How a Starbucks Latte Shows China Doesn’t Understand Capitalism

Criticism of the prices charged Chinese consumers by international companies is an unseemly interference in the free market

  • Share
  • Read Later
ChinaFotoPress / Getty Images

People line up to buy coffee during a Starbucks Coffee shop opening ceremony on Mar. 1, 2013 in Taiyuan, China

It will come as no surprise that some Chinese believe Starbucks coffee is a bit too expensive. After all, we do pay a pretty penny for a cup of water and milk. But are Starbucks’ prices something bordering on criminal? Chinese state media seems to think so. In a series of attacks, the press has accused Starbucks of overcharging Chinese with “outrageous” prices compared to those paid by consumers in the U.S. and elsewhere.

The coffee-shop chain, however, is only the latest victim of an apparent campaign aimed at forcing down the prices of foreign goods in China. The government is investigating the price tags on foreign automobiles, while in August several foreign companies were fined for supposedly selling their milk powder at unfairly high prices. Nestle and Danone pledged to slash their prices amid the enquiry.

What gives? We can only speculate as to the government’s intentions. Perhaps officials are trying to uncover real infractions, or what they think are real infractions. Or perhaps the campaign is an attempt to beat back foreign brands and give China’s own companies a leg up in the local market.

Foreign brands are favored by Chinese consumers in many industries, since there is a perception they are of higher quality. In milk powder, for instance, foreign labels have had a huge advantage ever since local brands were tainted by a 2008 scandal in which they sickened children with milk contaminated by a chemical. Perhaps the government is irritated that foreign firms are making some juicy profits off Chinese consumers.

(MORE: China Roasts Starbucks — Foreign Brands Come Under Fire For High Prices)

Take the case of pharmaceutical giant GSK. Here there was some wrongdoing afoot. Amid an official investigation into alleged bribery by its staff, GSK admitted to breaching Chinese laws even though such practices seem to be widespread in the healthcare industry. Still, the government also let slip one of its other concerns — the prices GSK charged for its drugs. GSK “damaged markets by engaging in bribery to raise drug prices, expand sales and reap inappropriate profits,” the Ministry of Public Security said in a July statement. The company promised to reduce its prices in response to the investigation.

Whatever the reasons behind the pricing campaign, it is clear is that Chinese officials and journalists have little understanding of how corporations and markets actually work. There are lots of reasons why companies charge what they charge in different markets around the world. In explaining Starbucks prices in China, CEO Howard Schultz said that “our cost structure in doing business in China and the investments we’ve made to build that business … gave us the position where we had to charge a little bit more than in our other market[s].”

Companies may charge higher prices because they have an edge in know-how or technology and thus are able to produce a superior product. Foreign-branded cars, for instance, often have bigger price tags in China, but they also have a clear record of better quality than local marques. Companies may also charge more for their wares because they possess serious brand power and want to position that brand at a certain place in the market.

The bottom line is this: Companies will price their products based on what the consumer is willing to pay. That’s nothing illicit. It’s simple supply and demand. If Starbucks lattes were truly overpriced in China, the Chinese wouldn’t be buying as many of them, and the American firm would not have been able to build a successful network of over 1,000 shops in the country.

If foreign companies are engaged in illegal practices, then they should be stopped. But meddling in the pricing decisions of independent private companies is another thing altogether. China’s leaders persistently promise to make the Chinese economy more market-oriented, liberalized and fair. Premier Li Keqiang recently committed the government to “steadfastly pursuing reform and opening-up with priority given to the stimulation of the market.” Interfering with the prices private firms charge Chinese consumers suggests that China’s officials believe that they should make economic decisions, not free markets.

MORE: China Got Into Bed With The U.S. Treasury and Can’t Get Out

34 comments
GurusViews
GurusViews

"Nestle and Danone pledged to slash their prices amid the enquiry" 


To me that appears like Nestle and Danone were actually charging really high in China. No sane company will reduce prices to a loss. They will reduce prices and settle with lower "PROFIT".

Assume Nestle making 30% net profit....and now will reduce cost and settle for 20% net profit. 

Austingalster
Austingalster

If a Chinese company does the same in America they are instantly bombarded with accusations. But American companies can do what they wish in other countries without complying to local laws in respective countries. Wasn't Bhopal gas leak caused by American company?

Channah
Channah

I will not pay he price for a cup of coffee at Starbucks.  It is ridiculous.  Then, too, I do not like flavored coffees.  I want plain ole good tasting coffee.  I was stuck going to a Starbucks once and asked for plain coffee-no flavors.  They had to make it for me and then charged what they do for one of their fancy mancy cups.  This cup of coffee was not good-entirely too strong.

