Tata Starbucks is at the risk of being upstaged by nimbler rivals; what's the impact on Tata Consumer stock?

When Tata Starbucks, a joint venture between Tata Consumer Products and Starbucks Corporation, opened its first Indian store in Mumbai in 2012, the iconic American brand promised to pioneer a new coffee-drinking culture in a country where the hot brew of choice has always been tea—a sweet, milky concoction sometimes spiced with cloves, cardamom and cinnamon, depending on local tastes. Thirteen years and some 487 stores later, the ride hasn’t been smooth for the Seattle-based giant that has set itself the target of 1,000 outlets in the world’s most populous nation by 2028. Its operating revenue grew 12% from a year ago to Rs 1,218.06 crore in the financial year ended March 2024. The venture made a loss of nearly Rs 80 crore in the year, a more than three-fold jump from nearly Rs 24.97 crore the year prior. That’s already prompting some analysts to question whether Starbucks is losing its mojo in a market where symbolised not just premium coffee, but a lifestyle upgrade for an aspirational India. Free WiFi alone is not enough to attract consumers. CEO Sushant Dash is resilient in the face of competition heating up. Dash also has a major milestone to mark: the opening of the 50th Starbucks outlet and first drive-thru store in the southern Indian city. “There’s no rocket science here,” says Dash, who is casually dressed in jeans and a round-neck tee, with the ease of someone who knows his morning caffeine fix. “If more people come to the store and we deliver value efficiently, we’ll be profitable.” Dash took the reins at Starbucks in 2021. Dash has more irritants than a delayed flight to worry about. Premium Indian coffee chains such as Blue Tokai and Third Wave Coffee Roasters are upping their game, offering artisanal brews, thoughtfully designed outlets and sharp branding so much so that the premium Starbucks once commanded is now under scrutiny. “Indian coffee brands are really stepping up now—they’re no less than Starbucks in any way,” says Satish Meena, principal analyst at Datum Intelligence. “If you look at their stores, the quality of products, and even the pricing, you’ll see they’re either lower (price) or at par. Usually, when a foreign brand enters India, a couple of copycats pop up, but they won’t quite match up. That’s not the case anymore,” says Meena. For Starbucks, the path to profitability may call for a recalibration, perhaps, of value, variety and even vibe. Blue Tokai and Third Wave are attracting cost-conscious Gen Zers with cheaper, trendier options. Even so, Tata Starbucks is doubling down—testing drive-thrus of the Bengaluru kind in other locations, hyper-local menus, and expansion to Tier II cities to protect its market share. People familiar with the situation say there have been internal debates over pricing cuts and the brand’s famed franchise models. Can Tata Starbucks brew a turnaround, or will its aggressive growth dilute the brand further? TRANSFORMING A NICHE INDULGENCE In India—a country where tea has long reigned supreme—coffee was once a niche indulgence, an occasional treat reserved for airport lounges or terminals. Over the past decade, the narrative has shifted. Coffee is no longer just a beverage; it’s a lifestyle marker, especially among India’s urban millennials and the Gen Z, who see café outings as social currency or working remotely. According to a study commissioned by the Coffee Board of India, the country’s overall coffee consumption rose to 91,000 tonnes (in green bean equivalent or GBE) in 2023, up from 84,000 tonnes in 2012. While the growing popularity of instant coffee has boosted in-home consumption, it’s the out-of-home segment—cafés, co-working spaces, and quick service restaurant (QSR) formats—that has truly transformed the coffee culture in India. Recognising the cultural shift, Tata Starbucks has been making a conscious effort to localise its products. The brand has rolled out region-specific snacks such as the Dakshin puff in Bengaluru, Malabari egg puff and Kosha Mangsho wrap in Kolkata, and an ‘inverted’ vada pav in Mumbai. These items don’t just add flavour—they deepen the brand’s cultural resonance across its growing footprint. To target Gen Zers, it has introduced colourful and lighter coffees with less dairy content. Apart from expanding their store footprint, Starbucks’ focus on a localised menu and other strategic initiatives could drive growth in the coming quarters. -Kruttika Prabhudesai, Research Analyst, Mirae Asset Sharekhan The