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Coffee Is Not a Smartphone: Starbucks (NASDAQ:SBUX), India, and the Myth of Untapped Markets

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Why does every big company think it can go everywhere?

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MINYANVILLE ORIGINAL Coffee giant Starbucks (NASDAQ:SBUX) is finally opening its first location in India next month. Given India's struggling economy, that announcement has been met with a lukewarm response from investors, although other major retailers like Wal-Mart (NYSE:WMT) and IKEA are also planning on expanding into the country. India, along with its fellow BRIC countries (Brazil, Russia, and China), has long been heralded as a massive untapped market for everything from fast food to smartphones to soccer.

Now, the Indian national soccer team is currently ranked 169th in the world. They have never played in a World Cup and never contributed a player to a top league. My friend Sandeep beat me at the video game FIFA 12 once and instantly became one of the greatest Indian soccer players of all time. There's no innate reason that Indian people aren't good at soccer; India's a massive country with plenty of urban centers and a developing economy, which is a pretty good recipe for a strong soccer nation (see Brazil, Mexico, et al.). But while the ingredients are there, India still has a strong cultural preference for cricket, instilled by years and years of history.

This is all to say that there are some historical events, and some cultural ties, that determine the preferences of a demographic, and it is this that determines the difference between an untapped market and a lost cause. There's no historical or cultural reason that Africa shouldn't like smartphones, which is why the text-only Facebook Zero (NASDAQ:FB) has been such a massive success there; as Africa increasingly moves from feature phones to smartphones, that market will already be accustomed to using Facebook.

India, though, has historical and cultural reasons for not being a coffee nation just as it does for not being a soccer nation.

The British East India Company kick-started the commercial production of tea back when it took over the region of Assam in the mid-1820s. Since then, tea has been cheap, plentiful, and of extremely high quality throughout the country. The years of British occupation created a place for tea in Indian national culture.

India does grow coffee although it exports nearly all of it-especially to Europe, where they like milder monsoon-grown stuff rather than the liquid lightning from Brazil and Colombia that we Americans prefer. Coffee consumption rose only 3% in India last year, which isn't saying much considering that the country still drinks a tiny fraction of what most Western nations consume per capita.

In short, there's no reason for Starbucks to assume that coffee consumption will continue to grow even at that slow pace.

As Africa continues to develop, smartphones will certainly become more prevalent, which, by logical extension, makes Facebook Zero a good move. Whether India will start drinking coffee as it develops, though, is anyone's guess since coffee consumption is not necessarily tied to economic growth.

Starbucks' decision to expand into India might be a stroke of brilliance. In a nation of over one billion people (at least some of whom like to drink coffee), there's at least some money to be made. But the idea that a company should expand into any of the large developing nations-India, China, Brazil, Turkey, much of Africa-simply because it's "time" is one that ignores the cultural reasons that Starbucks didn't come from India in the first place: They may just not like coffee much there.
No positions in stocks mentioned.
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