Institute of Technical Education and Research, An Investigation of Korean Consumers Service Quality Perception of Imported Retail Services: Implications of Consumer Ethnocentrism, Coupons and Oligopolistic Price Discrimination, Balancing Profitability and Customer Welfare in a Supermarket Chain, Profitable springs : the rise, sources, and structure of the bottled water business, Price Discrimination with Private and Imperfect Information, In book: China-Focused Cases (pp.103-118). The Starbucks share price has risen by almost 50% in 2019 with annual revenue growing 8% year on year to $6.82 billion. This is a preview of subscription content. Sending out coupons allows the sellers to separate market segments with different degrees of consumer brand loyalty. Starbucks can’t justify high prices in China Updated: 2013-10-15 09:11 (Chinadaily.com.cn) Starbucks is considered a success story in China, as it was able to convert the traditional tea drinkers of the nation to coffee lovers through its premium offerings. The cheering experience that the customers can have at a Starbucks store founds its great attraction to the community. According to Oberoi & Hales (1990), service is an activity which is produced simultaneously with purchase and the service providers are often present and visible to the consumer. “Top 10 Coffee Chains in the World 2015,” mba skool, Austin Ramzy, “State Media Call Starbucks Too Pricey,”, Wade Shepard, “Why Starbucks in China Is So Expensive,”. You may want to spend an extra minute or two savoring your next cup of joe from Starbucks. Brand Booming in China, In Spite of Economic Woes,”, Jennifer Duggan, “Spilling the Beans on China’s Booming Coffee Culture,”, Elaine Schwartz, “Why China Wants More Coffee,”. Or it could be the new coffee experience. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. Value Based Pricing Can Boost Margins. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. However, Starbucks also faced criticism for its high prices in China. Starbucks pursues premium pricing strategy and its products are generally more expensive compared to the competition. Total No of Starbuck‟s Store in China luxury design of the shop. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. “Starbucks and Fair Prices,” Summer Foundation, November 4, 2013, Hillary Dixler, “Chinese State Media Calls Starbucks Too Expensive,”, Hannah Beech, “China Roasts Starbucks: Foreign Brands Come Under Fire for High Prices,”. “Why Starbucks Is So Expensive in China,” David Wolf, January 31, 2013. For the most part, Starbucks is a master of employing value based pricing to maximize profits, and they use research and customer analysis to formulate targeted price increases that capture the greatest amount consumers are willing to pay without driving them off. But shift your focus to a more upmarket item like a three-piece suit, and sometimes you can move more at a solid … Starbucks has positioned itself as the premium coffee brand in China. Starbucks products are sold at much lower prices in the US than in China, even with tariffs and transportation costs added. Can Starbucks Sustain Its High Prices in China? Of course, price should not be the only key differentiator, and customers won’t buy Starbucks just because of (a high) price. A cup of Starbucks coffee costs about USD 5.03 in the US and about GBP 2.80 in London. Starbucks Corp
has been charging customers in China higher prices than other markets, helping the company realize thick profit margins, a report by the official China … In China, instant coffee is widely sold in China (especially in urban areas). You can request the full-text of this chapter directly from the authors on ResearchGate. However, the pricing strategy attracted criticism from media outlets in China, accusing the coffee giant of profiteering and of discriminating against its Chinese consumers. 217-0098-1 Subject category: Economics, Politics and Business Environment Access this item. Executive Summary China has been an economy on jet cruise ever since it opened doors for international trade during early 1980’s with much of the reforms being linked to the efforts made by Deng Xiaoping, with the help of late premier Zhou En Lai. “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. Starbucks Corp will raise prices for some of its products in mainland China from Jan. 1, a company spokeswoman said on Friday, as surging … With a population of 1.392 billion people in 2018, you can … In January 1999, Starbucks opened its first store in mainland China at the China World Trade Building located in Beijing. “Revenue of Starbucks Worldwide From 2003 to 2015 (in Billion U.S Dollars),” Statista. CNN Business recently observed that “every Starbucks growth strategy is working." store-pricing policy that is constrained to offer consumers at least as much surplus as a uniform chain wide pricing policy still enables the retailer to generate substantial incremental profits. Our cost of setting up the business in China and our cost of doing business in China is actually more than it’s been in many other markets, so that is why we charge more money [1]. Starbucks is considered a success story in China, as it was able to convert the traditional tea drinkers of the nation to coffee lovers through its premium offerings. Chee Leng, “The Power of Branding – Starbucks in China,” On Coffee Makers, “Starbucks Defends Higher Pricing in China,”. Whether sold in parched