Can Starbucks Sustain its High Prices in China?
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Case Code: ECON063 Case Length: 13 Pages Period: 2010- 2017 Pub Date: 2017 Teaching Note: Available |
Price: Rs.500 Organization : Starbucks Industry : Beverages, Retail Countries : India Themes: Manegeraial Economics, Competition, Market Structure, Pricing, Consumer Behavior |
Abstract Case Intro 1 Case Intro 2 Excerpts
Introduction
Starbucks Corporation (Starbucks), the world's largest coffee chain by revenues, was considered a success story in China, where it maintained its unique character of serving premium coffee and succeeded in cultivating the demand for high-price brews throughout China. The premium image of Starbucks in China enabled the company to drive up the aspirational status of the brand, which in turn made it an affordable luxury item in China. According to Ye Qiu from Ordos Kangbashi, Western China, "Starbucks got its success because of the quality of coffee it offered and also because it was more expensive than other prices. The fact that Starbucks coffee shops are expensive and luxurious is the very reason it attracts the wealthy in the society." The top management of Starbucks viewed China as a key growth market despite concerns over the country's sluggish economy since 2015.
However, Starbucks also faced criticism for its high prices in China. In September 2013, the coffee chain came under fire from the official Chinese media when it raised prices in its stores in the country. They accused the company of charging higher prices in China than in other countries. Criticizing the pricing strategy of Starbucks in China, China Central Television (CCTV) said, "What in Western countries is an average cup of coffee has in China become a coffee 'luxury product'." The media outlet criticized the coffee chain for squeezing out higher margins out of its operation in China than at its stores in the US. Defending its pricing strategy in China, Starbucks claimed that its higher price was due to the higher costs of doing business in the country than in other markets. For most Starbucks customers, the coffee chain was selling status, lifestyle, and an increasing acceptance of the coffee culture, more than just coffee and they had no qualms about paying extra for its services. "There's also the possibility that the high prices may give the coffee shop more cachet by making it seem like a venue for more affluent customers," Jing Daily reported.
The emerging coffee culture in China and the entry of foreign coffee houses with their competitive price and premium alternatives posed both opportunities and threats for Starbucks. Moreover, analysts were concerned about the coffee chain’s ambitious plan to increase the number of stores in China from 1,900 in early 2016 to 4,400 in 2020 as they feared that Starbucks’ premium brand image in the country might be in jeopardy.
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