Starbucks Pricing Strategy Under Attack in China

Where would you expect a Starbucks latte to be cheaper - in a coffee store in downtown New York or in a Starbucks store in China? Keep in mind that per capita incomes in China are around one tenth of those in the United States.
The answer may come as something of a surprise!

In a report on coffee prices that has caused something of a stir across social media platforms, the state-owned broadcaster CCTV reported that a medium-sized latte cost Rmb27 ($4.43) in China compared with Rmb19.98 in Chicago, Rmb14.6 in Mumbai and Rmb24.25 in London.

Starbucks responded that its pricing strategy was based on local market costs, including infrastructure investment, real estate and labour costs. It also added that its Asia-Pacific profit margin was for 14 countries, not just China. They added that each Starbucks market is unique and has different operating costs and that it would be inaccurate to draw conclusions about one market based on the prices in a different market.

The prices of imported goods in China are often raised because of the effects of import taxes (tariffs) - in this case the customs duty on roasted coffee beans is 15%. Add to that a sales tax of 17%.

Background info on Starbucks in China

• Retail sales of coffee in China grew more than 90 percent between 2007 and 2012, hitting 7 billion yuan ($1.15 billion) in 2012
• The China-Asia Pacific region led sales for Starbucks in 2012, and company is considering opening 600 new outlets in the region this year, targeting 1,500 stores in China alone by 2015.

In this blog entry we explain in more detail Starbucks growth strategy in China