OliverL
OliverL

"Or perhaps the campaign is an attempt to beat back foreign brands, and give China's own companies a leg up in the Local Market"

Is he really suggesting that the government lowering the price of Starbucks will help local brands? More people will buy the cheaper Starbucks  - Starbucks profit margins and maybe even total profit will go down, but that won't help the local brands.  Mean while, the government is, in effect, advertising in their newspapers that Starbucks is now cheaper.

Am I missing something?

InfinitySpace
InfinitySpace

It is monopoly rent. Starbucks have much more resources than their Chinese competitors, so they either buy local competitors, or out compete them for being "cool", which is hollywood propaganda( AKA: modern advertising). 

JonathanS.Levitt
JonathanS.Levitt

What about Haagen_Dazs for years they have positioned themselves as the Chanel of Ice cream, yet very few Chinese know its just a regular store brand, with no European chic background to it at all.

MoFreedom
MoFreedom

Under communism, the means of production are owned in common, & its fruits are supposed fairly divided.Under Fascism, the means of production are privately owned but tightly regulated to serve public needs & purposes.So, however you slice it, there's only miniscule difference between the two.Regardless of whether the people supposedly own the means of production, or whether people hold bare legal title to property dedicated to public purposes, the results are virtually indistinguishable.

 Under communism, the fruits of production are to be fairly divided. That's where government comes in. It controls & makes all those decisions.And you can imagine the differences of opinion among people over that.Under Fascism, government controls businesses to serve the public needs.Well, what are the best interests of the people?And you can imagine the differences of opinion over that.

So, under either system, and regardless of who owns the means of production, the government's calling all the shots.

 

MoFreedom
MoFreedom

Sorry Michael, 

America doesn't get capitalism. 

We haven't had anything resembling "capitalism," since Cal Coolidge was in office. Since then, we've drifted towards a combination of economic facism & "crony capitalism" whereby big business, big labor, big education, etc., partner with government to get protections, perks, & rewards, while crumbs are thrown to the poor in order to make them think the systems are working.

A smaller, leaner government wouldn't be as large of a milking cow or tool to gain competitive advantage.

“One of the reasons why I’m in favor of less government is because when you have more government, business takes it over.”Milton Friedman

btt1943
btt1943

China may not fully understand capitalism. However, apparently its economy works, at least for many years more. 

Capitalism in the socialist context could be the savior of current deprecating global economy.     (boontee)

KirkW
KirkW

Michael there is one important background you are not covering with this article: journalism for cash. Recently China has opened up private media business while restructuring a few state media outlets to run more like businesses (in other words, no more free hand outs from the govt.). This has caused Chinese media to be more aggressive on finding revenue sources, including implicit solicitation for money from businesses. Remember the attack earlier on Apple? It was largely orchestrated by the media themselves because Apple is not paying up, unlike say Samsung and Nokia who pay substantial "media relations fee" to keep themselves clean. Similarly, there are many other luxury foreign coffee shop brands in China, but they are not picked due to paying cash on time. Apparently, both Apple and Starbucks are very confident companies that they don't wanna pay up for this kind of things, and these Chinese media people just decides to give them a lesson. This is not much of a cultural/political story as outsider seem to believe (it's China, so it's gotta be political!), I have to point out.  

TimFuller
TimFuller

Somebody call Starbucks and find out how much they pay their help in those China locations.  That would be impressive journalism.  Too bad we don't have a worldwide network of communications that would allow such information to be quickly and easily procured.  Enjoy.

TimFuller
TimFuller

Starbucks actually costs MORE in China?  WTFFF?  If people in China can afford Starbucks it just shows that they aren't really being taxed as heavily as the rest of the world has been led to believe.  Enjoy.

clapsong
clapsong

The thing is that Starbucks in China is the same as perfume, cosmetics and other imported products, here it's considered as a luxury, so they're paying more for this. Almost everything here what is imported has a crazy price, like a 3 bucks for a one kg Australian oatmeal... it is crazy, I think it has to do with their attitude to imported stuff.

nicole_xi
nicole_xi

There is one solution for this.  Starbucks  must fold its business in China.  All the loses will be recoup by Starbucks once the company brings sues the Government of China in the USA for unfair trade.  The lawsuit will be an easy win for Starbucks and China will pay for damages.  The US government can freeze the income generated from the US treasury bills bought by the Government of China..


