Starbucks Corp , the world's largest coffee chain, unveiled a tie-up on Thursday that could bring its iconic cafes to Asia's third-largest economy, where western-style coffee shops are increasingly popular.

The Seattle-based chain signed a pact with India's Tata Coffee Ltd , part of the Tata group conglomerate, to source coffee in India and explore opening retail stores in the country, the two companies said in a statement.

Starbucks will likely open its first India store in July or August this year, K Krishnakumar, Chairman of Tata Coffee, told Reuters.

Acquiring real estate is currently a challenge in India but Starbucks will hopefully overcome that, Krishnakumar said. The companies said they would also explore opening cafes at retail outlets and hotels associated with the Tata group.

In India, where tea has long been the beverage of choice, an increasingly affluent and urban population with westernized tastes is embracing cafes, paying much more for a cup of coffee than at traditional restaurants.

A cup of plain coffee typically costs about 10 rupees (about 22 U.S. cents) at a basic restaurant in India, compared with 50 to 60 rupees at one of the western-style cafe chains that began sprouting up about ten years ago.

People in this country are spend oriented and not frugality oriented as is the case in many western markets these day, Harish Bijoor, an industry expert and independent consultant who previously worked at Tata Coffee, said.

If they had entered 5 to 6 years ago, they would have had to reduce prices. Now they can afford to keep the pricing, dollar denominated. They can afford to sell a frappacino at 180 rupees ($4).

Under the terms of the agreement, Starbucks and Tata Coffee will consider jointly investing in additional facilities and roasting green coffee for export to other markets.

India exports roughly 70 to 80 percent of its total coffee output.

We believe India can be an important source for coffee in the domestic market, as well as across the many regions globally where Starbucks has operations, Starbucks Chairman Howard Schultz said.

Margins of global coffee retailers like Starbucks were under pressure in 2010 after coffee prices rose 77 percent during the year due to supply constraints. The alliance with Tata Coffee could help ensure steady supplies.

GROWTH POTENTIAL

The organized coffee market in India -- which reflects consumption mainly through cafes -- accounts for about $140 million of the country's total domestic consumption of $667 million.

I think it's an untapped market and potentially a very lucrative market for them, Morningstar analyst R.J. Hottovy said.

It's a dense population and they probably have more confidence going into India given the success they've had in China breaching these traditional tea-drinking nations, he said.

Starbucks, which opened its first China store in 1999, has more than 400 stores across mainland China. The chain has 5,500 coffeehouses in over 50 countries.

A burgeoning middle class in an economy growing at nearly 9 percent a year has lured many U.S. companies to India in recent years. Several chains, including Domino's Pizza , McDonald's and YUM Brands with its KFC, Pizza Hut and Taco Bell units, have entered the Indian market, adapting their menus to the Indian palate.

Tata Coffee, which acquired a 34 percent stake in Indian cafe chain Barista in 2001, sold its holding to the Sterling Group in 2004. Sterling later sold the chain to Lavazza, Italy's largest coffee company, in 2007.

(US$1 = 45.11 rupees)

(Additional reporting by Tanmaya Nanda, Prashant Mehra and Rajendra Jadhav in MUMBAI and Helen Chernikoff in NEW YORK; Editing by Jui Chakravorty)

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