Starbucks Makes A Cost Effective Entrance Into India

| About: Starbucks Corporation (SBUX)
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It is going to be cheaper to get a sip of Starbucks (NASDAQ:SBUX) coffee in India than in any other neighboring countries in South-East Asia, including ones with stronger currencies like Singapore or Malaysia. The reason behind this is its local sourcing arrangement with Tata Coffee. India is the only country where Starbucks will not have to import a majority of its beans for its local stores. And the company assures customers that the taste will be the same as it is worldwide.

McDonald's (NYSE:MCD) and other U.S. chains promise the same things but it is rarely the case. The menu and coffee blends will be tailored to local tastes in order to be successful. Moreover, India is a place where price sensitivity is far higher than it is in other places. Add to that the extreme worry over opening up foreign retailers' ability to compete locally and this local sourcing scheme kills a number of birds both political and organizational. I'm sure Starbucks looked at the regional backlash against Wal-Mart's (NYSE:WMT) potential entry into India after the relaxation of foreign ownership rules for retailers and made the prudent decision to integrate itself into the local supply chain rather than forge a completely new one.

This drives lower operating costs locally. According to TATA global beverages, Starbucks was more than happy to partner up because of the quality of the coffee Tata produced - having India's largest plantations. This was an easy relationship to forge since the two companies have been in business together since 2004 as Tata is one of Starbucks' many global suppliers.

The local sourcing deal prompted Tata to set up new roastery at Kushalnagar in Madikeri district of Karnataka, ensuring future supply. While Starbucks has been non-committal about its rate of expansion into India, the 375 additional tons of roasting capacity should be a good indicator of where things are headed. The facility can grow alongside Starbucks if necessary.

Tata coffee is a commodity player in the B2B segment and supplies to private labels, having significant market share in Russia and Japan. Tata Global Beverages owns the Eight O'Clock Coffee brand sold in the U.S. Last January, Starbucks entered into a joint venture with it, putting up a US$ 80 million investment.

The move into India complements Starbucks' aggressive expansion plans in China along with its recent introduction into Vietnam. India, as the world's second most populous country, is a key market to move into in order to counterbalance slowing growth in the U.S. and the ongoing recession in Europe. The U.S. accounted for less than 70% of its sales last fiscal report, a first in the company's history.

This move into India has been methodical with more than five years' of preparation having gained experience from its China operations. And CEO Howard Schultz himself has been very involved in the process. The efforts seemed to be paying off. The initial response was very encouraging with mile-long queues to enter the flagship store in Tony Horniman Circle in south Mumbai along with similar response from other outlets.

However, the initial success is no guarantee for the future returns. Starbucks has to compete with Barista Coffee Co., a unit of Italy's LavazzaSpA and Café Coffee Day operated by Amalgamated Bean Coffee Trading Co. Cafe Coffee Day is the current the market leader with 1350 outlets. Dunkin Donuts (NASDAQ:DNKN) has also moved into India, opening 5 stores so far.

But India is a big country with enormous potential. Market dominance is not the metric for success, store comps and margins are. Starbucks took a very targeted approach to China staying in tier 1 cities and building a premium brand image. I would expect the same in India. Similar to other western firms, Starbucks is also adapting its food and beverage choices to appeal the local tastes.

Looking at the chart, Starbucks closed this past week with a big gain past the high at $56.81 which creates a major breakout from a short term consolidation it had been going through since the beginning of the year. This move has been extreme for the month of March. Starbucks generally moves just $2.23 when comparing monthly closes and as of the close on Friday March 8th the stock has moved more than $4.00. This is a very powerful move in the stock. If you are long Starbucks I would hold here until a monthly reversal signal is given, which at this point would be the January low of $53.68, but there is a very low probability of that happening, especially given the bullish atmosphere in U.S. equities right now.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.