Imagine walking into Starbucks and discovering that your grande latte cost $27. You'd probably think that the world's coffee supply had suddenly vanished. Or that you'd traveled by time machine many decades into the future.
These inflated prices gives you a pretty good idea of the relative cost (adjusted to per capita income) of what a Chinese person pays for the drink. China's per capita income, at about $7,200, is around five and a half times less than the American figure. Yet at a Starbucks in Beijing, a grande latte goes for about $4.80—or a dollar more than what it costs in the United States. A simple beverage of espresso and steamed milk is pretty damned expensive in China.
Considering this, it's a small miracle that Starbucks is still in business there at all. But in fact, the Seattle-based caffeine empire's China operations are thriving. Last December, Bloomberg reported that Starbucks plans to double its China workforce by 2015, adding hundreds of new stores in cities across the country in the process. The company even expects China to become its second largest market—behind just the United States—by this time.
In fairness, per capita income is a crude way to measure the buying power of Starbucks' actual customer base: The majority of its stores are located in China's large, coastal cities, where most people earn a lot more than the nationwide per capita average. Nevertheless, it's striking that in a developing country, one lacking an indigenous coffee-drinking culture, so many people are willing to pay a premium for Starbucks products. Logically, wouldn't it make sense for Starbucks to drop its prices a little in order to attract even more customers?
The problem with this idea is pretty simple—operating a Starbucks store in China is expensive. For a country where labor is cheap—Starbucks baristas in Beijing make much less than their American counterparts—this may seem counterintuitive. But labor is just one component that goes into making a grande latte, as this Wall Street Journal infographic shows:
What's expensive are the logistics. 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. The problem is getting these materials from point A to point B. "Transporting coffee beans from, say, Colombia to the port of Tianjin is about the same as transporting them from Colombia to the port of Los Angeles," says David Wolf, a public relations professional and expert in Chinese business. "It's getting them from the port in Tianjin to the store in Beijing that's expensive." China has invested billions of dollars over the years to improve its port and transportation infrastructure, but the combination of taxes, fees, and middle-men add to logistics costs—which are then passed on to customers in the form of marked-up frappuccinos and lattes.
So if Starbucks is so expensive in China, why do so many people go there? Most cities in the country have coffee shops that provide a roughly similar cup of coffee—and similarly comfortable atmosphere—at much lower prices. How does Starbucks make it work?
One major issue is culture. Since the Chinese economy opened up to import products in the late 1970s, these goods acquired a certain cachet with image-conscious consumers. "Traditionally foreign products were regarded as better-made, higher-status, and simply nicer," Fei Wang, a Washington, DC-based consultant who grew up in Wuhan, told me. "A person's social standing was defined by the objects they own." Far from acting as a deterrent, high prices actually enticed customers who wanted to show off their new affluence; put another way, purchasing a good like a cup of coffee at a premium was a good way to obtain "face" in business or personal relationships. And Starbucks had the good fortune of entering the country at a time when coffee drinking became fashionable among hip, young Chinese consumers.
There are signs, however, that Chinese preferences for high-priced, imported goods may be waning. With the rise of e-commerce—and more frequent foreign travel—Chinese consumers have begun to feel that they're paying too much for simple pleasures like a cup of coffee. "After living in America for awhile I was shocked at how expensive Starbucks was when I went back to China," says Wang. This trend appears to be happening across other industries, too: A disgruntled shopper told the Wall Street Journal's Laurie Burkitt that it simply wasn't "worth shopping in China anymore."
Could the Starbucks allure fade in China, as the country's once-non-existent coffee shop market matures? Probably not anytime soon. The company has proven adept at adding local touches in its Chinese stores, such as green tea flavored coffee drinks and collectible mugs, and has shown a flexibility that has eluded other foreign companies hoping to capitalize on the market. Eventually, though, Chinese customers may decide that a latte is just a latte—and the no-name place down the street is more than good enough.