POLITICAL ENVIRONMENT

The Indian economy has been experiencing more stability as far as the Government and
political scene is concerned. There has been reduced internal turmoil resulting from political
influences and this has created a better working environment for industries and businesses in India.
The current United Parties Alliance (UPA) government headed by the Indian National Congress party
(INC) has shown more tolerance towards foreign countries in general and towards foreign investments
in particular, and the recent reforms have placed India considerably high in the Doing Business
Report, 2009 released by the World Bank (www.doingbusiness.org). However, the ongoing elections
in India are expected to result in turning the tide in favour of the radical Hindu opposition party the
Bhartiya Janta Party (BJP) led National Democratic Alliance (NDA), which is opposed to
westernisation of the Indian culture. On the basis of this, it becomes safer for Starbucks to enter into
an alliance/joint venture with an Indian company that can provide a buffer from the political backlash
and consequent inroads into the Indian business scenario. Moreover, Starbucks needs to be vary of
possible opposition from the existing competitors (CCD, Barista, etc.) through use of political
influence and delaying tactics. However, likelihood of this is fairly low as the Indian market is large
enough to accommodate more players and the incumbents in the Indian gourmet coffee industry will
be minimally affected by Starbucks entry.
As far as the demographics are concerned, the majority of the Indian population is still rural
(www.eiu.com) but the urbanisation is occurring at a respectable 2.4 % annually. In spite of this, the
sheer size of the total Indian population (1.1 billion in 2007, www.eiu.com), makes the urban
population large enough for businesses to perform well. As the population gets increasingly
heterogeneous and the education levels improve, the standards of living have also been elevated,
which makes the environment extremely conducive for companies like Starbucks that are looked at as
an upmarket entity.
MACRO-ECONOMICAL ENVIRONMENT
The Indian economy has been predominantly based on agriculture as the majority of its
population, mostly in rural areas, is dependent on agriculture for sustenance. However, over the last
decade or so, the ratio is changing in favour of industrial and the services sector (www.eiu.com) with
nearly 83% of the GDP arising out of these two sectors. Overall, the Indian economy faces a tough
task as the fiscal deficit has been increasing and the policies required to overcome it have been found
difficult to implement. Many of the industries and sectors of the country depend on heavy subsidies
by the government and restrictions have been put on the extent of FDIs permitted in certain sectors. In
spite of the Prime Ministers promise to open up the retail sector to FDIs, the issue has been mainly
unresolved. However, certain sectors like manufacturing, advertising, pharmaceuticals, hotels, tourism
& restaurants, and some others have been opened to 100 % FDI. This has great implications on the
future prospects of Starbucks in view of its India strategy. However, foreign investments in real estate
are largely prohibited and this strengthens the case suggested in this paper that Starbucks needs to find

a locally established retailing partner in order to set its foot into the Indian gourmet coffee retailing
business.
The worlds largest democracy is currently also one of the largest and most attractive markets
in the world. The World Bank report (www.doingbusiness.org) has indicated that India had jumped 12
places in 2008 compared to the previous year and although it is currently placed at a dismal 122 out of
181 countries, the report has indicated a respectable rank for the credit facilities for Indian business
environment. As a result, Starbucks or its likely Indian partner may find it that much easier for
establishment of the joint venture and retail outlets in India. Besides this, there is an increasing trend
for franchisees in India and the improved credit availability bodes well for the prospective franchisees
too.
The global economic downturn seems to have impacted the Indian economy to a lesser extent
as compared to its western and more developed counterparts. The Indian economy has been growing
at an average of 7 % for the last decade and has maintained an above average growth despite the
global financial slump (www.cia.gov). The trend is likely to continue and this makes India a safe
investment proposition, especially if Starbucks is likely to consider entering India in the near future.
Almost 80 % of Indias industrial growth is attributed to specific parts of the country; mainly in the
states of Gujarat, Maharashtra, Haryana, Karnataka and Tamil Nadu (www.eiu.com) and this also
indicates that Starbucks might have to explore early opportunities in these areas as the majority of
urban population is located in and around these areas.
SOCIO-CULTURAL ENVIRONMENT
The increasing number of educated youth in India has also fuelled the skilled English
speaking services sector leading to increased per capita GDP and improved living standards for the
people. Indias per capita GDP (PPP) was estimated to at $ 2800 for the year 2008 compared to $
2700 for 2007 (www.cia.org), which indicates that the people are able and willing to spend more
money on life quality improvement. This has implications on coffee consumption as coffee is still
considered as an exclusive beverage compared to the traditional tea. Whereas tea has a market
penetration of nearly 94 %, coffee consumption has increased from 59 % in 2003 to almost 65 % in
recent times (www.indiancoffee.org). The explosion of cafes and gourmet coffee outlets is an
indication of the rising coffee culture in India (Appendix B) and an indication to Starbucks that the
Indian market is far from reaching saturation. The main competitors for Starbucks (CCD and Barista)
have

