Starbucks' FDI Strategy in India using Dunning's Eclectic Paradigm

Introduction

Dunning’s eclectic paradigm was proposed by John Dunning to explain the manner in which firms internationalize and why they choose to invest through FDI rather than an alternative investment strategy (Letto-Gillies, 2019). When conducting his research Dunning identified two key areas in which companies have involvement with foreign economies, firstly economic activities that take place within the home country of the company with goods and services directed towards foreign markets, the second is activities that take place within a host country that produces good or services and direct these towards foreign markets. The OLI paradigm refers to economic activity within foreign markets and specifically why and where FDI is focused. The eclectic paradigm is also referred to as the OLI paradigm, standing for Ownership, Location and Internalization advantages (Gray, 2003). Ownership advantages are tangible assets that firms own, these may include patents and intellectual property but vary to superior technology, management and workforce as well as less tangible assets brand recognition, reputation and the ability to exploit economies of scale (da Silva Lopes, 2010). Location advantages refer to the advantage of conducting business within a particular country or market and the benefits of doing so. These may include low cost labour, raw materials and government policy incentivizing FDI. Finally, Internalization advantages which stems from the ability of firms to “exploit its ownership advantage internally in order to minimize the transaction costs associated with the inter-firm transfer of proprietary knowledge and capabilities” (Buckley and Hashai, 2009). These three factors can be used to analyse Starbucks FDI strategy within India.

Starbucks were worried about over saturation of the US market which gave them cause for international expansion (Franck, 2017). Starbucks had massive success in China which is now their fastest growing market outside of the US and decided to try and implore the same strategy they had used within China in another developing market, India (Ramakrishan, 2017). Starbucks entered into the Chinese market through a joint venture with Uni-President Enterprises Corp and President Chain Store Corp (Reuters, 2020). They implored the same strategy in India forming a 50:50 joint venture with Tata Consumer Products to form Tata Starbucks Limited (Starbucks, 2020).

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Location Advantages

There are various factors that led to Starbucks choosing India but to properly understand them we must apply the ‘L’ of the OLI paradigm to explain why India was the right location. One location advantage that India has in common with China is their rapidly growing economy. Starbucks is confident that India will become a top 5 global market for them as their economy continues to develop (The Basis Point, 2018). The World Bank (2020) shows India’s economy has been growing by at least 5% every year since 2008 and on average by 7%. Combined with their rapidly growing population, currently at 1.366 billion people, this will create a huge consumer base as the country develops, becomes better educated and contains more people with disposable income (The World Bank, 2020).

India currently has a very sensitive price market, as a results Tata Starbucks currently operates with a target market of the urban middle class as these are the only people who can afford their products (Jain, 2014). Coffee drinkers are currently outnumbered 8-1 within India however coffee consumption has increased 40% over the last 10 years and is projected to continue this trend (Statista, 2020). This growing market is another location advantage of choosing India as with an increasing demand, combined with a growing middle class, will increase the demand for their products.

Perhaps the largest location advantage of India is the high availability of cheap labour, as a developing economy India has a large pool of unskilled workers seeking employment. These low wages reduce operation costs for Tata Starbucks and were part of the appeal of India as a target for FDI. The average monthly salary for a Starbucks barista in India is 13,000INR a month which is around £135 compared to the average salary for the same position in the UK over the same time is £1,160 (Glassdoor, 2020). This is about in line with what you would expect with the variation in average salary between the two countries however the real advantage here comes from Starbucks price of coffee’s, costing £2.67 in India and £2.90 in the UK and £3.49 in the US (Binsted, 2020). Although there is a major disparity between the two in terms of salary the same disparity is not found in product price, benefiting Starbucks profitability massively.

By locating in India Starbucks can also take advantage of the local climate as it is one in which coffee is grown naturally, according to the Associated Press (2012), Starbucks sources locally grown coffee for their Indian stores. Coffee requires a hot tropical climate and most of it is grown around the equator and in the tropics, often called the ‘coffee belt’ (Lincoln & York, 2020). India lies within this ‘belt’ and Starbucks uses this advantage to source coffee for their Café’s from within India, both cutting down on shipping and purchasing costs. All of these factors, cheap labour, low cost materials, rapidly growing economy and a growing demand for coffee contributed to Starbucks choosing India as their location for FDI.

