A brand salience study done in 2012 in 26 Indian towns revealed the most salient youth brands to be Nike, Reebok, Levi’s and McDonald’s. The fifth one was Café Coffee Day (CCD). This speaks volumes about the ability of V.G. Siddartha and his brain child CCD to capture the mindshare of the Indian youth. With about 1,500 stores in Tier 1 and Tier 2 cities and towns (as per socio economic classification), CCD is moving closer to the Starbuck’s vision of “having an outlet within a five-minute walk ” for youngsters.
But now that Starbucks itself has entered India, it will be battle royale between the two “experience sellers”. CCD has the early mover advantage, the incumbent advantage, local understanding and vertically integrated supply chains working in its favour. But does that mean it should overlook Starbucks’ India entry? Starbucks is a behemoth with presence in 62 countries and about 21,000 stores worldwide. Does it have the potential to gain rapid market share in India’s coffee house business? Should CCD be worried about this new entrant?
We think that CCD should be extremely wary of Starbucks’ entry into the Indian market and our stance is based on the following arguments. Starbucks has deep pockets. It can stay in the Indian market for a long time, maintain low prices, operate on razor-thin margins or even losses, but in the process bleed the competition to death. In the short term, Starbucks will hardly pose a threat to the profit and loss sheets of CCD, but in the long term, there is no reason why India should be any different from China or many other major urbanising, globalising emerging economies where Starbucks has managed to penetrate the local markets and upend local players.
If gaining local knowledge and insights was any issue, its joint venture with Tata Beverages should mitigate that and boosts its understanding of India.
Some schools of thought consider the coffeehouse business to be a game of Checkers, wherein the first player to take up all the prime locations wins. But in India, with so many “emerging” centres in Tier 1 and Tier 2 cities and towns, the real estate space is far from saturation of “prime locations”. Thus Starbucks has sufficient time to customise its store site selection strategy for India as well.
Another key success driver for the coffeehouse industry is the strength of its supply chain. From sourcing to the store via distribution logistics, CCD owns almost everything under its parent brand. It has the necessary cold chain and logistic infrastructure and procurement process in shape via its sister firms. Starbucks will find it quite difficult to navigate these supply chain systems in India. The only way for them is to partner with other firms as supply chain partners, and continue focusing on its USP of in-store coffee experience. Starbucks very clearly understands this and even their entry into the Indian market was through a joint venture with Tata Global Beverages. While there are obvious merits involved in vertical integrations, time and again we have seen systemic inefficiencies being hidden because one sister firm cross-subsidises the other in tough times, while a partner system ensures that market forces and competition prevent inefficiencies from remaining hidden. Thus, there is no justification in saying that CCD’s integrated system can beat the partner/ joint venture system that Starbucks is adopting.
In an analysis done by IIM Bangalore’s marketing faculty using Business Model frameworks (developed by Johnson, Christensen & Kagermann in 2008), Café Coffee Day’s customer value proposition, profit formula, key processes and resources were identified and studied. We superimposed those against the model followed by Starbucks and found striking similarities in the way the two operate. No wonder that CCD is touted as the Starbucks of India.
Thus, we conclude that the only possible sustainable competitive differentiator is offering the Indian customer the most delightful experience and cultivating her loyalty. It would be immature to dub the Indian coffehouse business a price game; CCD started selling its coffee for about Rs 50 at a time when Nescafe could be made at home in less than Rs 5. Remarkable coffee blends, amazing assorted eats, well-trained staff and putting together everything that generates the “aha!” moment is something CCD will have to very strongly fight for, especially as Starbucks loads it guns to capture what it considers will be one day its “biggest market”.
P. S. R. Akhilesh and Vikramaditya Shekhar are pursuing PGP in management from IIM Ahmedabad.