Starbucks Prices: Tempest In A Coffee Pot

Starbucks under scrutiny for high coffee prices

Chinese media are finally discovering something that I’ve know all along, namely that Starbucks (Nasdaq: SBUX) coffee here is ridiculously overpriced. Some might say a new investigative report from national broadcaster CCTV could be cause for alarm for Starbucks, as previous similar reports have spelled headaches for other big foreign names like Apple (Nasdaq: AAPL), KFC (NYSE: YUM) and McDonalds (NYSE: MCD). But in this case, I’m actually quite encouraged to see the story is actually sparking some healthy and relatively well-informed debate about free markets and the premiums that “luxury” brands should be able to charge for their products.

Obviously it’s still a bit early to say how this new controversy involving a major western firm will evolve, and I’m sure that executives at Starbucks are watching the situation carefully. It’s still possible that other Chinese media could start criticizing Starbucks for overcharging for its coffee and other products, perhaps creating a backlash among Chinese consumers. But I suspect this new crisis will have little or no effect on Starbuck’s booming China business, and perhaps could even boost its appeal as a relatively affordable high-end brand for Chinese consumers.

All that said, let’s look at the content of the actual CCTV report that aired on Sunday. That report doesn’t accuse Starbucks of any wrongdoing, but instead highlights the fact that the chain charges higher prices for its coffee in China than in many other global markets. It said a medium sized latte at a Beijing store sells for 27 yuan ($4.43), or one-third more than a comparable product in Chicago. (English article) The same cup of coffee costs just 14.6 yuan in Mumbai, and 24 yuan in London.

Perhaps I should move to Mumbai so I can save half the money that I currently pay for my overpriced Starbucks coffee! But on a more serious note, the flurry of reports that I’ve seen on this topic following the original CCTV report do seem a bit more balanced than some of the previous assaults on companies like Apple. For starters, CCTV itself does point out that Starbucks has done nothing wrong, but simply wants to ask why Chinese consumers are being asked to pay a bigger premium than their peers in many other markets.

Starbucks has responded with its own carefully worded statement, saying that prices depend on a wide range of factors, and that it’s still investing big money to build up its business in China. The company said late last year it plans to more than double its store count in China to 1,500 by 2015, and has also previously launched a series of initiatives to develop the local coffee growing culture in southwestern Yunnan province. (previous post)

But all those factors aside, at the end of the day Starbucks, as a private company in a highly competitive sector, should be allowed to charge whatever it wants for its products. That’s how market economics works. One commentary I saw noted that Starbucks doesn’t operate in a monopoly industry, unlike many of China’s big state-owned firms that operate in highly protected environments. Instead, it faces competition from a wide range of competitors, both domestic and foreign, and has also had to convince this tea-drinking culture to pay big money for foreign-oriented coffee products.

As I’ve said several times already, I personally think that Starbucks coffee is quite overpriced in China, even though I regularly drink it myself. But that fact aside, I do have to commend the company for spending lots of time, effort and money to create a product that Chinese are willing to pay such a big premium for. Some of the voices in the latest discussion have pointed out this fact, and say that Starbucks is simply now reaping the rewards of its big investment. I would agree with that view, and suspect Starbucks will weather this current controversy relatively unscathed and could even polish its brand if it handles the situation well.

Bottom line: Starbucks is likely to weather the current controversy about its high prices with little or no negative effect, and could even end up with a more premium brand image.

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