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
Excerpts
Starbucks in China
Starbucks forayed into the Asian market in 1996 when the company opened its first branch outside of North America in Tokyo, Japan. China, being a nation of predominantly tea lovers, Starbucks’ subsequent foray into China was done with the objective of converting the 1.3 billion tea drinkers in the country into coffee lovers through its premium offerings. China was far from the world’s biggest coffee market as the average Chinese consumed only 4 cups of coffee annually compared to Americans who consumed an estimated 441 cups annually. However, China’s young, fast-growing middle class felt the traditional tea houses of China had failed to keep pace with modern life and culture. Moreover, the tea culture of the country lacked a “third place” outside of home and work for the people to spend their leisure time. . .
Adapting to Chinese Culture
Starbucks entered the Chinese Mainland with the marketing approach of lifestyle branding wherein the brand was sensitive to the cultural differences of the Chinese market. Realizing the long-standing value of Chinese culture and tradition, Starbucks worked to enhance the customer’s experience by integrating local customs in store designs and offering local food and drinks among...
An Expensive Taste
In China, coffee was considered a premium product and with its high price, it targeted affluent consumers. Unlike the Western lifestyle that treated coffee as a daily essential, the Chinese consumers viewed it as a new social trend and considered Starbucks more like a restaurant rather than a coffee lounge...
Higher Price Criticized
Despite Starbucks’ increasing footprint in China, it failed to attract the average Chinese consumer who could not afford it because of its high price. In China, Starbucks raised the price of its products at different times, which attracted public attention and strong media reaction. On January 31, 2012, the coffee giant raised the price of some products in its 500 Chinese Mainland stores by 1 to 2 yuan (US$0.15 to US$0.31), the first price hike for its China stores after five years (the company had made its previous price adjustment in 2007). The price hike was almost the same as in the US stores owing to the rising cost of raw materials, labor, and logistics in China. As a result, the consumer had to pay 30 yuan (US$4.62) instead of 28 yuan (US$4.31) for a 16-ounce Grande Latte while the prices of hot chocolate, fresh-brewed coffee, and espresso drinks increased by 1 to 3 yuan (US$0.15 to US$0.46) in China. In November 2012...
Defending Price Hike
In the face of the massive media attack, Culver was apprehensive about achieving the projected growth of 30,000 cafés in the region within two years (2013-14) in China. The company feared that it could become the next major foreign company to be targeted by the Chinese state media. Earlier in 2013, the Chinese state media had launched an aggressive campaign against foreign companies like Apple Inc. (Apple) and Wal-Mart Stores, Inc. (Wal-Mart) for their higher prices and alleged inferior customer services and goods in China...
Is it Sustainable?
Euromonitor International said while China’s small fraction of 4.5 billion cups of coffee drunk per year lagged behind that of North America’s 133.9 billion as of 2016, Chinese coffee consumption would grow 18% annually, significantly outpacing the US growth of 0.9% by 2019....
Exhibits
Exhibit I: Top 10 Coffee Chains in the World
Exhibit II: Starbucks' Key Financials
Exhibit III: Number of Starbucks Stores in China (2005-2015)
Exhibit IV: Region-wise Starbucks Store Status
Exhibit V: Expensive Foreign Products in China vs. U.S
Exhibit VI: Breakdown of Starbucks Grande Latte Price in China
Exhibit VII: Price Comparison of Coffee Chains in China (Prices in Yuan)
Exhibit VIII: Forecast Change in Cups per Capita Consumption (2014-2019)
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