Tourism Industry in India and Prospects for Starbucks - Research Paper Example

Tourism Industry in India and Prospects for Starbucks Introduction: India, the world's largest democracy and second most populated country, has surfaced as a major market for foreign investments after a period of alien ruling spread over numerous decades through which its financial system was almost closed. Tourism industry is one of the significant export industries in India. Although the global tourist inflow is comparatively little, India has found tourism emerging as an important sector of its economy (Theodore Koumelis, 2006). Tourism generates substantial foreign exchange for India. It is turning into a volume game where a large number of participants are contributing to the revenue of the industry. Segments such as hotels, tour operators, airlines, shipping etc., are significant contributors to this revenue. With lot of imagination and ideas the Indian tourism sector is gathering momentum and is set to have not only large numbers of foreign tourists but also make a big share in the country's Gross Domestic Product (GDP). Theodore Koumelis, in his article on Indian tourism and recent statistics, suggests that the performance of the Indian tourism industry has been very encouraging and has registered an 11% increase in foreign tourist arrivals during 2006. According to Starbucks annual CSR of 2006, Starbucks had then planned to enter the Indian market through a joint venture with an Indian partner RPG Enterprises so as to expand its business. Although many foreign companies see huge potential in Indian market due to huge middle class population, entering into it may not be that lucrative at time due to strict governmental economic policies. Therefore, certain country risks are involved. Political Risk Analysis: Almost entire South Asian region has faced severe political instability crisis for many decades with variable consequences. India, by far has been an example not only for South Asian countries but for many developed nations as well. Known as the largest democracy in the world, India has enjoyed continuous trends in its political and economical policies while directly resulting in greater political stability. Thus, tourism and hospitality industry in India has greatly benefited. However, greater stability of such magnitude has resulted in slower shifts and transitions in policy making processes, while negatively affecting the emergence of Indian tourism market for becoming a regional market. Perhaps, this has been the reason why multinational companies did not want to come to India in the earlier stages. Although there is opportunity for domestic and foreign business to grow, there are certain obstacles to these expansions. One of the major obstacles is the entry barriers abound and restrictions imposed on foreign direct investments. The government currently permits on an automatic basis with the exception that they do not already have an existing venture in India in the same field and proposals that may fall outside notified sectional policy/caps. The risk for these new businesses is that regulations are poorly enforced and the restrictions imposed on each zoning and tenancy laws make property ownership among the most expensive in the world. Therefore, the government has ownership of most of the businesses and this lowers the economic growth, making it expensive for other businesses to gain ownership. For Starbucks in India, political and legal risks can include threats to the profitability. These threats derive from the government action or inaction by economic conditions in the marketplace. The threats are included in the action or inaction by political authorities or their agents, rather than changes in supply and demand of goods and services. Therefore, Starbucks is required to open a bank account with an authorized dealer for designated foreign currency. A Foreign Currency Non-Resident (FCNR) account is to be established while converting the foreign exchange to Indian Rupees (Indian Liaison, 2007). India has a tax structure that is well developed to levy taxes divided between central and state governments. The corporate income taxes are usually taxed on their worldwide income arising from all sources unless the corporation is considered a resident of India and then the taxes are to be based on the profits derived from a business in India only. Domestic businesses are subject to a tax rate of 30% enhanced by a 10% surcharge and foreign investments are 40% enhanced by a 2.5% surcharge. With the heavy taxation laws, it could almost be impossible for a small business to make a profit and be worth opening. Most of the successful businesses are larger consumer markets that have generated a demand for a variety of products such as convenience foods, branded clothing, automobiles, toys, home appliances, electronic goods, restaurants, travel, communications, and entertainment. However, as of late, major investments in the tourism sector from public as well as private sector have highlighted the tourism and hospitality industry in India. Economic Risk Analysis: The Indian financial system is characterised by a large network of commercial banks, financial institutions, stock exchanges, and a wide range of financial instruments. Commercial banks and cooperative banks generally cater to the working capital needs of the corporate sector. Since the introduction of economic reforms in 1992-93, commercial banks have diversified into several new areas of business like merchant banking, mutual funds, leasing, venture capital, and other financial services. Commercial and cooperative banks hold around two-thirds of total assets of the Indian banks and other financial institutions taken together. Medium and long-term finance is largely provided by development financial institutions, investment