Starbucks is considered a success story in China, as it was able to convert the traditional tea drinkers of the nation to … was very unsatis ed with the high prices of coffee (Kamenetz, 2013). The coffee beans Starbucks brews in its Beijing stores, as well as other materials like cups and mugs, don't cost any more to import in China than in the United States. In contrast, the price charged after a disloyal signal has been observed falls as the signal's accuracy rises. With margins running between 10 % and 15 %, bottled water was on par with most consumer products, and far less profitable than many luxury goods. “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?”. To read the full-text of this research, you can request a copy directly from the authors. History. Shuai Zhang.1 U.S. Starbucks has been leveraging its consumer loyalty and lack of elasticity among its consumers by continuously passing on increases in costs, due to wages and coffee prices, to its customers. Paradoxically, Starbucks’ high prices may actually be helping the company sell its beverages. To ensure our pricing problem exhibits a well-defined optimum, we use the parsimonious, mixed-logit demand function that allows for flexible substitution patterns across brands and also retains a link to consumer theory. Premium pricing strategy holds that sometimes a higher price conveys an image of higher quality or status to the buyer. While industry profit and overall welfare fall monotonically as price discrimination is based on increasingly more accurate information, the reverse happens to consumer surplus. You can request the full-text of this chapter directly from the authors on ResearchGate. Starbucks Corp will raise prices for some of its products in mainland China from Jan. 1, a company spokeswoman said on Friday, as surging … 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 cheering experience that the customers can have at a Starbucks store founds its great attraction to the community. All rights reserved. Chee Leng, “The Power of Branding – Starbucks in China,” On Coffee Makers, “Starbucks Defends Higher Pricing in China,”. CBN Daily reported. “China’s Not So Hidden Inflation,” RS Bullion, Massoud Hayoun, “China Takes on Starbucks, Biting a Hand That Feeds It, Analysts Say,”, “Chart: The Extra-Caffeinated Cost of a Starbucks Latte in China,”, “Starbucks Raises Coffee Prices in China Stores,”, Gina Smith, “Chinese Want Their Starbucks, No Matter the Price,”, Lauren Alix Brown, “Welcome to the Middle Class, China: The $5 Cup of Starbucks Has Arrived,”, “CCTV: Chinese Pay Higher Price for Starbucks Coffee,”. Brand Booming in China, In Spite of Economic Woes[N/OL]. CNN Business recently observed that “every Starbucks growth strategy is working." 217-0098-1 Subject category: Economics, Politics and Business Environment Access this item. Value Based Pricing Can Boost Margins. “Starbucks EPS Jumps 28% to a Q3 Record $0.55 Per Share,” Starbucks Newsroom, July 25, 2013. Over 10 million scientific documents at your fingertips. 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]. 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). 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. In equilibrium, however, couponing increases competition and reduces profits. Every Starbucks coffee outlet shows a sense of luxury. — Howard Schultz, CEO of Starbucks, in 2013. Nathan Barlow, “China’s Coffee Industry is Brewing,” China Briefing, October 9, 2013, Shuai Zhang, “1 U.S. The core global café business has grown 6%. Starbucks China. Or it could be Starbucks’ success at making its stores the “third living place,” after home and office. Can Starbucks Sustain its High Prices in China? 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 … 1999 1st Starbucks Store In January 1999, Starbucks entered the mainland China market by opening the 1st store in the China World Trade Building, Beijing. Brand values of Starbucks could be as simple as the product (coffee), itself. As of May 2016, the world’s … 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? Not affiliated Despite Starbucks’ increasing footprint in China, it failed to attract the average Chinese consumer who could not afford it because of its high price. The global coffeehouse chain just raised the price … “Starbucks Opens Store on Alibaba’s Marketplace Tmall,” Economy, December 22, 2015. Is Starbucks Sowing the Seeds of Its Own Demise in China? However, with competition growing in the market, can Starbucks sustain its high prices in China? The Starbucks share price has risen by almost 50% in 2019 with annual revenue growing 8% year on year to $6.82 billion. In September 2013, the coffee chain came under fire from the official Chinese media when it raised prices in its stores in the country. 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. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. Serving high quality coffee to satisfy a rapidly growing interest, our goal is to share the Starbucks Experience with Chinese consumers, one cup, one person and one neighborhood at a time. 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. First we measure the impact of the chain's current zone-pricing policy on shelf prices, variable profits and consumer welfare across its stores. This is a preview of subscription content. It charges 20% higher prices in China compared to other parts of the world. The model is also extended to a public information setting. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. © 2008-2020 ResearchGate GmbH. 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. View our pricing guide or login to see prices. 3 They accused the company of charging higher prices in China than in other countries. 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. “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,, The case was developed by Debapratim Purkayastha, Benudhar Sahu and S. Venkata Seshaiah of ICFAI Business School Hyderabad and Trilochan Tripathy of XLRI Jamshedpur. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. This case is about Starbucks’ pricing strategy in China, under which the company charged higher prices for its products than in Western countries. Cite as. manufacturers’profits were hardly astronomical. Starbucks products are sold at much lower prices in the US than in China, even with tariffs and transportation costs added. This case was the Nominated Case Award winner of 2016 Global Contest for the Best China-Focused Cases. 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,”. 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. The case was developed to provide the basis of classroom discussion rather than to illustrate effective or ineffective handling of a management situation. But shift your focus to a more upmarket item like a three-piece suit, and sometimes you can move more at a solid … 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. increase in the cost of couponing decreases consumer surplus while the impact on profits and social surplus is ambiguous. Case -Reference no. 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 ( The case is about Starbucks' pricing strategy in China under which the company charged higher prices for its products than in Western countries. We discuss the issue of price endogeneity when estimating the demand parameters with weekly store-level data. Starbucks has positioned itself as the premium coffee brand in China. But equity analyst, John Zolidis isn’t concerned about Starbucks competition in China. Not logged in “Revenue of Starbucks Worldwide From 2003 to 2015 (in Billion U.S Dollars),” Statista. An, We investigate the impact of price discrimination by a large Chicago supermarket chain. 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. This is despite the coffee cups being made in China and sent to the U.S. “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 pursues premium pricing strategy and its products are generally more expensive compared to the competition. In China, Starbucks raised the price of its products at different times, which attracted public attention and strong media reaction. Starbucks now has 30,600 stores in China and by partnering with Uber Eats and… Sending out coupons allows the sellers to separate market segments with different degrees of consumer brand loyalty. With a population of 1.392 billion people in 2018, you can … 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. 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. pp 103-118 | Ruchi Gupta, “Starbucks Corporation (NASDAQ: SBUX) Might Be Digging Its Own Grave in China,”. This kind of price discrimination is profitable for the individual seller when the cost of couponing is sufficiently low. However, with competition growing in the market, can Starbucks sustain its high prices in China? Using the chain's database to simulate a finer store-specific micro-pricing policy, we study the implications of this policy on profits and welfare. 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 pricing strategy can be described as a hybrid of premium pricing, geographical pricing, psychological pricing strategies. International Journal of Industrial Organization. A cup of Starbucks coffee costs about USD 5.03 in the US and about GBP 2.80 in London. The case is about Starbucks’ pricing strategy in China under which the company charged higher prices for its products than in Western countries. © 2020 Springer Nature Switzerland AG. The firm downgraded Starbucks to neutral from buy, and lowered its price target on Starbucks to $68 from $75. Case Details; Case Intro 1; Case Intro 2; Excerpts <