Starbucks: More expensive in China than Japan or America, butwhy?

Casey Baseel SoraNews24. Oct 11, 2013

It's safe to say that no one you see at Starbucks is there because they want to stretch their java-buying budget. With locations in more than 60 countries (and seemingly every branch in the Tokyo area at maximum capacity every day between 3 and 7 p.m., the Seattle-based chain must be doing something right, but sometimes it's hard not to feel a bit surprised at the prices they charge.

But the next time you're sitting in a Starbucks in Japan or America, pretending to sip from an empty mug because you're not quite ready to disconnect from the free wi-fi but don't feel like laying out the cash for another cup, consider yourself lucky. You'd be paying a lot more for your latte if you were at a Starbucks in China.

Starbucks' first foray into Asia was in 1996, when its initialJapanese branches became the company's first locations outside of North America. And while Starbucks is an unqualified success in Japan, it's said that the market receiving the lion's share of the company's attention these days is China, where it's winning over affluent urbanities just as it has in every nation the chain has spread to.

However, despite the low production costs that have made China a global manufacturing center, there're no savings to be found by getting your Starbucks fix there.

Consider the cost of a short-size Starbucks latte. Prices vary by location in the US, but tend to run about $2.75. In Japan, well-known to have some of the highest consumer prices on the planet, that same beverage will set you back 320 yen (US $3.27).

Place your order at a Starbucks in China, though, and the damage comes to a whopping 27 yuan (US $4.39). This makes a small cup of Starbucks coffee over one and a half times the price charged in the US, and the economic equivalent of a reasonable meal in China.

The pricing structure becomes even more eye-popping when you stop to consider the expenses that go into making that latte. The cost of ingredients and labor are far cheaper in China than in most other nations where Starbucks operates. Analysts speculate that the company's mark-up on its products in China is higher than in any other market and in the neighborhood of 16 times its European profit margin.

Media outlets in China have begun to question these practices, referring to them as "profiteering" or simply "a rip-off." But as Econ 101 tells us, where non-essential goods like gourmet coffee are concerned, products are worth exactly as much as people are willing to pay for them. So how is it that even with their high prices, Starbucks isn't just surviving in China, it's thriving?

Paradoxically, Starbucks' high prices may actually be helping the company sell its beverages. Premium pricing strategy holds that sometimes a higher price conveys an image of higher quality or status to the buyer. For example, a T-shirt is an easier sell at $9.95 than $10. But shift your focus to a more upmarket item like a three-piece suit, and sometimes you can move more at a solid $1,000 than at $995. At that point, rather than feeling good about saving five bucks, the buyer who laid out an even grand can take some form of satisfaction in thinking, "Sure, I splurged a little, but now I've got a thousand-dollar suit to show for it!"

At least one branding specialist feels this is the tack Starbucks is taking in China. "By setting the price high, you strengthen the perception of your product as a premium offering. In Starbucks' case, it lets their customers feel that 'Going to Starbucks shows that I appreciate the finer things in life,' or 'I'm not the same as everyone else.' For some people, those feelings are, in and of themselves, satisfying."

In this way, the key to Starbucks' success is providing enough value, in whatever form, to justify its high prices in its customers' minds. Aside from creating the same fashionable yet relaxing atmosphere as in its branches elsewhere, Starbucks in China offers services like its "Coffee Classroom" at branches in Shanghai. Available for groups of three to four customers, a lecturer from the chain will explain everything you'd care to know about the various types of coffee Starbucks offers.

Not only does this help customers find the blend most suited to their individual palate, it also helps to reinforce the image of a sophisticated coffee culture that Starbucks is promoting, with a subtle hint that the best place to experience it is at one of the nearly 1,000 Starbucks locations in China.

Please have a discussion in your group, and answer the following questions:

1. Find out the GDPper capitavalue of Brazil, China, India, the UK, Canada, and the U.S. in 2021.
2. Compared to the U.S., do the consumers in those countries have more purchasing power?
3. Why the price of Starbucks in China is more expensive than the other places?
4. Under Porter's generic strategies, whichone is Starbucksfollowing in the Chinese market?
5. Three major reasons for Starbucks' failure in Italy. What kind of strategies can you suggest for Starbucks to win the game back in Italy?
6. Is Starbucks' business success or failure in France?