already

established

close

to

1000

cafes

in

India

over

the

last

few

years

(www.businesstoday.intoday.in) and they continue to expand at a phenomenally high rate. While tea
consumption is reaching maturity, the expenditure on coffee is likely to grow at 9.5 % (Appendix C).
On the other hand, with almost 550 million people forming part of Indias labour force
(www.cia.gov), and with unemployment considerably high at 6.8 % (www.cia.gov), the cost of labour
is likely to remain low. This possibility is augmented by the fact that an increasing number of people
are moving away from the traditional occupation of agriculture and turning to urbanised locations for

manual labour that is better paying. This again provides a significant advantage for Starbucks to
consider while entering India, especially if it is to source its raw materials locally.
With the changing culture of the Indians toward coffee consumption and the increase in
disposable income amongst the youth, the cafes have come to act as a place for socialising and as
hangouts mainly for collegians and young people. Although this might sound as a highly lucrative
situation for Starbucks, it must be kept in mind that the normal cup of tea or instant coffee at a roadside stall in India would cost no more than Rs. 5.00 (approximately $ 0.10). The Indian consumers are
extremely price sensitive, and in many parts of the country the Rs. 35.00 (approximately $ 0.70) for a
cup of Cappuccino (at CCD or Barista) may still be considered a luxury.
The most challenging task for Starbucks will be to match this pricing if it aims to be
successful in India. With an average Starbucks coffee priced at over $ 3.00 (approximately Rs.
150.00) (www.siliconindia.com), Starbucks might possibly face an uphill task in wooing the Indian
consumers. However, it remains an option for Starbucks that while the local chains like CCD and
Barista focus on the large low end consumer market, Starbucks could cater to the needs of the smaller
but growing upper segment, thus eliminating competition and maintaining its niche image in the
environment.
One area where Starbucks can focus on is the Corporate Social Responsibility (CSR) and its
policies towards the upliftment of the Indian rural community. For the purpose of this paper, it would
makesense to include the Environmental Factors of this analysis here as most corporations are not
direct ly involved with environment conservation and similar efforts have been included as part of
their CSR activities. This effort would go a long way if Starbucks is looking at cementing its position
in the Indian sub-continent. Although the company may not expect to open any outlets in the villages
of India, it can work towards the betterment of the lives of these people. The best place to start could
be the coffee planters and the workers in India so as to create a synergy between the plantation
owners, workers as well as the Starbucks community. This will prove to be beneficial for Starbucks in
the long run when many of these workers and their family members would be part of the urban
population and when Starbucks would become a part of their lives. Potentially, this may also create
strong sentiments for providing high quality raw material for Starbucks.
TECHNOLOGICAL ENVIRONMENT
Indian coffee has been improving in quality continuously and almost 80 % of Indias coffee is
exported. As mentioned earlier, Starbucks has entered into an alliance with Indias largest coffee
producer, Tata Coffee since 2004. The whole process leading to the forging of this alliance was the
fact that in 2004 Tata Coffee had won the Gold Medal for the Best Robusta in the World at Grands
Crus de Caf, Paris (www.tata.com). This also shows that the Indian coffee growers are seriously
working at improving the standards in order to bring India up to mark in the world of coffee. With low
cost of labour and easy availability of high quality coffee beans, Starbucks would be well placed to do
business in India. If Starbucks was to take this into consideration, the building up of strong working

