International Business Plan Starbucks India Proposal by Vrushali Paunikar 1 Table of Contents I. EXECUTIVE SUMMARY……………………………………………………...…………….p.3 II. INTRODUCTION……………………………………………………………….……………p.4 III. ANALYSIS OF THE INTERNATIONAL BUSINESS SITUATION……………………...p.6 IV. PLANNED OPERATION OF THE PROPOSED BUSINESS/PRODUCT/SERVICE….. p.11 V. PLANNED FINANCING……………………………………………………………….…..p.16 VI. BIBLIOGRAPHY………………………………………………………………………..…p.17 VII. APPENDIX………………………………………………………………….………….…p.18 2 I. Executive Summary In 1991, the Indian economy experienced a rebirth after the liberalization policies of the new prime minister. Thirteen years later, India has become one of the most exciting economies in the world with a huge increase in foreign investment and consumers who are willing to “spend, spend, spend!” Due to massive outsourcing on the part of foreign companies especially from the United States, educated Indians are now presented with exciting career opportunities, excellent pay, and the confidence to spend more money. Time magazine reports that these new consumers command $10.5 billion in cash to burn. There couldn’t be a more opportune time for the Starbucks Coffee Company to open its shops in the exotic land of India. The following is a proposal to open two new locations of Starbucks in India: one in Mumbai, a highly populated cosmopolitan business city, and the other in the nation’s capital, New Delhi. These locations were strategically picked to ensure success of the business venture and will serve as test locations. If the new stores are highly profitable, Starbucks can expand to more than 200 locations in India. Starbucks India locations will customize their menu to meet the tastes of their new target market. This includes the addition of more tea items taking in accordance that Indians are known to be more a “tea-drinking” population, as well as adding some new flavors in their coffee selection. The major competition for Starbucks at the moment is the Barista Coffee Co., which is an existing coffee shop branch in India, but Starbucks is expected to gain its market share for several reasons. The international popularity of the Starbucks brand will help the company step into the country. With superb marketing and reasonable prices, 3 neither of which the Barrista Coffee Company is able to provide, Starbucks will take over the market, and with its assurance of quality and commitment to giving back to the community, the company will earn brand loyalty. II. Introduction In 1971, the Starbuckscoffee company opened its first location in Seattle's Pike Place Market. Inspired by the espresso bars in Milan, Italy, Howard Schultz wanted to introduce the coffee bar culture to America. Now Starbucks has over 7, 500 locations in over 30 different countries. What’s the next step? Starbucks India! The probability of Starbucks successfully introducing its coffee bar culture in India is relatively high for many reasons. There is a new consumer culture emerging in India. “India’s young are becoming world-class consumers, and multinationals are taking note,” reads the sub header for an article titled “Hey, Big Spenders!” in the August 2003 issue of TIME Magazine. This change can be attributed to many factors. For one, the Indian economy went through a massive liberalization under the new minority government of P.V. Narasimha Rao in 1991. This revolution opened the economy to foreign investment and trade: it dismantled important controls, lowered customs duties, and devalued the currency: it virtually abolished licensing controls on private investment, dropped tax rates, and broke public sector monopolies. This was good news for both foreign and local entrepreneurs (Das 3). Multinational companies such as Citibank, McDonald’s and Motorola have been taking advantage of these new policies and finding a new home in India. These companies owe their success to the rising young elite due to the mass outsourcing by foreign companies especially from the US. Jyoti Thottam in her Time 4 Magazine entitled “Where The Good Jobs are Going,” writes, “ U.S. companies are expected to send 3.3 million jobs overseas in the next 12 years, primarily to India according to a study by Forrester Research.” This trend of offshore outsourcing is expected to accelerate in the upcoming years. Thottam continues in her article: Those relatively low-skilled jobs were the first to go, starting in 1997. But more and more of the jobs that are moving abroad today are highly skilled and highly paid…educated Indian workers are quickly adjusting to their new status as the world’s most sought-after employees. They have never been more confident and optimistic…Five years ago, computer-science graduates had one career option in India: routine, mind-numbing computer programming. Anything more rewarding required emigrating. Until three years ago, the first preference was to go overseas. Nowadays [these educated Indians] are interested only in business trips to the U.S. People are pretty comfortable with the jobs and pay [in India]. (Jyoti Thottam, Time Magazine) As job