The world's largest premium coffee retail chain announced on Thursday that it has entered into an agreement with Tata Coffee for a strategic alliance.

Under a non-binding memorandum of understanding, Starbucks will explore setting up stores in the Tata group's retail outlets and hotels, besides sourcing and roasting coffee beans at Tata Coffee's Kodagu facility.

Tata Coffee, one of the biggest suppliers of Arabica coffee beans, has shipped coffee beans to Starbucks in the past and is now building a structure for a long-term relationship, a joint release from the Tata group and Starbucks.
Starbucks, which runs over 16,000 stores worldwide, has been in talks with the Future Group, Reliance and Jubilant for an entry into India, but none of those discussions fructified.

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Retail growth outside the US is now central to the company's strategy. In an investor presentation, Starbucks International president John Culver said the company hopes to operate at least 1,500 stores in mainland China by 2015.

He also said that the company sees exciting growth prospects in other emerging countries such as India and Brazil.

According to the MoU, the two companies will collaborate on providing training to local farmers, technicians and agronomists to improve coffee-growing and milling skills.

The two companies will also explore social projects in the coffee-growing regions Tata Coffee operates.

R K Krishna Kumar, chairman of Tata Coffee, told Business Standard that the first Starbucks outlet could open in the next six to seven months.

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He said there was no exclusive arrangement with Starbucks at the moment.

One of the hurdles that the two companies have to sort out is Starbucks' franchisee-led business model -- something Tata is uncomfortable with.

"It's up to Starbucks to decide what kind of a sustainable partner they are looking at and what will be the shared values," Krishna Kumar said.

"This MoU is the first step in our entry to India. 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," said Howard Schultz, chairman, president & CEO, Starbucks Coffee Company.

In the areas of sourcing and roasting, Starbucks will explore procuring green coffee from Tata Coffee estates and roasting at the Indian company's existing facilities.

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At a later phase, Tata Coffee and Starbucks will consider jointly investing in additional facilities and roasting green coffee for export.

Headquartered in Seattle, Washington, Starbucks operates in more than 50 countries. It has been sourcing coffee beans from India for the last seven years.

Tata Coffee is Asia's largest coffee plantation company and the third-largest exporter of instant coffee in the country.
It produces more than 10,000 million tonne of shade grown Arabica and Robusta coffees at its 19 estates in south India.

Its two instant coffee manufacturing facilities have a combined installed capacity of 6,000 tonne.

Devangshu Dutta, chief executive at retail consultant Third Eyesight, said Tata offers a good platform for Starbucks.
The Indian group has deep experience in running food supplies, so it can handle the that part of the outlets. But in terms of running cafes, Tata has no specific advantage.

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He said Starbucks need to address pricing issues for India, since demand is highly elastic. It is a challenge the US company has faced in its home market, with other chains competing on price.

Though there are several competitors in the segment -- Barista (200 outlets), Cafe Coffee Day (1,040 outlets) and Costa Coffee and others (100) -- analysts said the market is far from saturated.

Harish Bijoor, chief executive officer, Harish Bijoor Consults, says the agreement provides a win-win situation for both partners.

Tata can leverage the Starbucks name, and vice versa.

The entry of more players means the market will grow. India can absorb up to an estimated 5,400 outlets; at the moment, the number is over 1,300.