Starbucks under media fire in China for high prices

Reuters

By Adam Jourdan

SHANGHAI, Oct 21 (Reuters) - Starbucks Corp hasbeen charging customers in China higher prices than othermarkets, helping the company realize thick profit margins, areport by the official China Central Television (CCTV) said.

The world's largest coffee chain is the latest foreigncompany to come under fire from official Chinese media, whichhas targeted other prominent foreign names like Apple Inc, and comes amid a pricing crackdown by regulators.

The report by CCTV aired on Sunday and said a medium-sizelatte 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 inStarbucks and other Western brands," Wang Zhendong, director ofthe Coffee Association of Shanghai, told CCTV. The report echoeda separate critique by the official China Daily newspaperpublished last week.

Starbucks' pricing strategy in China, which the companyestimates will be its second-biggest market after the UnitedStates by 2014, is tied to local business costs such as labourand commodity costs, infrastructure investment, currency andreal estate, the company said in a statement emailed to Reuters.

"Each Starbucks market is unique and has different operatingcosts, so it would be inaccurate to draw conclusions about onemarket based on the prices in a different market," the companysaid.

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

China has been cracking down on pricing in markets rangingfrom milk powder to drugs, with the high premiums enjoyed byimported goods attracting much of the ire from local watchdoggroups 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 whichsaid it treated Chinese consumers differently to those fromother regions.

COFFEE CULTURE

Retail sales of coffee in China grew more than 90 percentbetween 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-AsiaPacific region top the sales growth table for Starbucks in 2012,and has prompted the company to consider opening 600 new outletsin the region this year, targeting 1,500 stores in China aloneby 2015.

Starbucks had a profit margin of 32 percent in China-AsiaPacific in its second quarter, compared to 21 percent in theAmericas and 2 percent in Europe, Middle East and Africa, saidthe CCTV report.

Analysts said while Chinese consumers were becomingincreasingly price aware, the latest reports were unlikely todull demand for high street coffee in China anytime soon.

"Consumers are increasingly aware of these pricesdifferences...it's become a very hot (topic) and is reallycommon knowledge at this point," said James Button,Shanghai-based senior manager at SmithStreetSolutions. "Butbranded coffee is something people are treating as a luxury andthey are willing to pay for that luxury experience."

China's influential netizens seemed to support Starbucks.

"Those who are saying Starbucks is expensive are probablythose who don't drink much coffee," said user Wang Shuo onChina's Twitter-like microblog Sina Weibo. "The prices arecompetitive and the quality makes people feel safe."

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