Starbucks and Pret battle for share of India’s growing coffee market

India’s biggest billionaires are on rival sides of a battle by international coffee chains to convince one of the world’s largest tea-drinking nations to spend on flat whites and Frappuccinos.

Starbucks announced last week that it planned to nearly triple the number of outlets in India, where it opened its first café more than a decade ago, to 1,000 by 2028.

The chain, which operates a joint venture in India with the country’s Tata conglomerate, says it planned to expand beyond large metropolises into smaller cities, in a country where consumers generally buy Rs10 ($0.12) cups of masala chai served by vendors on the road.

India is a “market that has huge long-term potential”, Laxman Narasimhan, the Seattle-based coffee chain’s chief executive, told the Financial Times after a visit to India this month. “The development of the infrastructure here, the growing consumer base and the widespread adaptation of technology translate to a prime opportunity for bolstering Starbucks stores.”

Starbucks is confronting an increasingly competitive field as investors seeking to tap the growing food-and-beverage market turn to cafés. Fast-food chains such as McDonald’s and Domino’s grew 25 per cent a year between 2010 and 2020 as they built thousands of outlets around India, according analysts.

International food brands have typically entered the market through franchisees or local partners familiar with the market. Pret A Manger launched in India last year in partnership with Mukesh Ambani’s Reliance Industries, shortly after Canadian brand Tim Hortons, which is backed by fast-food group Restaurant Brands International.

Costa Coffee, operated by an Indian franchisee of Yum Brands, has announced plans to add 50 cafés a year, while homegrown chains such as Third Wave Coffee and Blue Tokai Coffee Roasters each raised money from venture capital firms last year to finance hundreds of new outlets.

Tarushi Chauhan, a 29-year-old engineer waiting for her order at a Starbucks in Delhi, said she started drinking coffee when she discovered Frappuccinos as an undergraduate.

“Compared to five years ago, especially in metro cities, people are earning more and they’re not hesitant to spend Rs500 on a coffee,” she said. “When I was in my undergrad, it was an exclusive thing.”

Speciality coffee is still well out of reach for most of India’s 1.4bn population. Goldman Sachs estimates only 60mn Indians have an income above $10,000 a year, with the figure set to grow to 100mn by 2027.

The market for coffee is “restricted by geographies, incomes and households”, said Ankur Bisen, a retail analyst with Technopak Advisors.

Coffee has long been part of Indian culture. The country is among the world’s largest coffee growers, and it has traditionally been the drink of choice in the south, where a strong filtered brew is blended with chicory, frothed milk and sugar.

Café Coffee Day, which launched in 1996 and is based in Bengaluru, pioneered international coffee culture in India with sleek cafés that offered WiFi and twists such as cold coffee, before a debt crisis forced it to close many outlets. The company’s share price is down 80 per cent from a 2018 peak.

International brands such as Starbucks have proliferated in its place, seeking to ingratiate themselves by focusing on speciality Indian-grown coffee and adapting their menu to local tastes with masala potato puffs and chilli chicken in English muffins.

“People are willing to spend money for good-quality coffee,” said Rohan Kuriyan, a manager at Balanoor Plantations, a grower in the southern Indian state of Karnataka. “When [brands] started seeing the numbers increasing . . . it just cemented their idea of money in coffee.”

Jasper Reid, the founder of IMM, who runs a number of cafés in India under the Jamie Oliver brand, said cafés had proven particularly popular among international investors because operating them cost less than for other types of fast-food restaurants.

A typical coffee outlet could cost about a quarter of the tens of millions of rupees needed to open a burger joint, he said. “The thing about coffee and the café format, it’s much lower capex, much cheaper to build . . . [and] you charge like a wounded rhino for a flat white,” Reid said.

Yet in the race to build hundreds of new outlets across the country, brands risk overestimating the ability and appetite for Indian consumers to spend on discretionary drinks, said analysts.

Reid said the successful chains would need to exercise patience in order to capitalise on the India opportunity. “The people that tend to win tend to have a very long view, have capital that is aligned with that view and won’t panic or try to sell out too quickly,” he said.