Starbucks Corp. (NASDASQ: SBUX) just announced an important deal with India’s diversified conglomerate Tata Group that includes sourcing and roasting coffee beans in India. But lest you think this is just outsourcing of coffee production, take note – fast food giants like Yum! Brands (NYSE: YUM) restaurant Taco Bell and McDonald’s (NYSE: MCD) have made emerging markets like India and China top priorities this year.
That means the roasting deal is likely the first step in the production chain for Starbucks when it comes to rolling out a coffee operation in India that’s robust as its dark roast’s flavor.
India is a tremendous untapped market for Western restaurant stocks that have achieved market saturation. Take Yum! Brands label Taco Bell, which last year focused like a laser on India with menu items like a potato and paneer burrito. Similarly, Domino’s Pizza (NYSE: DPZ) reported in 2010 that global sales accounted for nearly half the Domino’s pie – thanks in large part to its peppy paneer pizza in India. More recently, MCD announced it’s Asia strategy with a plan to double McDonald’s stores in China, opening 1,000 stores in just 3 years.
So it’s no surprise that Starbucks is jumping on the bandwagon of emerging markets. SBUX chair Howard Schultz recently told the Wall Street Journal that India could one day rival China for the biggest global Starbucks market. That’s saying something, considering Starbucks has an aggressive plan to triple its stores in China to around 1,500 over the next five years.
The roasting deal with mega-business Tata is also a strategic one for Starbucks, since the firm operates businesses in almost every sector from chemicals to steel to automobiles to information technology and power generation.
Oh yeah, and hospitality and restaurants.
That’s the key for Starbucks. In addition to providing the roasting infrastructure to feed grounds to its Indian baristas, the deal with Tata builds a relationship with a company that could help it launch counters in retail outlets and hotels. Just as SBUX is a fixture in every mall and airport in the U.S., Tata can help Starbucks get into high-traffic locations to connect with India consumers.
As an interesting aside for American coffee drinkers, the deal also has an impact on a small segment of java junkies here in the states. It’s worth noting that the Starbucks roasting pact involves Tata Coffee Ltd. – the group which owns the Eight O’Clock Coffee Co. Starbucks CEO Schultz also told the Journal he hopes to raise the profile of Indian-grown Arabica beans in Starbucks stores, but this could also give a bit of a jolt to Eight O’Clock Coffee.
Jeff Reeves is editor of InvestorPlace.com. Follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.