Starbucks under media fire in China for high prices

Starbucks under media fire in China for high prices

3:20am EDT

By Adam Jourdan

SHANGHAI (Reuters) – Starbucks Corp (SBUX.O: Quote,Profile, Research, Stock Buzz) has been charging customers in China higher prices than other markets, helping the company realize thick profit margins, a report by the official China Central Television (CCTV) said. The world’s largest coffee chain is the latest foreign company to come under fire from official Chinese media, which has targeted other prominent foreign names like Apple Inc (AAPL.O: Quote, Profile, Research, Stock Buzz), and comes amid a pricing crackdown by regulators.The report by CCTV aired on Sunday and said a medium-size latte at the U.S. coffee house in Beijing costs 27 yuan ($4.43), or one-third more than at a Chicago store in the United States.

“Starbucks has been able to enjoy high prices in China, mainly because of the blind faith of local consumers in Starbucks and other Western brands,” Wang Zhendong, director of the Coffee Association of Shanghai, told CCTV. The report echoed a separate critique by the official China Daily newspaper published last week.

Starbucks’ pricing strategy in China, which the company estimates will be its second-biggest market after the United States by 2014, is tied to local business costs such as labor and commodity costs, infrastructure investment, currency and real estate, the company said in a statement emailed to Reuters.

“Each Starbucks market is unique and has different operating costs, so it would be inaccurate to draw conclusions about one market based on the prices in a different market,” the company said.

Imported products often cost more in China because of high import duties and tax rates. Roasted coffee beans, for example, draw an import duty of 15 percent and a sales tax of an additional 17 percent, according to DutyCalculator.com.

China has been cracking down on pricing in markets ranging from milk powder to drugs, with the high premiums enjoyed by imported goods attracting much of the ire from local watchdog groups and media.

Apple has also come under fire in China for high prices, while the U.S. firm was stung in a media expose last year which said it treated Chinese consumers differently to those from other regions.

COFFEE CULTURE

Retail sales of coffee in China grew more than 90 percent between 2007 and 2012, hitting 7 billion yuan ($1.15 billion) last year, according to data from Euromonitor.

The rise of China’s cafe culture helped the China-Asia Pacific region top the sales growth table for Starbucks in 2012, and has prompted the company to consider opening 600 new outlets in the region this year, targeting 1,500 stores in China alone by 2015.

Starbucks had a profit margin of 32 percent in China-Asia Pacific in its second quarter, compared to 21 percent in the Americas and 2 percent in Europe, Middle East and Africa, said the CCTV report.

Analysts said while Chinese consumers were becoming increasingly price aware, the latest reports were unlikely to dull demand for high street coffee in China anytime soon.

“Consumers are increasingly aware of these prices differences…it’s become a very hot (topic) and is really common knowledge at this point,” said James Button, Shanghai-based senior manager at SmithStreetSolutions. “But branded coffee is something people are treating as a luxury and they are willing to pay for that luxury experience.”

China’s influential netizens seemed to support Starbucks.

“Those who are saying Starbucks is expensive are probably those who don’t drink much coffee,” said user Wang Shuo on China’s Twitter-like microblog Sina Weibo. “The prices are competitive and the quality makes people feel safe.”