Coffee wars in India: CCD & Starbucks I.
Problem analysis As of 2013, a key issue for CCD management is that it has not remained competitive enough to sustain market leadership position in India. CCD’s external environment has changed significantly with rise in expectation levels from blossoming middle class and entry of global dominant coffee chain Starbucks bringing global service standards. CCD’s competitive strategy shift from “differentiation” towards “cost leadership” has given it unique cost advantage. Nevertheless, new strategy also made CCD complacent with average customer service levels, new operational challenges and limited focus on attractive affluent segment that may impact CCD brand equity and future growth ambitions. Analysis: CCD’s low competitiveness is derived from multiple factors in current market scenario. So far CCD had only very limited focus in affluent segment for growth. Even after successful experiments in lounges and square formats, CCD is contemplating its portfolio expansion with focus on affluent segment. This is a large attractive and largely untapped market. Global dominant coffee player Starbucks already saw this big opportunity and has partnered with TATA group to tap it. Starbucks has successful track record in multiple countries and can easily replicate its success in India. Success of Starbucks may dilute the brand, squeeze its margins from the top and threaten CCD’s global growth ambition. Changes in CCD’s external environment have raised service level performance benchmarks. Demand for better customer service is increased with growth of middle class customers in India. Entry of Starbucks has further brought global customer service levels, several product innovations in partnership with TATA, and locally themed exquisite stores to customers. CCD has still not rejuvenated itself to deliver against these higher service standards. Even if we forget about Starbucks’s entry in India, the customer service level at CCD has deteriorated in recent past. CCD staff is not able to engage well with the customers and their interaction with customers is primarily transactional. Most of the staff is hired from small towns and villages and not groomed enough such that they can fit with customer’s culture. At the same time, CCD also appear as a tired brand to customers. It has failed to introduce major changes in its café formats that brings majority of the revenues. Product innovation has been also very low. Food and beverages menu is currently updated once in every two to three years compared to quarterly updates, to keep customers engaged. CCD is also facing store level talent management issue. High attrition level is driven by lower salary levels and benefits to staff. This operational issue is indirectly linked with customer service levels at stores. Despite all these challenges, a key strength for CCD has been strong emotional connect with youth. This segment has been a key driver for CCD’s growth and should be sustained.
II. Decision analysis In order to enhance its competitiveness, CCD should choose decision option 3 to “create a separate premium brand to target affluent segment”
Decision options: 1. Slight course correction: Continue status quo with growth focus on youth segment, fix operational issues, invest in branding and wait how market shapes up in affluent segment. 2. Aggressive course correction: Focus growth in affluent segment by expanding portfolio of lounge and square formats to compete with Starbucks. Support this growth by heavy branding and by fixing operational issues 3. Create a separate premium brand for affluent segment: Adopt differentiating brand strategy to target both affluent and youth segments. Create separate premium brand to tap affluent segment, convert lounges and square formats to this new brand, and position it to compete with Starbucks. At the same time simply sustain growth momentum in youth segment by leveraging original CCD brand. Fix operational issues in this segment. Decision criteria: 1. Growth in affluent segment: Focus on new business growth in 25+ age affluent segment 2. Sustain growth in with youth: Sustain growth in 25 and below age segment 3. Customer satisfaction level: Driven by food and beverages product innovation, store interiors revamp, and increased staff courteousness 4. Staff satisfaction level: Driven by better staff salary and benefits in parallel to industry 5. Budget: Monetary investment to implement the strategic decision 6. Time: Implementation timeframe Decision analysis: For CCD there is a clear trade-off between focusing on affluent segment and youth segment. By creating a separate premium brand for affluent segment, CCD can tap into this attractive segment without losing its strong position among youth segment. A separate premium brand will allow all branding effort to successfully focus in competing with Starbucks without distorting CCD image in the minds of youth segment. Decision option 1 ‘slight course correction’ is rejected because it is a very conservative approach to address the issue of CCD competitiveness. This option doesn’t targets affluent segment, hence gives open invitation to Starbucks to succeed in affluent segment and put pressure on CCD from top. This may further dilute CCD brand and threaten its existence. Similarly, decision option 2 ‘aggressive course correction’ is rejected as it will hamper growth in youth segment. This option suggests that CCD need to position itself across both affluent and youth segment. However, this may give inconsistent and conflicting messages to end customers and has risk of creating confusion in minds of customer about the brand. For example youth segment may start perceiving CCD as unaffordable if intrigued by messages targeted at affluent segment. Remaining decision criteria of customer satisfaction level, staff satisfaction level, cost and budgets are of lower priority in evaluating different options. All the three decision options meet these criteria and hence suitable in making CCD more competitive. Along with benefits of recommended decision option mainly in medium to long term, there are some inherent risks as well. In short term, the decision may hit sales from lounges and square format stores given CCD brand will be replaced with a premium brand that will take time to gradually develop. Also CCD’s inexperience in catering to premium segment so far opposed to Starbucks’s rich history of winning in this segment adds another risk to the decision.
III. Action plan The recommended decision will enable CCD to adopt a differentiating strategy for growth in both affluent and youth segments. The new premium brand will enable CCD to compete with Starbucks. At the same time growth momentum in youth segment will be continued through CCD brand. CCD can adopt following steps in order to implement the recommended decision: For new premium brand targeting affluent segment 1. 2. 3. 4.
Create a premium brand for affluent segment either organically or inorganically In decision making focus on “differentiation” compared to “cost leadership” Convert existing lounges and square format stores to this new premium brand Push growth in a manner such that premium brand contribute 25-30% to overall portfolio by parent CCD in medium term 5. Implement innovative food and beverages options in menu, attractive store interiors, and high service levels with the help of better trained staff 6. Spend heavily in branding. Position the new premium brand to compete with Starbucks 7. Do necessary price adjustments to keep it parallel with Starbucks to justify premium positioning and manage higher operational cost For original CCD brand targeting youth segment 1. In decision making focus on “cost leadership” compared to “differentiation” but not at the cost of falling service standards 2. Upgrade staff selection process and put in place certain minimum criteria such as English knowledge, interpersonal skills and local cultural fit 3. Upgrade in-house residential training programme for both CCD brand and premium brand. Have special training module for premium brand parallel to Starbucks 4. Upgrade food and beverages breadth and quality. Update menu options quarterly. 5. Upgrade store interiors and furniture gradually among all stores 6. Spend portion of total branding budget to strengthen CCD brand to compensate for cannibalization effect