opportunities increase in India, money stays in the palms of the Indian consumers enabling them to reinvest in the Indian economy. Time Magazine journalist, Michael Schumann, asserts that with the changing Indian economy, “Attitudes towards money are also changing. The mantra for the average Indian family, as in most of Asia, has always been save, save, save, but young Indians today, inspired by job opportunities, have switched to spend, spend, spend.” Pramod Saxena, president for Motorola in India, backs him up stating, “The attitude of the young generation is to enjoy life and spend money. We’re looking at India as a major growth market.” In addition, India’s pop culture shows a heavy desire to follow western trend. As put simply by Indian entrepreneur Ravi Deol, “Indian consumers want to do what the rest of the world is doing.” The young Indians buyers want everything from McDonalds, to Levis Jeans, and Brittney Spears CDs, but what’s more is that they are willing to pay 5 for it. Indian consumers will definitely welcome the internationally popular Starbucks Coffee Company to its country, as thirty-nine other countries have. The two new proposed locations for Starbucks Coffee shops are strategically picked to ensure their success. Both Mumbai and New Dehli are home to many call centers where these younger spenders work, and many colleges and Universities are also located here. This will allow Starbucks to target the younger consumer generation with the advertisement campaign. These two cities are also major hot spots for tourists, who recognize a multinational brand such as Starbucks. The new Starbucks menu must cater to the India taste, mixing traditional menu items with those that a customized for the Indian tastes. III. Analyses of International Business Situation A. Economic, political and legal analysis of the trading country 1. Economics: India's economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of support services. India has recently emerged as a vibrant free-market economy, rejecting its previous socialist path along with the old inefficient centralized bureaucratic state. In 1991, when the Congress party gained power under the leadership of P.V. Narashima Rao, the government liberalized the number of industries open to foreign investment, loosened approval requirements and allowed majority foreign equity ownership. The economy has posted an excellent average growth rate of 5-7% since then, reducing poverty by about 10 percentage points. Management guru, Peter Drucker sees India as an economic powerhouse, and the risen GDP of 8.4% in the last quarter of 2003 supports 6 his argument. India has large numbers of well-educated people skilled in the English language. The country has recently become is a major exporter of software services and software workers, and the information technology sector leads the strong growth pattern. With a world changing from an industrial to an informational economy, India is bound to play a monumental role in the future of the global industry. (CIA World fact book, History of Nations- India, http://www.livinginindia.com/archives/) 2. Government: India’s government was formed in 1947 after the country gained its independence from the Imperial Britain. The Indian constitution adopted in 1950 was modeled after the United States constitution. Under this constitution, India is a federal republic, meaning it’s a representative democracy with power divided between the state and federal government. There also three branches including a bicameral legislature, executive branch, and judicial branch. Unlike America, the head of State and the head of government in India are different. The head of state is the President who serves more as a symbolic ceremonial figure, and has little power except for in emergency situations. The current Indian president is Dr. A.P.J. Abdul Kalam. The head of government is the prime minister and is responsible to the Indian parliament. The current prime minister of India is the Honored Atal Bihari Vajpayee. The current government of India is in favor of longterm foreign investment. In 1999, The Prime Minister called for a second Generation of reforms to include improving the investment climate, cutting red tape, a comprehensive WTO strategy, reform in agriculture and small scale industry, and better corporate governance. India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long-term investments. These include a free and vibrant press, a judiciary that can and does overrule the government, a 7 sophisticated legal and accounting system and a user-friendly intellectual infrastructure. (Phillip/Gritzner 78) 3. Laws: Though liberalized, economic policies for International business still have many restrictions. The most common business organization used by foreign investors in India is the locally incorporated company because other forms such as sole proprietorships and partnerships are essentially impossible under the Indian law. Companies may be public or private but the common public is not allowed to buy shares of the company and there can