Starbucks and Price Discrimination

According to the “Coffee Business Statistics Report” generated by the E-Imports, averagely every American consumes 3.1 cups of coffee each day. To fulfill the high demand for coffee, more and more coffee stores are opening and operating. The popularity of coffee gives coffee franchises opportunity to grow and flourish. Starbucks is one of them that origin from Seattle and extends its domain across the world.

After realizing that there is a fast growing market in China, Starbucks decides to head toward China in 1999. The success of Starbucks is prominent by today – there are about 730 stores in business. However, some consumers are confused when they discover there is a price difference on coffee between Chinese Starbucks and American Starbucks. The difference is as large as 75%. The wholesale price for coffee beans has dropped more than one third in 2012, but the prices of Starbucks beverage still continue to rise. It seems like Starbucks is setting the price of coffee base on consumer’s value instead of the cost of good sold. Since Starbucks is positioned as an upscale in China, Chinese consumers are willing to pay a higher price. The coffee becomes a conspicuous consumption good and thus revenue of Chinese Starbucks continues to increase.

There are also other reasons that boost up the price. Unlike North American franchises, since the coffee culture is still developing in China, most of Starbucks franchises are located in commercial centers and tourist sights. The expensive rent, along with labour cost, taxation, and other miscellaneous expenses add a heavy burden to Starbucks shoulder. To maximize its profit, Starbucks has to shift the burden to Chinese consumers.

The difference in value proposition and cost of expenses create geographic price discrimination. However, one concern rises. If other existed or new franchises also enter the Chinese market, can Starbucks continue to enjoy its superiority in market power or will the price discrimination eventually settle?

References:

http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20121109000093&cid=1202

http://blogs.wsj.com/chinarealtime/2012/02/01/starbucks-price-increase-stirs-chinas-netizens/

http://www.e-importz.com/Support/specialty_coffee.htm