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. CCDs 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. CCDs 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: CCDs 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 CCDs global growth ambition.
Changes in CCDs 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 Starbuckss 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 customers culture. At
the same time, CCD also appear as a tired brand to customers. It has failed to introduce major
changes in its caf 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 CCDs 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 doesnt 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 CCDs inexperience in catering to premium segment so far
opposed to Starbuckss 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. Create a premium brand for affluent segment either organically or inorganically
2. In decision making focus on differentiation compared to cost leadership
3. Convert existing lounges and square format stores to this new premium brand
4. 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