nicole_xi
nicole_xi

There is one solution for this.  Starbucks  must fold its business in China.  All the loses will be recoup by Starbucks once the company brings sues the Government of China in the USA for unfair trade.  The lawsuit will be an easy win for Starbucks and China will pay for damages.  The US government can freeze the income generated from the US treasury bills bought by the Government of China.

del2009loc
del2009loc

I don't think it has anything to do with capitalism. Buying a Starbucks tall latte in Shanghai will cost you about 40 CNY, about 6.5 dollars. Buying the same tall latte in Chicago only costs you 3.5 dollars. Not mentioning Starbucks in China has relatively low operational cost (Chinese standard employee salary, etc). I think Chinese state media actually has a point this time. This is simple way too greedy.

Capitalism != ridiculous overpriced items

prastagus
prastagus

THe whole thing about the Chinese media pointing this out is to heighten Chinese star buck goers nationalism against it. Capitalism also includes people's / customer's attitude toward products in which media plays a big part of it. Whether it will work depend on the acception of the Chinese people of the media point of view or star buck's or their own.

RedBeardedWonder
RedBeardedWonder

Anyone else think some of these comments might be paid trolls?

TLW
TLW

you can tell the Chinese government's comment campaign is in full swing, trying to pretend to be Americans to save face.

@databaseben.usa and @fivedavidng  are both Chinese. Notice how they call starbucks "starbuck" and "star buck". 

databaseben.usa
databaseben.usa

starbuck saying that chinese do not know capitalism is like the pot calling the kettle black.  greed, gouging and profiteering are traits found in virtually all business's world wide.

if anything the chinese are worried that starbucks will be their new heroin that will once again turn their citizens into addicts.

besides the world knows that china is the place to make a fortune.  so if all the chinese citizens become addicted to starbucks, starbucks will make more money in one year doing business in china, than in the past 10 years here in the u.s.


fivedavidng
fivedavidng

This article shows that Starbucks Doesn’t Understand China.

Starbucks is trying to impose their way of doing business onto its host country.

This is not a good guest behavior!



fivedavidng
fivedavidng

Star Buck has a load of advertising money, from wall street, to convince Chinese to buy their coffee compare to local mom and pop store. Local mom and pop store don’t have access to wall street money to compete in terms of fighting for customers.This is unfair.This article didn't mention this and this doesn't seem fair and balanced.

Advertising's goal is to make consumer buy things that they don't need and make them spend more money than they have. US Companies are the master at miss leading customers with without lying by withholding information with really really small prints!

Sarah81472840
Sarah81472840

  <!--Start working at home with Google! It’s by-far the best job I’ve had. Last Wednesday I got a brand new BMW since getting a check for $6474. I began this 8-months ago and immediately was bringing home at least $77 per hour. I work through this link,...................................Buzz55.ℂℴm-->

aten
aten

yeah, that's pretty upset to live in china. you had a less salary and more expensive consume.

amjgunn
amjgunn

@Channah

Lel.

Yes Starbucks isn't the cheapest. A medium coffee costs about $2.20 here in Canada, while I'll pay $1.90 at timmies or at my university cafeteria. Is the taste worth the 30 cents? Not really, but it's not so outrageously more expensive that I complain when I go there. I don't know what planet you live on, but $2.20 isn't the $5.00 I'd pay for a mocha or a latte. 

They generally have three roasts, you probably got a light roast and didn't add cream, thus it was strong. Do you even drink coffee?

Channah
Channah

@JonathanS.Levitt The best Ice Cream (I think) is Kroger's Vividly Vanilla with no sugar added.  I must try one of their favored ones sometimes.  But, the vanilla is so good-------------.

clapsong
clapsong

Especially if you're foreigner who wants to buy cheese :D

DeweySayenoff
DeweySayenoff

Being a coffee snob doesn't mean you know what someone else likes.  The worst coffee I've ever had was from Starbucks.  So with regard to Channah's post, I can definitely relate.  Some people don't want to add crap to their coffee.  And Starbucks is all about crap in coffee.  So your snobbish attitude about "adding cream" is entirely off base.  

Apparently, you've never heard of having one's coffee black.

Starbucks can't do that well at all.  It doesn't help when the coffee starts out as crap to begin with.

del2009loc
del2009loc

@nstaley401 @del2009loc Fortunately, I don't drink coffee very much. It's just interesting to me that how Chinese media are repeatedly emphasizing on price difference but U.S. media are just not mentioning price at all. I think this is an interesting example how modern media outlet shapes our opinion. Even it's the same news, different media coverage and word choice can make it sound so different.