relations with the Tata Group could also be the key to achieving lower costs and probably Starbucks
might even be able to match the prices offered by its local competitors.
LEGAL ENVIRONMENT
In the business environment, there exists a perception that the sanctity of the contract may not
be well respected in India. However, India has adopted the Geneva Convention and is bound to
enforce international legal proceedings. Although it may be accepted that limitations do exist in the
Indian legal system, an autonomous body, the International Centre for Alternative Dispute Resolution,
has been established to hasten domestic and international disputes. Moreover, the Indian judicial
system remains largely free from the political interference and pressures that other institutions in the
country are subjected to. Moreover, enforcement of copyright laws and trademark protection is
questionable as in spite of improvement in the system over the years piracy is widely prevalent
(www.businessmonitor.com). The case of Starstruck and the ongoing legal proceedings with
Starbucks has already been mentioned above.
The Indian governments willingness to become part of the Madrid Protocol might provide
some consolation to foreign firms as this will allow the extension of trademark protection into India.
But the fact that India still remains on the US Trade Representatives (USTR) Priority Watch List,
does not fare too well for firms looking at entering the country. Another drawback might be that India
has yet to approve the United Nations backed World Intellectual Property Organisation (WIPO)
treaties (www.businessmonitor.com).
One concern that businesses in India cannot overlook is the prevalent corruption at all levels
in the business environment. According to the Bertelsmann Foundation 2008, the political system in
India has an inclination towards maintaining discretionary policies and that corruption has been found
to be deep-rooted at every level of the political and administrative systems. Moreover, the Indian
environment personifies the definition of emerging economies in that corruption, weak institutions
and political crime have undermined the effectiveness and accountability of the government (Freedom
House 2008). The Transparency International Global Corruption Report 2008 (www.transparency.org)
has ranked India at a poor 72 out of the 180 countries included in the survey and the World Bank
Report (www.doingbusiness.org) has shown poor numbers for Indian business environment
(Appendix D). However, all does not look so grim for foreign companies like Starbucks, as India has
shown significant improvement in its reforms and in its performance in trading across borders and
that should boost FDIs into India.
CONCLUSION
In spite of some serious drawbacks mentioned above regarding the business environment for
Starbucks in India, the advantages as brought out with the help of the Eclectic Paradigm far outweigh
the limitations especially if Starbucks focuses its attention on the socio-cultural aspects of the Indian
business environment. The fact remains that India is an emerging economy and like all emerging
economies, it will be plagued by certain shortcomings. Over and above this, the retail food market in

India is expected to grow by 9 % (www.economictimes.indiatimes.com, www.ibef.com) and although

the traditionally tea-drinking country is the largest producer and consumer of tea in the world, coffee
has made steady inroads into the minds and lives of the people serving nearly a million people every
day (www.indiacoffee.org). Starbucks has already entered most of the emerging economies except
India, which seems to surprise everyone including its potential competitors in India, and it is clear
from the analysis and the arguments provided above that the time is just right for Starbucks to try its
luck now, albeit cautiously and with adequate preparation. Of course, there will always be groups and
organisations ready to protest against such companies especially in emerging economies where the
sentiments towards local companies are inherently strong. Like the criticism by Taylor Clark in his
book Starbucked (Appendix E), Starbucks should expect these and be prepared to overcome them
with finesse. After all, India is (after China) undoubtedly the most developing amongst the emerging
economies (Appendix F).
Finally, how Starbucks decides to make its mark on the Indian gourmet coffee market and
when it does so has to be left to the management of the company. However, it might prove beneficial
for the company to dwell a bit upon adopting a multi-tier strategy and thinking beyond conventional
greenfield entry modes in order to harness the immense potential that India holds.