Why a grande latte costs $1 more in China: Starbucks

Coffee is more than a drink- it’s like fashion and a reflection of one’s social status ( at least in China). To get some interviews for the story, I stalked people at Starbucks over a cup of tea. I’m a stalker.

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Why a grande latte costs $1 more in China: Starbucks

Swilling a Starbucks grande latte will cost you more than a dollar more in China than in the U.S. despite lower wage costs in China, but the president of Starbucks’ China division told CNBC the higher cost was justified.

A grande latte in China will set you back roughly 30 Chinese renminbi ($4.92), while in the U.S. the same coffee costs approximately $1 less, a price differential that has provoked controversy considering that China’s per capita income at $7,200, is around five and half times less that the American equivalent.

“When you look at our pricing structure, we look at it market by market. It’s based on our true cost of running our business in China and or any market that we operate,” John Culver, group president at Starbucks Coffee China and Asia Pacific, told CNBC Asia’s “Squawk Box” on Monday.

Culver said the firm has invested nearly $100 million in China over the past year on store designs, back-end infrastructure, supply chain integration and opening the Starbucks China University.

“[When] you compare us to the competition, for instance, our pricing is at parity and in some cases lower than our competitors,” he said.

“From our standpoint we are priced competitively it does reflect our cost of operating in the market,” he added.

Regardless of any pricing complaints, Starbucks’ operations in China appear to be thriving, as the conglomerate plans to employee another 8,000 employees (or partners as Starbucks refers to them) in the coming fiscal year, expanding its 20,000 strong workforce there.

The firm has 1,100 stores in the country. If plans to open another 750 in China and the Asia Pacific region this fiscal year come to fruition, China will surpass Canada as Starbucks’ second largest market, after the U.S.

32- year old Linda Long, who works in Beijing told CNBC, she did not consider the price of Starbucks expensive compared to other brands such as Costa Coffee.

“Their prices are pretty much the same. Maybe one might be one kuai [renminbi] more expensive but it’s not a big deal. I’m not bothered by the Starbucks price, most prices are the same,” she said. Culver told CNBC China represented the biggest and fastest growth opportunity the company had in front of it.

“Fifteen years ago when we entered the Chinese market what we had coming in to our stores were a lot of tourists and expats, and what we’ve seen… is that as we’ve grown our footprint, the Chinese consumer is making Starbucks part of their daily ritual,” he added.

But a worrying headache for Culver will be the price of arabica coffee – the bean used by Starbucks and most other coffee retailers – which has sky rocketed in recent months rising 69 percent from a four-year low of around $1 per pound in November to trade at $1.7635 a pound on Monday.

A punishing drought in Brazil, which produces a third of the world’s coffee, has been the main factor behind the spike, which has also impacted sugar prices. Significant production losses in Brazil could cause the arabica supply to fall short of demand.

Culver told CNBC Starbucks he was well prepared for the price hike, however.”On the commodities issue, they do continue to move around, but we’ve taken long-term position… and we do think we’re in a good position to weather the storm,” he said.

This isn’t the first time coffee prices have seen a dramatic spike. In 2011, Arabica futures spiked to $2.82 per pound, causing pain for coffee brewers.

Starbucks incurred $200 million in additional costs in 2011 and again in 2012, as a result of the elevated prices. It was able to offset most of the increased costs through cost cutting, The Motley Fool reported. Starbucks buys more than 500 million pounds of coffee beans each year.

http://www.cnbc.com/2014/02/24/why-a-grande-latte-costs-1-more-in-china-starbucks.html

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