.
Over the past five years, Luckin Coffee has employed discount strategies to attract customers to its primarily pickup or delivery-focused network of 10,000 stores in China.
BET ON CHAI:
In India, Starbucks has continuously incorporated domestic elements into its offerings to enhance their appeal. However, the company is now intensifying these efforts, following the footsteps of global giants such as McDonald’s and Domino’s.
According to estimates, only 11% of Indian households consume coffee, while a significant majority of 91% prefer tea. Hot milky tea, known as “chai” in Hindi, is readily available at roadside stalls, where hundreds of cups are sold each day for as low as 10 rupees (equivalent to 12 U.S. cents).
Previously, Starbucks had only one milk chai “latte” on its menu, prepared using tea syrup. However, the company has now introduced “Indian-inspired” tea options infused with popular spices like cardamom, which are beloved in many Indian households. These tea offerings, starting at INR 185 ($2.24), aim to cater to the local preferences and flavors.
The drinks were introduced to attract those who do not drink coffee and shun Starbucks, said Dash, adding the company would retain its focus on coffee and not make chai a primary offering.
The launch of smaller, cheaper beverages in India indicates Starbucks may have seen “a decline in traffic related to a pushback” on higher prices, said Chas Hermann, a U.S.-based restaurant consultant and former Starbucks executive.
COMPETITION, SMALL CITIES PUSH:
In May, a YouTube video captured scenes reminiscent of Starbucks’ initial opening in India, as people lined up outside the first Starbucks store in the city of Aurangabad. The attraction was a one-for-one offer, drawing customers to eagerly queue up in anticipation of their visit.
However, its competitors are catching up swiftly, and a price war has ensued in the market.
Shortly after Starbucks introduced their milkshakes priced at $3.33, specifically targeting children, Third Wave responded by launching their own line of milkshakes at a price 20% lower, at $2.71.
In Bengaluru, Third Wave outlets have become popular meeting spots for startup investors and founders. Surpassing Starbucks, Third Wave currently operates over 40 stores in the city, according to data from real estate analytics firm CRE Matrix, whereas Starbucks has 35 stores.
Third Wave’s Chief Executive, Sushant Goel, said he planned to add 60 to 70 stores every year, with a focus on big cities. He saw Starbucks’ cheaper, small-sized drinks as a response to competition in “an incredibly price-sensitive market”.
Matt Chitharanjan, Chief Executive of Blue Tokai, said it had “seen success in converting customers from Starbucks”, partly because of lower prices.
Despite the presence of competition, Dash expressed his unwavering determination. On the other hand, Starbucks acknowledges the threat posed by rivals, although they do so discreetly.
During the review of a lease agreement for a Bengaluru mall, Reuters discovered that Starbucks included a clause of “cafe exclusivity.” This provision prevents the mall owner from allocating space to competing “premium” brands, such as Third Wave and Blue Tokai, on the same floor as Starbucks.
“Going deeper into smaller cities, beyond the metros, is the only way to grow,” said Ankur Bisen, Head of retail at India’s Technopak Advisors.