only be up to fifty shareholders. Import duties are applied to almost all goods entering India. The tariff system is based on the Harmonized System (HS) and tariffs are in the 40 to 60 percent range for basic raw materials, 60 to 100 percent for semi-processed goods, and 100 percent and above on finished and consumer goods. Shipments to India require a commercial invoice, a packing list and bill of lading. A certificate of origin is not required on imports originating in the United States. The following are the foreign investment policies of India: * All foreign investment projects, not considered a priority industry eligible for automatic clearance by the Reserve Bank of India, require approval by the Foreign Investment Promotion Board or a newly created committee for review of smaller investment projects. * The government permits foreign firms to hold up to 51 percent equity in Indian venture on a case-by-case basis. * Automatic approval is granted to foreign investments of up to 51 percent equity in 34 high-priority industrial sectors. * Foreign companies are permitted to acquire land and own buildings as long as permission is obtained from the Reserve Bank of India. *No specific tax incentives exist to attract foreign investment. 8 (Note that only policies that may apply to these particular business venture were listed: source: http://strategis.ic.gc.ca/) B. Trade Area and Cultural Analyses 1. Geographics and Demographics With a population of about 1.03 billion people, India is the second most populated country in the world. That makes up over 15% of the world’s population even though the country only occupies 2.4% of the world’s land. The male to female ratio is 1.08, and the birth rate is 1.9%. This large population provides a huge consumer market for businesses. Age Break Down Source: http://www.indiantelevision.com/ Shown above is the age breakdown of the Indian population. On average 50% of Indians are literate. The breakdown of religions are as follows: Hindu 80%, Muslim 14%, Christian 2.4%, Sikh 2%, Buddhist 0.7%, Jains 0.5%, and other 0.4%. Many Indians are vegetarian and most do not eat beef. Some of the rituals associated with normal life are the frequent relegious fasting days of the Hindus, Muslims and Parsis.The national language is Hindi and about 83% of the population speaks it. Other than that, India has 18 official languages primarily asscociated with the different states, as well as over 700 different dialects. Though English enjoys associate status, it is the 9 most important language for national, political, and commercial communication. India has been influenced by many cultures including the English, the Iranians, Central Asians, Arabians and Afghanistani. Therefore, India itself has a very diverse culture and history. The caste system though no longer sanctioned by the government still exists to a certain extent, yet it is slowly fading away. Geographically speaking, India is located in South Asia in the Eastern Hemisphere. There are 25 states and seven union territories and New Dehli is the capital. Though most of India is rural land, there are also large Urban areas. India’s land features are as diverse as its people, ranging from the tall Himayan mountains to tropical rainforests of Jamunake. Heavy rainy season and stretches of extremely hot summers are common. 2. Target Market a. Primary Target Market: The Primary target market for Starbucks Coffee Co. in India is the young both male and female from the ages of 16-38. This market is well educated and comes from middle class to upper middle class population. Since our locations are close the newly opened call centers where well educated and highly paid consumers work, special marketing strategies will be used to gain their brand loyalty to Starbucks. The geographics of the target market are mainly consumers who live or work in the vicinity of the two proposed locations for the Starbucks Coffee shops b. The Secondary Target Market: The secondary target markets are the tourists in the areas. Tourists will recognize Starbucks, as it is a multinational company, as most tourists in India come from the countries of U.S., England, 10 Germany, and Japan. This market will also fall in the middle to upper middle class population and will find the Starbucks India prices relatively cheap. 3. Analysis of the potential location Both proposed coffee shops are in highly urban locations, and home to many call center locations, technology companies, major tourist hot spots, colleges and universities, and shopping centers. Mumbai: The Starbucks in Mumbai will be located at Nariman Point near Churchgate and Gateway to India, which is a major tourist spot. In close proximity to Nariman Point are many technology companies and call centers. Nariman Point and the nearby area of Colaba are home to the higher-class affluent society. The Architecture around the area is very modern and developed. The roads are in good condition to maintain easy access to our location. (A map of the location can be seen in Appendix.) New Delhi: The Starbucks in New Delhi will