institutions, mutual funds, and state-level financial institutions. In addition there are around 12,500 non-banking financial companies in the private sector which cater to the financing needs of the corporate sector. Stock exchanges also serve as an important and cheaper source of funds for the corporate sector. With the presence of all these financial institutions in the country, India has entertained negligible levels of liquidity than that of its neighbour countries, while resulting in higher economic growth in the later years. According to an online article published in the Economy Watch on Indian tourism1, the year 2004-05 saw tourism emerging as one of the major sectors for growth of Indian economy, the foreign exchange earnings increased from 353 Million US$ to 5 Billion US$. The curve is on constant rise since then. Economy Watch further states that, India's tourism industry is thriving due to an increase in foreign tourists' arrivals and greater than before travel by Indians to domestic and abroad destinations. The visitors are pouring in from all over the world: especially from Europe, Africa, Southeast Asia and Australia. At the same time, the number of Indians travelling has also increased. Some tourists come from Middle East countries to witness the drenching monsoon rains in India, a phenomenon never seen in desert climates. Economy watch suggests that interesting feature of this rapid growth is that it has come even as global tourism has dropped, due to the September 11 terrorist attacks in the United States, the outbreak of Severe Acute Respiratory Syndrome in East Asia, and the Iraq war. Even the disastrous tsunami didn't affect India's tourism industry, as tourist arrivals in India rose 23.5 percent in Dec 2004 and tourist arrivals crossed milestone of 3 million journeys for the first time in 2004. The disaster was expected to have a negative impact on India's tourism in terms of large-scale cancellations of tourists to India but nothing of that sort was seen. Therefore, it can be said that the tourism is among India's important export industries. Even with comparatively low levels of international tourist traffic, tourism has already emerged as an important segment of the Indian economy. Tourism also contributed to the economy indirectly through its linkages with other sectors like horticulture, agriculture, poultry, handicrafts and construction. Besides being an important foreign exchange earner, tourism industry also provides employment to millions of people in India both directly and indirectly through its linkage with other sectors of the economy. It is estimated that total direct employment in the tourism sector is around 20 million (Tourism Industry in India, Economy Watch). Recently, Indian government adopted a multi-pronged approach for promotion of tourism, which includes new mechanism for speedy implementation of tourism projects, development of integrated tourism circuits and rural destinations, special capacity building in the unorganized hospitality sector and new marketing strategy. Social/Environmental Risk Analysis: India is a mixture of various different societies comprising of thousands of ethnic, cultural, religious, and social groups. Thus, social and cultural risks are very high due to immense differences in these groups. Although labour relations in India are too complicated for foreign investors, the Indian Trade Unions Act interestingly offers acknowledgment and shield for promising Indian labour union associations. Many unions are allied with local or countrywide coalitions, such as The All-India Trade Union Congress, The Indian National Trade Union Congress, The Centre of Indian Trade Unions, The Indian Workers' Association, The United Trade Union Congress, etc. Indian labour force is a complicated mixture of large numbers of illiterate workers and exceedingly knowledgeable and cultured scientists, doctors, engineers, managers, technicians, and other professionals who are competent enough to work and achieve any desired goal. Although large number of skilled personnel has already left India to work in foreign shores due to improved pay related issues, India still has abundance of skilled and technically educated labour in the country. Managerial skills, which were not in great supply, have also improved numerically due to the rapid rise in the salaries for top administrators and technical staff. This change has been brought into Indian markets with the arrival of foreign companies in India. India has one of the world's richest traditions of corporate social responsibility. While much has been done in recent years to raise awareness on social responsibility as a business imperative, CSR in India has yet to achieve critical mass (Ritu Kumar, 2004). If this goal is to be realized then the CSR movement will have to become much more aligned with companies starting to set clear objectives, making real investments, measuring actual returns, and reporting performance openly while linking their goals and objectives parallel with those of the society. Ritu Kumar's study further suggests that SMEs play a central role in Indian business; hence, it is imperative for these SMEs to implement CSR while resulting in social as well as environmental care. India is so vast that the climatic conditions are much varied. India has mainly three seasons a year; these are rainy season, summer season, and winter season. Indian extended monsoon season attracts large number of tourists from all over the world. The geographic and environmental importance of India perhaps is one of the main reasons for its major share in tourism industry when compared to its neighbours and rivals. For Starbucks management team, this can be seen as an opportunity. Competitive Risk Analysis: Though India is conventionally a tea drinking nation, there is a great deal of