push towards localisation seems all the more critical when viewed against Starbucks’s missteps in Australia, where rapid expansion, failure to adapt to local coffee preferences, and stiff competition from homegrown cafes led to a major retreat. Starbucks’ global reputation has taken a hit recently, not just in Australia. Former CEO Laxman Narasimhan resigned after only a year, and the company is now led by Brian Niccol—its fourth CEO in just two years. During Narasimhan’s tenure, the coffee giant faced significant challenges, including a decline in global sales. The struggles point to deeper issues in Starbucks’ evolving business model, which has shifted from a sit-down café experience to a focus on drive-thru and mobile orders. In India, Tata Starbucks appears keen to not repeat them. FRANCHISE MODEL When it entered the Indian market, Starbucks consciously differentiated itself from rival Café Coffee Day (CCD), the then-undisputed market leader. CCD catered to the masses—young professionals seeking budget-friendly coffees—and Starbucks carved out a niche among the premium crowd. The strategy worked for a while with plush interiors, global menus and a certain aspirational appeal packing in the crowds. But the equation is beginning to shift. To be sure, aggressive expansion played a significant role in the red ink that spattered its balance sheet in the last financial year, but changing consumer behaviour too played a role. Footfalls are no longer concentrated at Starbucks’s counters alone. Competitors like Blue Tokai and Third Wave Coffee Roasters have brewed their way into public consciousness—and wallets—slicing away at Starbucks’ premium market. Still, price remains Starbucks’ Achilles’ heel in India’s evolving coffee war. No longer are rivals content to play catch-up They’re competing head-on—on quality, price, ambience, and even scale. And while Starbucks continues to enjoy strong brand recall and customer loyalty, a new challenge has emerged: consumer fatigue. “Today’s customer wants novelty,” Meena says. “Even if the product is good, they’re looking for something fresh and exciting. That’s where many legacy brands are struggling.” CRITICAL MASS With close to 500 outlets in India, Starbucks does have a critical mass of stores in India. Industry experts say that once a brand goes beyond that count, it could start experiencing portfolio saturation. One can open stores on highways, for example, but if there are two or more competitors located nearby, the customer footfalls get divided. “As a general sentiment, Indian coffee brands are now often rated higher than Starbucks. So, the (Starbucks) brand no longer commands that premium perception. They’ll need to innovate—not just with pricing, but also with products,” Meena adds. Now, Pret A Manger, a UK-based coffee house chain, has also entered the market in partnership with Reliance Brands. With expansion costs mounting and Starbucks operating in the red, the path to profitability appears distant. Kruttika Prabhudesai, research analyst at Mirae Asset Sharekhan, says that reviving Starbucks would be tough because it’s facing a challenges on multiple fronts. There’s no significant demand to boost growth. Third Wave Coffee, since its inception in 2016, has carved a niche in India’s fast-evolving coffee landscape, thanks to its commitment to local sourcing, in-house roasting, and regionally tailored menus. Rajat Luthra, the company’s CEO, credits these practices for the brand’s distinctive edge, helping it resonate with an increasingly discerning coffee-drinking public. Our offerings are also curated in keeping with the evolving palate of consumers... With close to 150 cafés across 11 cities, we are well positioned to cater to the growing demand in the ecosystem. -Rajat Luthra, CEO, Third Wave Coffee Roasters To turn its balance sheet into a profitable one, Tata Starbucks will need to reassess pricing, improve its menu and perhaps rethink store format. It can’t rely on the brand name alone anymore; to stay competitive, it will have to offer more value to customers. The race for the best coffee experience in India, it would seem, has never been more competitive. @PalakAgarwal64

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Tata Starbucks is at the risk of being upstaged by nimbler rivals; what's the impact on Tata Consumer stock?

Tata Starbucks, once synonymous with premium coffee and a lifestyle upgrade for the urban affluent, is at the risk of being upstaged by nimbler rivals like Blue Tokai and Third Wave Coffee Roasters that are upping their game.