China: Storm In A Coffee Cup

Howard schultz chinaChina PhotosHoward Schultz attends a Chinese Starbucks opening in 2006.

The furore over Starbucks prices is the latest in a series of setbacks for foreign firms in China. The difference this time has been in how the chain has reacted to the criticism.

China Central Television (CCTV) recently broadcast a 22-minute “special investigation” into why a medium latte at Starbucks in Beijing costs Rmb27 (US$4.43), one-third more than in Chicago. The investigation linked high prices to the company’s “fierce” profit margins in Asia and to Chinese customers “blind faith” in foreign brands at any price. It also cited an old Chinese phrase to describe the relationship: “one is willing to hit, the other to be hurt”, in reference to an episode from the historical epic tale “The Three Kingdoms”, in which one character is publicly flogged by his ally to fool enemies into believing his subsequent feigned defection.

Savvier consumers

The comparatively high price of Starbucks in China has, for years, been targeted by the media, but this was the first time the issue made national television. In fact, the current round of Starbucks-bashing (dubbed “fierce-gate” since the CCTV airing) originated in a September story on the Chinese website of the Wall Street Journal. The story found that internet use and foreign travel is increasing price awareness among consumers, and that many items are pricier in China than elsewhere. Aside from Starbucks, data cited from SmithStreet, a Chinese consulting firm, compared the prices of 500 items across 50 clothing brands and found them, on average, to be priced 70% higher in China than the US. Despite this, the CCTV report was ridiculed by the foreign media as nationalist posturing by a state-controlled network.

Starbucks China’s head office in Shanghai was understandably dismissive when approached by CCTV journalists. And, in what it claims was an inadvertent move, Starbuck’s official page on Chinese microblogging platform Weibo the next day featured a picture that was interpreted by many followers as a veiled censor-evading insult directed at CCTV. Starbucks denied any such intention. Whether it was an act of defiance or the innocent result of neglect is hard for authorities to determine, just as China’s critics may never know if the media attack on Starbucks originated from within government.

Public apologies

Acquiring a grande latte is hardly a burning issue in China and a visit to the ubiquitous Taiwanese chain 85°C would yield a take-away version for less than one-half of the Starbucks price (Rmb13). Starbucks are also not breaking any rules in setting a high price for their coffee, and consumers have plenty of choices elsewhere. In fact the phrase “one is willing to hit, the other to be hurt” may be more suitable to illustrate China’s recent relationship with a number of foreign brands who have taken a public flogging, whether justified or not.

In April, Apple CEO Tim Cook apologised and changed Apple’s warranty terms in China after a CCTV campaign reported that broken iPhone claims were handled differently in China than elsewhere. In July, Danone and Nestle cut baby formula prices by as much as 20%, after the official People’s Daily newspaper claimed that regulators had evidence of price-fixing. Adverse publicity over food scares this year has also significantly impacted Yum, owner of the KFC brand and a New Zealand-based dairy giant, Fonterra. Most recently, a Korean electronics giant, Samsung, sent “deep apologies for causing inconvenience to its customers” after CCTV claimed that it had been selling faulty smartphones in China, despite no confirmation of the alleged faults.

Foreign critics have pointed out that the national media increasingly resembles a consumer advocacy body. This seemed to be supported when Li Yi, a consultant to the Ministry of Information wrote on Weibo that CCTV’s priority should be to “protect domestic consumers from the bullying of foreign brands” and that “at the same time, domestic products also should get stronger”. Whether this is a change in tack for the channel or whether targeting foreign companies makes good television, CCTV is clearly willing participate.

A defiant stance?

Unlike other firms, Starbucks CEO Howard Schultz has been unwilling to bow to media pressure. Rather than issuing a grovelling apology, he publicly defended prices by blaming higher costs and investment in the Chinese market. This has been refreshing for some observers and, in the short term, has proven productive. The brand has been basking in a newfound popularity since the broadcast. “Starbucks coffee price investigation” became the second most popular topic trending on Weibo, with users questioning the broadcaster’s motive for covering something as trivial as the price of a coffee.

However, taking on the Chinese media, and authorities, is a difficult battle to win. The lower price of competing chains makes “higher costs” difficult to defend. There is a brand cachet attached to western firms, but rising awareness is pushing consumers to realise that Starbucks is hardly a luxury brand. This, combined with media antagonism, could generate consumer hostility and harm Starbucks’ image, and revenue, in China.

These are potentially troubling times for foreign firms in China. Periods when regulatory scrutiny intensifies are not uncommon in China. In fact, it may be tough to find foreign firms that haven’t been on the receiving end of price, safety or hygiene scandals at some point. But over the last few months scrutiny has been more sustained, led by consumers and the media, as well as regulators. In addition, domestic firms are growing in confidence. A recent tie-in between China Resources and Tesco, for example, gives the world’s fourth-largest retailer a stake of just 20% in the venture. Meanwhile, the likes of Bright Foods and Shuanghui are making significant acquisitions abroad. This comes against a backdrop of rising consumer awareness and a mooted slowdown, driven partly by crackdowns on corruption and gift giving that have exposed potential frailties among foreign-owned luxury brands.

Other firms have been swift to apologise because they see long-term opportunity in China, and do not wish to harm this by raising ire among those in power. Starbucks may need to tread carefully in an environment where the media is difficult to distinguish from the regulators, and where consumers are becoming more informed and price conscious. In fact, Mr Schultz may eventually end up adopting the approach taken by other foreign firms, of issuing an apology, whether warranted or not, to bring the matter to a swift conclusion.

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