Starbucks’s Premium in China: the Coming Domestic Demand Times

The difference in price of Starbucks coffee in China and America has become a topic hotly debated on Sina Weibo. “The price of the middle–cup of Starbucks’s Caffè Americano is equal to 12 yuan in America but 21 yuan in China. Namely, the price is 75% higher than in America.” Some one calls this phenomenon as “Starbucks’s premium in China”.

“Why the same goods or service can be sold at multiple prices?” The research on this phenomenon by economics has become very mature. The explanation is called the “price discrimination”.

The so called “price discrimination” means a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller will charge each customer the maximum price that he or she is willing to pay. As a result, the entire customer surplus will become the seller’s profit. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.

To put it simply, such situation is a tug of war between seller and customer. Both of them fight for the “highest price paid by consumer with willingness”. The seller will approach this highest price as much as possible while consumers want to be far away from this price as much as possible. Each additional cent strived for by seller is his profit while each additional cent strived for by customer is called the “consumer surplus”. This tug of war for “consumer surplus” is also called the “bargaining”. That is to say, the commodity transaction between seller and consumer is the competition for “consumer surplus”.

Then, who is stronger in this tug of war? The more exclusive of the product or service, the more strong monopoly power that seller has; and the more consumer information been known, the more powerful that sellers become. As for Starbucks, it is a typical monopolist in China.

Key reason for Starbucks’s premium in China is that Starbucks’s monopoly power in Chinese market is stronger than that in American market. It is not difficult to understand that Starbucks has a lot of competitors in American coffee consumption market and the Starbucks’s monopoly power is weakened greatly. European cases can explain this point more easily. The coffee consumption, coffee tradition and coffee culture are older and there are more cafes in Europe. Thus, Starbucks cannot be that successful in Europe. However, cases in China are contrary to that in Europe, coffee consumption in China has just begun to grow and is still in the rise phase. Thus, Starbucks’s monopoly power in this market is strong enough to govern the whole market. Starbucks’s premium in China in comparison with Starbucks in America exactly represents the differential of monopoly power.

As for Starbucks’s premium in China, people tend to blame it for high customs duty and circulation expenses. However, this explanation does not indicate the essence for premium nor realize the big picture behind it in China.

Starbucks’s premium in China reflects the Starbucks’s monopoly power at dominant level in Chinese market. As for the source of this kind of dominance, it is generated because of the abrupt rise in coffee consumption market in China from nothing. This high premium reflects the current situation that demand exceeds supply. This means that the Starbucks’s additional monopoly power in China is caused by the prosperous and explosive demand side rather than the opposite case.

Starbucks’s premium in China is exactly the display of domestic demand in China. From the bigger background, the domestic demand times in China is barreling in. “Starbucks’s premium” will appear in succession in various fields.

Originally published on Oriental Morning Post | 2012-11-7