be located in Connaught Place, a large commercial shopping area in New Dehli. Most of the call centers and big companies are also in the Connaught Circle. New Dehli is the nearest big city to the world famous Taj Mahal, therefore also being the popular place for tourists from all over the world. The Starbucks Zone Office will be located in this Starbucks store. (A map of the location can be seen in Appendix.) IV. Planned Operation of the Proposed Business A. Proposed Organization Starbucks India will be a privately incorporated business with horizontal organization. Each of the two stores will have a manager and five employees that will rotate shifts 11 depending on the rush during the day. Starbucks believes in an open and friendly work environment and all employees of Starbucks refer to each other as partners. In addition to that a Zone Office and a small scale Roasting Plant will be set up at the New Dehli Location of Starbucks. The Zone Offices will oversee the regional operations of Starbucks stores and the positions include human resource generalists, facilities manager, account manager, finance representatives, sales specialist, a regional marketing specialist who will handle all marketing for Starbucks India and a legal specialist who will deal with the laws and customs of the new country. The roasting plant will have production and distribution responsibilities. The production team will produce the coffee; the distribution team will mange the inventory and distribution of products and equipment to the retail locations. Further accounting, finance, information technology, sales and supply chain management will be handled at the Starbucks Support Center (SSC) in Seattle, USA. (Starbucks) STARBUCKS India Store Zone Office Roasting Plant Managers 5 employees Human resource generalists, managers of- facilities, account, finance, marketing, legal analyses. Production Team Distribution Team Specialist, Starbucks stores in India will open regional April 1 with the commencement of India’s fiscal year. marketing whoapproval should be completed in All legal paper work, licensing, andspecialist government will handle all marketing for specialists from the US will be sent out December of the previous year. Human resource Starbucks India and a legal in January to interview and hire prospective employees to run the new locations. The specialist 12 stores spaces will be bought in January as well and one month will be allocated for remodeling the space to fit Starbucks needs. B. Proposed Product/service 1. The Product Starbucks Coffee shops sells a variety of coffee and tea beverages along with different types of pastries, confections, and baked goods, coffee-related accessories and equipment. The coffee shops provide customers with a pleasant place to come and relax, study, work, or have business meetings. Both locations will provided wireless Internet access in the stores so that customers can bring their laptop and continue their work if they wish. The Starbucks Coffee Company must customize their menu to fit the tastes of the Indians. A new menu will be formulated after several months of research and development. There are some common tastes preferences of the Indians known already. For example, Indians tend to take more cream in their coffee. Also, the skim milk option will not be offered in India because dieting is not a commonly accepted practice in the country. Indians will feel that they are being cheated out of their money if skim milk is put in their beverages. Indians also like spices in their tea and coffee, especially ginger and black clove. One of India’s favorite fruit flavors in mango, and in fact the mango is India’s national fruit. The coffee beans and tea will be bought from local Indian farmers in order to support the local agricultural economy, save money in transportation and tariffs, and gain tax benefits. Through inspections of the crops will ensure the high quality and stands behind the Starbucks brand name. These goods will then be transported to the Starbucks 13 roasting plant located near the New Dehli location and then transported to Mumbai making use of India vast and efficient railway system. Equipment and other necessary supplies will be shipped from the United States keeping in mind there is a tariff on all these items. The inventory policy is to keep the stores stocked but not overstocked to ensure freshness of products. Better gauges of the numerical figures in the inventory policies can be made after observing consumer trends. To begin with policies can be formulated assuming an average of five hundred consumers per day. 2. Transportation of goods The raw goods (coffee beans and tea) will then be transported to the Starbucks roasting plant located near the New Dehli location and then transported to Mumbai making use of India’s vast and efficient railway system, and supply trucks. Equipment and other necessary supplies will be shipped from the United States keeping in mind there is a tariff on all these items. C. Proposed Strategies 1. Pricing Competitive pricing is necessary for