Starbucks to Expand in India

SEATTLE ( TheStreet) -- Starbucks ( SBUX) is making moves to expand its global footprint.

Starbucks said this week it entered into a non-binding memorandum of understanding with India's Tata Coffee.

Under the terms of the deal the pair will collaborate on sourcing and roasting green coffee beans in Tata Coffee's Coorg, India-based facility, as well as jointly exploring "the development of Starbucks retail stores in associated retail outlets and hotels."

"This memorandum of understanding is the first step in our entry to India," Starbucks CEO Howard Schultz said. "We are focused on exploring local sourcing and roasting opportunities with the thousands of coffee farmers within the Tata ecosystem. We believe India can be an important source for coffee in the domestic market, as well as across the many regions globally where Starbucks has operations."

Starbucks said it and Tata will "collaborate on the promotion of responsible agronomy practices, including training for local farmers, technicians and agronomists to improve their coffee-growing and milling skills." The company's statement also mentioned it would build on Tata's "demonstrated commitment to community development," and the pair would "explore social projects to positively impact communities in coffee growing regions where Tata operates."

Starbucks-Tata is likely to start out by procuring green coffee beans from Tata's existing estates and roasting the beans in Tata's existing roasting facilities. Starbucks implied the pair will later look into investing additional facilities and roasting coffee for exports to other markets.

The announcement came a week after Starbucks unveiled a new wordless logo, a move Schultz said "gives us the freedom and flexibility to think beyond coffee."

A fair amount of consumer ire ensued, but a number of analysts saw the change as a positive step for Starbucks as it looks to expand in global markets.

A Rice University study on consumer reaction to logos showed that Starbucks' new logo could prove beneficial in the long run as it expands in Asian markets.

Vikas Mittal, a Rice professor of marketing and co-author of two studies on customers, logos and brand commitment, found that rounded logos are widely accepted in Asian countries such as India and China where interdependency and collectivism are cultural norms, as opposed to Western cultures which tend toward independency and individualism.

The professor said that while some loyal U.S. customers may feel alienated, Starbucks' new logo could drive new loyalties in strong emerging markets like China, India, Taiwan and Singapore.

Removing the word coffee from its logo is "an important step," Michael A. Yoshikami, president and chief investment strategist at YCMNET Advisors, told TheStreet.

"Starbucks knows that future growth will be in leveraging their brand into other products and markets," he added. "Eliminating the word coffee helps the brand be more flexible in terms of products associated with the company."

India isn't the only emerging market where Starbucks has big plans.

In November Starbucks said it plans to open 500 stores this fiscal year, 400 of which will be outside the U.S. The company's China chief, Jinlong Wang, said Middle Kingdom customers can expect to choose from over 1,000 Starbucks locations in the "near future."

As in India, Starbucks also plans to grow coffee beans in China.

"We're going to actually plant trees and grow coffee in China, in the Yunnan Province," Schultz said in November, according to a CNN report, calling the move "a comprehensive strategic commitment to doing business in China, in a way that's locally relevant."

All its plans for international expansion led analysts from UBS to lift their price target on Starbucks shares, citing its global growth prospects.

UBS maintained a buy rating on Starbucks but lifted its price target by $5 to $37, citing higher earnings estimates for fiscal 2012 and beyond.

Analyst David Palmer noted that his new earnings estimates "reflect an acceleration of international unit growth, a reacceleration of U.S. unit growth, and the insourcing of the company's bagged coffee business in fiscal 2010."


Palmer's mention of Starbucks' expected insourcing of its bagged coffee business related to the recent schism between Starbucks and its retail distribution partner, Kraft Foods ( KFT).

China represents a huge market for many U.S. companies.

McDonald's said in December it plans to open 200 stores in China, growing its presence in the region by 40% over the next couple of years.

The Golden Arches said its investment will include opening new restaurants and updating existing stores. Among the new store openings, about half will be drive-through locations, McDonald's said.

Restaurant sector peer Yum! Brands ( YUM) also recently discussed growth of its brands in emerging markets.

Yum!'s chief of India operations said in November he expects revenue to grow between 35% and 45% in 2011. Comparable same-store sales, or sales at stores open at least one year -- a closely watched metric in the restaurant industry -- should increase in the mid-teen percentages, Niren Chaudhary told Reuters at the World Economic Forum's India summit.

"So 2011 is going to be a transformational year in which I personally expect that we will beat all of the metrics of 2010. So we will grow faster, we will build more stores and hopefully get more recognition for the brand," he said.

-- Written by Miriam Marcus Reimer in New York.

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