Objective: Decide if CCD should react to Tata Starbucks’ entry into Indian market. Propose future strategy, if needed.
Approach: We analysed CCD’s core competencies, factors which make it the largest coffee chain brand in India. We analysed Starbuck’s performance in some of the countries where it has been successful and where it has failed. This helped us understand how Starbucks can alter the Indian coffee chain market. Further, we analysed if the synergies produced by Starbuck’s joint venture with Tata would add to what they can offer to the Indian customer.
The parameters that we used were
1. Location
2. Product mix
3. Revenue/Prices
4. Cost model
Analysis
CCD’s advantages in India: CCD’s biggest customer base is young adults (19-29 years old), which makes 74 per cent of its total customers. One of CCD’s core strengths is its pricing, which makes it the most sought after coffee chain among students. CCD has been able to keep its prices low because of its vertically integrated model. From coffee plantations and beans roasting to making coffee powder and selling coffee, everything is done in-house. Along with this, almost everything that CCD needs, such as waste management, furniture and logistics, is sourced in-house. Its stores are strategically located on high streets, family entertainment centres, in and around malls, cinemas, gas stations and colleges.
Starbucks in various markets: Starbucks is the largest coffee chain in the world. It has succeeded in Japan and China whereas in Europe it has slowly begun to feel the heat from local cafes. It failed miserably in Australia. The successful entry in China can be attributed to the fact that it became a meeting place for executives as well as for the gathering of friends. The coffee is sold at a premium, thus making it a status symbol. However, in Europe, people do not see any value addition by spending more money at Starbucks as they do not like its taste much. In Australia, it opened 87 stores in a short period of time, which made customers perceive it as a ‘mass brand’ and not the exclusive brand position it was after.
Synergies between Tata and Starbucks: Tata Starbucks has the advantage of in-house coffee sourcing, thus reducing costs, and hence, prices. But by reducing prices, it will suffer from the same problem it suffered in Australia - that is, positioning itself as a mass brand. So the only option is to keep prices high. Tata Starbucks is stylish, sophisticated outlet targeted at high-end customers. It has become a hub for business meetings and get-togethers.
CCD and Tata Starbucks in the Indian market: Café Coffee Day is more successful in India than other coffee chains like Barista and Costa Coffee because of the market segment it targets and the prices it offers. The majority of young adults in India have money to spend but not too much to spend on highly priced coffee. Thus, if Tata Starbucks offers coffee at a high premium, it would not affect CCD’s target market much as there isn’t much overlap.
But Tata Starbucks has the potential to attract executives and the rich urban youth as well. This will affect Café Coffee Day’s Lounge business. The only differentiator can be quality and services that CCD Lounge can offer to them.
Implications
Middle class youth across cities will not be affected by the Starbucks brand. They might try it out for experience once, but will not switch their loyalties from CCD.
Starbucks’ main customer base would be limited to executives and rich urban youth, which generally prefer to go to Barista and Costa Coffee. CCD’ Lounges can suffer from the entry of Starbucks.
If Starbucks lowers its prices and opens multiple stores, it will become just another mass brand, thus losing its premium positioning. Then it would not be preferred by any customer segment
Recommendations
CCD should focus more on tier-II and tier-III cities. The average dispensable income is increasing and CCD can again create the first mover advantage.
Also, CCD’s differential pricing strategy gives it an edge over Tata Starbucks in such places. Costs are lower here, which means that CCD’s prices will be considerably lower than Tata Starbucks’.
CCD should differentiate its Lounge brand from Starbucks based on quality of the product and the services it offers to the customer. It should start the Lounge brand in those tier-II and tier-III cities which have MNCs, since MNCs provide options for meetings over coffee whereas cities which have more local businesses, however big they may be, do not socialise over coffee.
(Rahul Dalia and Suket Murarka are pursuing PGP in management from IIM Ahmedabad.)