the success of the venture, but we must take our costs into consideration. Because of the costs involved in startup, transportation and imported goods, the price will be set at about USD 1 per drink using the concept of zone pricing to make the coffee affordable to the target audience. Exchanges will be done in rupees so that would be about 55 rupees. The prices for all good will be relative to the others. With the use of this pricing policy, Starbucks prices will be 20% lower than those of the Barista Company. This use of penetration pricing will ease the company’s slide into the market place. Though it is possible to get a cup of coffee for 14 merely 5 rupees in small stalls on the street, the success of the Barista Coffee Company show that the customers are willing to pay for better quality, service, and environment. 2. Promotion Types of available media for marketing purposes are in India are very similar to those of the United States, which include everything from newspaper advertising to television ads. Since this is a test venture and there are only two locations of Starbucks being opened, the promotion for the store has to be very focused on our target markets. Billboard advertising on the roads leading to the store locations is a good way to increase awareness of the locations. Direct mail advertising with promotional coupons will be used to reach the homes of the target market. Sales brochures offering delivery services will be sent to the local call centers and big companies. Costs: Billboards: 1500 rupees (USD 27.27) per 10ft by 15 ft billboard ad. Direct Mail: 3000 rupees (USD 55.55) per 2500 prints plus stamps costs to mail directly to the homes. Sales Brochures: 3500 rupees (USD 63.63) per 2500 prints. Starbucks, in partnership with Jump Start Co., is committed to giving back to the communities of its locations. Starbucks India will sponsor scholarship contests for the local students and make an annual large donation of 275, 000 (USD 5000) to the local public school systems. This environmental campaigning will give Starbucks positive publicity. 15 V. Planned Financing COSTS AND EXPENSES Costs are for one year of operation Natural Resources- coffee beans, USD 500, 000 tea, spices, etc. (some imported, so considering tariffs) Land- store rental, utilities costs USD 150, 000 Labor- Starbucks India employees USD 200, 000 ex. Managers, marketing specialists, human resources generalists, etc. (approximately 50 employees) Marketing- billboard and print USD 8,255 advertising. Costs listed in previous sections. Licensing and Legal WorkUSD 10,000 Miscellaneous Costs- repairs, USD 5,000 emergency costs Total: USD 873, 255 REVENUE The predicted amount of customers per day for the Starbucks Coffee Co is 3,000. If USD $1.20 is amount of money on average spent by each customer then the projected revenue per day is $3,600. If Starbucks closes for only 3 days in the year for Diwali (Indian holiday) and Christmas, then the per annum revenue would be USD $1, 306, 800. PROFIT Subtracting the predicted costs from the predicted revenue, we get a per annum untaxed profit of USD $433, 545. Taxes are 33% for foreign businesses in India. This would give us the new dollar amount of profit to be USD $289, 027. 16 Keep in mind that the costs for the following years will reduce and revenues will increase, giving higher amounts of profit. After the end of the first fiscal year, the company will determine whether or not it should expand in the country of India. If the first year proves to be a success, Starbucks Coffee can open over 200 location in the subcontinent of India, taking advantage of their international partnerships with Sheraton (Starwood) Inn, and Hyatt Inn. Starbucks will also try to win accounts with local airlines companies, so that they may serve Starbucks drink on flight. In three years profits are expected to exceed one million dollars per annum. 17 VI. Bibliography 1. Free Online World Encyclopedia. : “Demographics of India.” http://en.wikipedia.org/wiki/Demographics_of_India 2. Indian Television Marketing to the Demographics: http://www.indiantelevision.com/marketdatabase/demographics/agepr ofile.htm#urban 3. US Census Bureau – Summary information on India: http://www.census.gov/cgi-bin/ipc/idbsum?cty=IN 4. The Population of Indiahttp://www.eia.doe.gov/emeu/cabs/india/indiach1.htm 5. Discover India- Economics: http://www.meadev.nic.in/economy/menu.htm 6. “Hey, Big Spenders.” By Michael Shuman: Time Magazine, August 25, 2003 Volume 162, No. 8 7. “Where The Good Jobs Are Going.” By Jyoti Thottam: Time Magazine, August 4, 2003 Volume 162, No. 8 8. India Unbound by Gurcharan Das. Copyright 2002 Anchor Books, A Division of Random House, Inc. New York 9. History of Nations- India copyright 2003 Greenhaven Press, a Division of Thomas Learning Inc. San Diego, USA 18 VII. Appendix Map of India and Starbucks locations Source: http://www.globalsecurity.org/military/world/india/ Map of Southern Mumbai and Starbucks Location 19 Map Source: http://www.mapsofindia.com 20 Map of Central New Dehli and Starbucks location 21