MUMBAI (MarketWatch) — Starbucks Corp., which this past week signed a deal to open retail stores with India’s Tata Global Beverages Ltd., is banking on its brand’s attraction within a young and increasingly affluent middle class to face domestic competition and command higher prices.

“The middle and upper middle class in India is growing very fast in size and income,” said DK Joshi, an economist at Mumbai-based CRISIL Research. “It will be expensive coffee, but a growing number of people can afford it and people who want to drink Starbucks will drink Starbucks.”

Brand appeal has already worked in China for Starbucks SBUX, -1.47% , which has opened up more than 500 stores there and just implemented its first price hike in five years.

Starbucks Corp unveiled a deal that sets the stage for the world's largest coffee company to bring its iconic cafes to India, hoping to replicate its success in China, where Western-style coffee shops are increasingly popular. Photo: Reuters Reuters

With an initial investment of about $80 million, the world’s largest coffee chain and the Tata Group, one of India’s largest conglomerates, plan to open as many as 50 stores within 12 months on the subcontinent, starting with New Delhi and Mumbai this summer.

Tata Global Beverages (500800), whose shares jumped 22.5% on the Bombay Stock Exchange last week, will provide domestic coffee supplies for the stores of the joint venture, which will be called “Starbucks Coffee, A Tata Alliance”.

“It’s a benefit for [Starbucks] to have Tata source the coffee for them, bringing a good understanding of the local market and with a manufacturing base here,” says Sageraj Bariya, managing partner at Equitorials.

India is the world’s fifth-largest coffee producer and importing coffee beans from abroad is highly taxed.

Domestic sourcing is also part of the requirements in India’s foreign investment reform legislation passed late last year to allow foreign ownership of single-brand retailers.

A similar reform for multi-brand retail, which would have allowed the likes of Wal-Mart Stores Inc. WMT, -0.08% to own their operations in India, met with fierce resistance amid claims it would destroy local jobs and was eventually withdrawn.

Starbucks, which had already reached a preliminary agreement with Tata Global Beverages nearly a year ago, still plans its Indian operations as a 50-50 joint venture.

Asia's week ahead: China inflation

Now the coffee chain hopes to replicate the same success it has found in China, where sales jumped 20% last year.

In a traditionally tea-drinking nation, India’s overall annual coffee consumption of about 85 grams per capita is far below that of the 4.1 kilograms in the United States or even the 3.6 kilograms in Japan, according to data from the International Coffee Organization.

But in a mostly poor population of 1.2 billion, it’s the growing middle class, estimated at between 300 to 400 million people, which represents the sweet spot for many multinationals.

And coffee consumption has already doubled since the 1990s, along with the growing incomes and demands of young urbanites and the spread of coffee chains.

Therefore, India’s legendary Chai wallahs who provide tea anywhere from train corridors to street corners, won’t be threatened by the arrival of Starbucks, according to CRISIL’s Joshi.

“There is only a certain segment of the population which will enjoy this and has the money to afford it,” he said.

The venture is likely to open stores within Taj Hotels, which are also owned by the Tata Group.

A rickshaw passes by a local coffee shop in Mumbai Nick Godt/MarketWatch

As for facing the established competition, analysts say Starbucks can bank on its brand appeal to charge higher prices, even in India’s inflation-prone economy.

Currently leading the market is Café Coffee Day, India’s largest coffee chain with about 1,200 stores, and Barista, which is owned by Italy’s Lavazza, with about 200 stores. The U.S.’ Coffee Bean & Tea Leaf and Costa Coffee, owned by the U.K.’s Whitbread PLC (WTB), also already have an established presence in India.

Testing the grounds

In Bandstand, which faces the Arabian Sea in a trendy suburb of Mumbai, the adjoining terraces of Café Coffee Day and Barista are often filled with groups of twenty-something middle-class Indians chatting and sipping beverages for hours, even on weekdays.

Sitting at the terrace of Café Coffee Day, one young couple confessed they had never heard of Starbucks.

But right across at the Barista, both Neerav Aggarwal, 20, and Noinika Marwaha, 20, who’ve tasted Starbucks abroad, said they’d happily pay extra money for “the quality, the space, the scenery”.