or polluted regions, where few other sources exist, or water-rich places like Manhattan, bottled water fetched a significant markup over the often identical liquid that flows from the taps, its price rising by a factor of as much as 4.000. While industry profit and overall welfare fall monotonically as price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus. To maintain competition, Starbucks started with a low cost range at few outlets and to cater the customers who couldn’t be attracted by its high prices. It charges 20% higher prices in China compared to other parts of the world. Chinese Want Their Starbucks, No Matter the Price, Welcome to the Middle Class, China: The $5 Cup of Starbucks Has Arrived, Starbucks Is Too Damn Expensive, Says Chinese Media, After Apple, Is Starbucks Chinese State Media’s Next Target?” South China Morning Post, Chinese State Media Calls Starbucks Too Expensive, How a Starbucks Latte Shows China Doesn’t Understand Capitalism, Why Starbucks Succeeds in China and Others Haven’t, KFC Thinks It Can Out-Coffee Starbucks in China, Why Are Chinese Media Outlets Brooding Over What Starbucks Is Brewing?” The Cheat Sheet, Starbucks Caught in China’s Crosshairs Over Posh Prices, Starbucks: More Expensive in China Than Japan or America, Coffee Culture Is Catching on in Tea-Steeped China, Starbucks Approaches Recycling Goal with Systems-Based Approach, The Power of Branding - Starbucks in China,” On Coffee Makers, This paper studies sales promotion through coupons in a duopolistic market. Starbucks products are sold at much lower prices in the US than in China, even with tariffs and transportation costs added. increase in the cost of couponing decreases consumer surplus while the impact on profits and social surplus is ambiguous. “Starbucks Delivers Record Q1 Revenues and EPS,” Starbucks Newsroom, January 21, 2016. Nestle and Starbucks Licensing Deal-A New Brew in the Global Coffee Market: Behavioral Economics and Starbucks` Cup Problem: Can Starbucks Sustain its High Prices in China? pp 103-118 | The premium pricing strategy of the company aimed at improving its brand positioning in the Chinese market, where consumer perception was that higher-price products offered higher quality. CBN Daily reported. “Starbucks Reports Record Second Quarter Fiscal 2012 Results,” Starbucks Newsroom, April 26, 2012, Casey Baseel, “Starbucks: More Expensive in China Than Japan or America, But Why?”, “Starbucks Accusation Causes Controversy,”, Mia De Graaf, “Chinese State-Controlled Media Zeroes in on Starbucks Accusing Coffee Chain of Overcharging When Compared with Shops in London and U.S.,”, “Starbucks Defends High Prices in China,”, Matt Schiavenza, “Why Is Starbucks So Expensive in China?”. The case is about Starbucks’ pricing strategy in China under which the company charged higher prices for its products than in Western countries. Every Starbucks coffee outlet shows a sense of luxury. Rachel Wang, “Starbucks Price Comparison After the CCTV Attack,” Danwei, October 24, 2013, Anya Kamenetz, “Starbucks Is Too Damn Expensive, Says Chinese Media,”, Patrick Boehler, “After Apple, Is Starbucks Chinese State Media’s Next Target?”, “Starbucks Can’t Justify High Prices in China,”, Lu Chen, “In Attack on Starbucks, Chinese Broadcaster Gets Coffee on Face,”. Profit maximization is the process by which a company determines the price and … There are Starbucks (and of course other innumerable cafes) in metropolises like Beijing, Shanghai, Guangzhou, Shenzhen, Xiamen, Hangzhou, and Xi’an, and small coffee houses serving real ground coffee are easy to find in a hot tourist destinations like Guilin, Lijiang, and Yangshuo. Not logged in Starbucks is considered a success story in China as it was able to convert the traditional tea drinkers of the nation to coffee lovers through its premium offerings. Can Starbucks Sustain its High Prices in China? The premium pricing strategy of the company aimed at improving its brand positioning in the Chinese market, where consumer perception was that higher-price products offered higher quality. As of May 2016, the world’s … Both findings seem tied to the fact that in large part, what consumers are really buying and producers selling are convenience, packaging, and – in the market’s small, luxury segment – image. View our pricing guide or login to see prices. This paper investigates the competitive and welfare effects of information accuracy improvements in markets where firms can price discriminate after observing a private and noisy signal about a consumer's brand preference. The case was developed to provide the basis of classroom discussion rather than to illustrate effective or ineffective handling of a management situation. Starbucks defended its pricing strategy in China, saying that its higher prices were attributable to its higher cost of doing business in the country than in other markets. You must be logged in to view this material casecent.re/p/148714. The case was developed by Debapratim Purkayastha, Benudhar Sahu and S. Venkata Seshaiah of ICFAI Business School Hyderabad and Trilochan Tripathy of XLRI Jamshedpur. With margins running between 10 % and 15 %, bottled water was on par with most consumer products, and far less profitable than many luxury goods. For any level of the signal's accuracy, moving from public to private information boosts industry profit and welfare at the expense of consumer surplus. Coffee is not