22 April 2019

Is Starbucks ripping off its Chinese customers?

A cup of Starbucks latte costs US$3 in United States, but in Shanghai, you have to shell out 27 yuan (US$4.4), a 46 percent mark-up, for the same brew. Given the average discretionary income of an office worker in China is way below that of their American counterpart, the situation seems unreasonable. Which is why Starbucks is being accused of making excessive profits in China.

According to Wall Street Journal, Beijing is one of the most expensive places to purchase a cup of Starbucks Grande Caffe Latte. The price can go as high as US$4.81, more costly than in other megacities like Tokyo, New York and Hong Kong.

The cost structure of Starbucks can be divided into two parts: operating cost and material cost. In the context of globalization, the cost of coffee beans won’t have a big difference anywhere in the world. Everything else, including rent and labor, is pricier in the US, so why the wide price discrepancy?

Some say the logistics fees, taxes and other intermediary charges are high in China, and Starbucks naturally has to pass on those costs to consumers, which explains the difference. But that’s just part of the story.

Starbucks marked up the prices on purpose, quoted branding and marketing expert Zhou Wei as saying. Its intention is to make the brand look more high-end. Such a strategy appears to work well in mainland China, where many patronize the coffee chain to show off their social status or make it look higher than what it really is.

In fact, according to Starbucks’ latest quarterly report, the operating margin in China and the rest of Asia Pacific has reached 36.2 percent, while the same item was 22.3 percent in the Americas and a measly 3.2 percent in the EMEA (Europe, Middle East and Africa) region.

Having achieved such a high operating margin in China, Starbucks wants to expand even more in the country. China and Asia Pacific contribute US$84.7 million or 13.8 percent of the group’s operating income, and the figure is expected to keep growing.

Its official website shows that Starbucks now has 1,001 outlets across China and aims at increasing the number to 1,500 within two years. The group estimates China will become its second-largest market behind the US next year.

It is not only Starbucks that is price-discriminating the Chinese. Haagen Daz, an ice-cream brand from the US, sells its 14 fl. oz. ice cream for US$4.7 in its country of origin, but in China, the price could shoot up to 80 yuan (US$13).

Some experts don’t agree that this is obscene profiteering. China Brand Research Institute chief researcher Zheng Xueqin says it is just practicing different brand positioning for different markets.

But one thing’s for sure, after the success of Starbucks and Haagen Daz, more foreign brands will try the same strategy and market what is otherwise a quite common product overseas as a premium brand in China.

– Contact the writer at [email protected]



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