Ownership Advantages

Most competitors within India have adjusted their storefront to better suit the Indian market however Starbucks, like they did in China, have maintained the same style of Café regardless of location in order to maintain a more authentic ‘Starbucks ambience’ (Aiyer, 2014). The major benefit of structuring their business in this way allows Starbucks to leverage their brand recognition by giving customers the same experience that Starbucks are known for as a western beverage company, creating customer pull as they’re attracted to this lifestyle. While these quick service restaurants are not the preferred or traditional type of café for India people to frequent, they are increasing in popularity with a compound annual growth rate of 22% between 2016-2022 (Singh, 2017).

Tata Starbucks recognised the extremely high demand for tea within India, a demand they were not meeting. One of the benefits of being a large international organization is the ability to quickly and efficiently leverage your position to make fast and effective changes to your business to meet market demands. In Tata Starbucks case this meant increasing the amount and variety of tea they had available. In 2017 they introduced 18 new varieties of tea under the newly created brand Teavana (Tata Global Beverages, 2017).

As a large MNE that has been in existence since 1971 Starbucks is able to use its vast experience in coffeehouse culture to create some of the most efficient chain of café’s in the world (Starbucks, 2020). With this wealth of experience Starbucks has set up its STRIVE program in India that combines job skills training with Starbucks experience and expertise within its retail operations. Within this program they are planning on training over 3000 young people from disadvantaged backgrounds who do not have practical labour skills and who face barriers to employment. Starbucks have a particular focus on young women with an aim to increase the proportion of women within their workforce up to 40% from 25% by 2022 (BW Online Bureau, 2017). While this will benefit Starbucks directly through having a better skilled workforce the indirect of this program will be a recognition within the communities they operate in as a company who tries to help the people who work for them and those around them, for Starbucks they hope this reputation will translate to patronage further along the line.

Internalization Advantages

As mentioned earlier Starbucks have set up their café’s in the same manner as those in the US however there is another advantage to this aside from creating a ‘Starbuck ambience’. They create economies of scale for themselves with suppliers. These economies of scale are established through a large network of their café’s using the same ingredients from the same suppliers, lowering their costs as it is spread over a large number of goods (Baumol, Blinder and Solow, 2008).

Starbucks have faced an issue with their joint venture partner Tata Beverages as Tata also owns multiple other tea and coffee brands within India making up the majority of the market share. While looking for expansion opportunities into India, Tata are the clear favourites in the market to partner with due to the huge range of connections they have. While Starbucks are confident in their ability to be successful on a store front basis, they are unfamiliar with the Indian market in terms of suppliers, this is the main area Tata would be able to help with. The issue comes from Tata owning such a large portion of the market share, that Starbucks are now directly competing against their partner creating a conflict of interest within their business relationship. Going forward this may be Starbucks biggest obstacle however this is one we can see they have already overcome before. Starbucks operation in China was originally a Joint Venture however in 2017 Starbucks acquired 100% ownership for approximately $1.3billion (Starbucks Stories, 2020). Starbucks vast success as a company allows this kind of risk mitigating strategy as they have the capital behind them to be able to afford acquisitions on this scale, the benefit to them is the original joint venture partnership introduces Starbucks to the foreign market with a local experienced company to assist in areas they may be unfamiliar with. At this point Starbucks were aware of how the market and suppliers functioned and were confident enough that the risk to them had been mitigated so continuing without a partner was no longer as hazardous as it would have been prior to their investment. Starbucks may employ the strategy in India once stores become profitable, projected to be 2020 however this is likely to be delayed as a result of the Covid-19 pandemic (Malviya, 2017).

Conclusion

In conclusion Starbucks utilized a joint venture partnership to enter a rapidly growing Indian economy with minimised risk to themselves exploiting the advantages that come with operating within a developing economy with cheap labour and products. They further strengthen their position by instead of the traditional tea drinking culture targeting a growing middle class within the country and drawing them in with an authentic Western style Starbucks experience.

References

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