Godiva Choclates

The Price of Coffee in China

When Starbucks, the Seattle-based coffee shop chain, first entered China, it faced a country of tea-drinkers. Still, Japan too had been a country of tea drinkers but had evolved into a major coffee market. Starbucks itself had recently entered Japan and was already the top-ranked restaurant chain, according to a prestigious industry study. Top management at Starbucks was astounded at the firm’s brand recognition across Asia, an awareness that had come about with virtually no investment in advertising.

In considering China, Starbucks noted that coffee consumption in a country is directly related to income. The firm sought to take advantage of growing disposable income in China, where per-capita income had reached $750 a year. In particular, Starbucks believed there would be substantial demand among young urbanites in China.

Confident in their decision, the firm entered the Chinese market with plans to open ten shops in Beijing in 18 months. The first Starbucks in Beijing was located in a shopping centre across the street from a five-star hotel.

Nevertheless, some were sceptical about the Starbucks move. In the 1990s, coffee sales had grown between 5 and 8 percent a year in China, but when the economy slumped in the late 1990s, many foreign expatriates left the country. Consequently, coffee sales growth had tapered off. However, Starbucks stated strategy was to set prices lower than those of comparable coffee shops already opened in China. These other coffee shops targeted expatriates, tourists, and elite Chinese. Starbucks hoped to target a larger segment of the Chinese society.

Starbucks imported all its coffee beans into China, despite the fact that China was attempting to improve both the quality and the size of its own coffee harvests. Other nations, such as Vietnam had expanded coffee production. This had resulted in a world supply of coffee beans that exceeded demand by 10 percent. Furthermore, a devaluation of Brazil’s...