coffee spending and other malt-based drinks. Coffee culture in India is a growing process. Customers at existing retail coffee shops are students and professionals between 18 and 35 years old. Big coffee retail players in India like Barista (with Tata and an Italian partner), Costa Coffee (based in UK), Cafe Coffee Day (funded by Sequoia) and Barnie's (based in US) have aggressive expansion plans and are adding new drinks apart from coffee (Vrushali Paunikar, 2006). Although Starbucks does not have a first mover advantage, it has entered in an already tried, tested, and proven market along with a local player (RPG) with strong retail expertise, while giving Starbucks an advantage along with its strong brand. This move also provides strong long-term growth opportunities for Starbucks. Since a Coffee Caf shares some of the characteristics of a bar, and some of the characteristics of a restaurant, Starbucks will have to differentiate its product from its other competitors. Its product must have different flavours with different offerings. A nice blend of coffee servings in presence of amusing environments should be accompanied by the highest serving quality. As the Indian coffee market has a good history, Starbucks faces fearsome competition from its rivals. Therefore, pricing becomes one of the very important issues in this respect as it directly attracts the psychology and mentality of the locals of India. Hence, lower the price, greater the market share among competitors. Venturing into an established market leads Starbucks to review some internal and external environmental stressors. Internally, Starbucks leverages knowledge which it has obtained from moves into the other twenty two countries where it serves in the hospitality and tourism sector. Externally Starbucks must ensure coordination with the government of India as well as establishing a close relationship with the businesses in the desired locations. With the already established market Starbucks should work to find a way to stand out from the competitors in the region. While there are several coffee cafs already in the thriving cities in India, Starbucks is looking to establish presence within some area businesses such as call centres. Perhaps, competitors may not have approached there at this time and could provide the leverage needed to make the difference between Barnie's and Starbucks (Vrushali, 2006). This mode of entry used (joint venture acquisition with a local partner) is a wholly owned subsidiary, because Starbuck's owns all of its stores. When a firm's competitive advantage is based on technological competence, a wholly owned subsidiary will often be the preferred entry mode, since it reduces the risk of losing control over that competence (Hill, 2005 pg 494). Proper management of risks will assist in the strategies chosen to aid the planning process. By planning to joint venture with Indian partner, RPG Enterprises has allowed Starbuck's to gain knowledge about certain interests involved in India. Since RPG has interests in power, retail, entertainment, and technology, it is to Starbuck's advantage to consider any risks associated with these interests. Starbuck's can utilize RPG to provide cultural, economic, operating and franchising expertise that may also lend its retail network. Based on evidence of the established competition, Starbucks should proceed forward with the plan to build relationships with area businesses. While other businesses may have coffee available in their cafs, Starbucks should build a small full service coffee caf within the business. This should allow Starbucks to leverage a relationship with the middle-class workers and open the doors to establish relationships with other companies as well as build full sized cafes in India. Distribution and Supply Chain Risks may be termed as the major competitive risk factors for Starbuck's in India. Effective resource planning becomes very crucial, since distribution through independent sources may become highly cost effective. Abundance of highly educated manpower in this regard can be regarded as the key for solution. Conclusion: India, as a nation, is broadly regarded as a destination for colours and enjoyment. Its homogenous society, which comprises of many distinct ethnic and religious groups, is widely regarded as a fun loving, educated, and business oriented. The preservation of great Indian culture perhaps is the most motivating force behind every tourist's ambition to visit India and taste the flavour of its hospitality. This obviously paves the way of success for Starbucks. Although India still has some tough rules and regulations, which can discourage foreign direct investment, global organizations certainly look forward to gain huge and vacant market share regardless of obvious restrictions. References: Ritu Kumar, (2004). Acknowledging Progress, Prioritizing Action. National Seminar on Corporate Social Responsibility. http://www.terieurope.org/docs/csr_state.pdf Accessed on April 16, 2007 Hill, C.W. (2005). International Business: Competing in the Global Market Place. New York, New York. McGraw-Hill/Irwin. Ernst & Young (2006). Doing Business in India. Tax and Business Guide. www.ey.com/India Accessed on March 1, 2007 Vrushali Paunikar (2006). Starbucks India - International Business Plan (pg. 6-17) http://www.cbe.csueastbay.edu/sbesc/1bp04.pdf Accessed on March 1, 2007 Theodore Koumelis (2006). Tourism: The most important export industry of India, Travel Daily News. http://www.traveldailynews.com/new.aspnewid=31736&subcategory_id=98 Accessed on April 16, 2007 Indian Liaison (2007). Exchange and repatriation of funds-India. www.indianliaison.com Accessed on March 2, 2007 Tourism Industry in India, Economy Watch. http://www.economywatch.com/business-and-economy/tourism-industry.html Accessed on April 16, 2007 Read More