the only cheaper product in the US. Howard Schultz, CEO of Starbucks, saw China as a primary growth market and had ambitious growth plans at a time when there was worldwide anxiety over the country’s sluggish economy and market turmoil. In China, Starbucks raised the price of its products at different times, which attracted public attention and strong media reaction. Starbucks is considered a success story in China as it was able to convert the traditional tea drinkers of the nation to coffee lovers through its premium offerings. Starbucks said its prices reflect higher costs in China for expenses ranging from coffee and milk to rent and supply chain operations. All rights reserved. The firm downgraded Starbucks to neutral from buy, and lowered its price target on Starbucks to $68 from $75. “Our Starbucks Mission Statement,” Starbucks, Anne Marie Mohan, “Starbucks Approaches Recycling Goal with Systems-Based Approach,”. manufacturers’profits were hardly astronomical. International Journal of Industrial Organization. First we measure the impact of the chain's current zone-pricing policy on shelf prices, variable profits and consumer welfare across its stores. © 2008-2020 ResearchGate GmbH. However, the pricing strategy attracted criticism from media outlets in China, accusing the coffee giant of profiteering and of discriminating against its Chinese consumers. Not affiliated Nathan Barlow, “China’s Coffee Industry is Brewing,” China Briefing, October 9, 2013, Shuai Zhang, “1 U.S. An, We investigate the impact of price discrimination by a large Chicago supermarket chain. Starbucks China. Brand values of Starbucks could be as simple as the product (coffee), itself. 3 They accused the company of charging higher prices in China than in other countries. Is Starbucks Sowing the Seeds of Its Own Demise in China? High Starbucks prices are understandably … 149.202.175.42. was very unsatis ed with the high prices of coffee (Kamenetz, 2013). I show that firms charge more to customers they believe have a brand preference for them, and that this price has an inverted-U shaped relationship with the signal's accuracy. Starbucks pricing strategy can be described as a hybrid of premium pricing, geographical pricing, psychological pricing strategies. Starbucks defended its pricing strategy in China, saying that its higher prices were attributable to its higher cost of doing business in the country than in other markets. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. In equilibrium, however, couponing increases competition and reduces profits. Howard Schultz, CEO of Starbucks, saw China as a primary growth market and had ambitious growth plans at a time when there was worldwide anxiety over the country’s sluggish economy and market turmoil. 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. To read the full-text of this research, you can request a copy directly from the authors. The price is justified due to its high end technology and the varieties it offer along with the best customer experience. Starbucks can’t justify high prices in China Updated: 2013-10-15 09:11 ( Chinadaily.com.cn) Print Mail Large Medium Small. This is despite the coffee cups being made in China and sent to the U.S. Starbucks now has 30,600 stores in China and by partnering with Uber Eats and… “Starbucks Reports Record Fourth Quarter and Record Fiscal Year 2015,” Starbucks Newsroom, October 29, 2015, Victoria Sgarro, “Coffee Culture Is Catching on in Tea-Steeped China,”, “Starbucks to Add Thousands of Stores in China,”, Venessa Wong, “KFC Thinks It Can Out-Coffee Starbucks in China,”, Ketti Wilhelm, “China’s Growing Coffee Culture,”, Wade Shepard, “Is Starbucks Sowing the Seeds of Its Own Demise in China?”, © Shanghai Jiao Tong University Press and Springer Nature Singapore Pte Ltd. 2019, https://www.cbsnews.com/news/starbucks-china-open-2500-new-stores-chinese-customers-coffee-culture/, https://doi.org/10.1007/978-981-13-2706-3_6. This kind of price discrimination is profitable for the individual seller when the cost of couponing is sufficiently low. “Starbucks Reports Record Second Quarter Fiscal 2013 Results,” Starbucks Investor Relations, April 25, 2013, Andy Hill, “Starbucks in Hot Water for High Coffee Prices in China,”, Emily Coyle, “Why Are Chinese Media Outlets Brooding Over What Starbucks Is Brewing?”, Michael Schuman, “How a Starbucks Latte Shows China Doesn’t Understand Capitalism,”, Le Li, “Starbucks Caught in China’s Crosshairs Over Posh Prices,”, Shaun Rein, “Why Starbucks Succeeds in China and Others Haven’t,”. In contrast, the price charged after a disloyal signal has been observed falls as the signal's accuracy rises. Similarly surprising given the economics, consumers who preferred vastly more expensive bottled water over tap nonetheless discriminated between brands almost solely on the basis of price. Paradoxically, Starbucks’ high prices may actually be helping the company sell its beverages. Standard instrumental variables techniques used to account for such endogeneity also seem to increase the magnitudes of own-price elasticities thereby offsetting the problem encountered by previous researchers of predicted prices from a demand model exceeding those in the actual data. © 2020 Springer Nature Switzerland AG. China's acceptance of premium coffee may not reach 363 cups annually, however, Starbucks sells premium tea as well. Case Details; Case Intro 1; Case Intro 2; Excerpts <