Starbucks chief defends China coffee prices

FT - Barney Jopson - 22/10/2103

The Starbucks executive who oversees its China business has defended the chain against local criticism over its coffee prices, but said the public relations storm did not require him to take an urgent trip to China from his US base.

John Culver, a group president, told the Financial Times: “I have regular plans to visit China as part of my day-to-day business. This issue right now does not warrant me spending a special trip going to China.”

Mr Culver, who is based in Starbucks’ home town of Seattle, said the price of a Starbucks café latte in China was close to and in some cases lower than the prices of its competitors, and that its profitability in China was no higher than in the US.

Following criticism of Starbucks in Chinese newspapers, CCTV, the state broadcaster, reported that a medium-sized latte cost Rmb27 ($4.43) in China compared with Rmb19.98 in Chicago, Rmb14.6 in Mumbai and Rmb24.25 in London.

It also noted that Starbucks, which will soon open its 1,000th store in China, appeared to have much fatter margins there.

Foreign companies from Apple to Nestlé have faced pressure in China from state media and regulators to cut their prices or improve their customer service in recent months. Given China’s increasing importance to them, most have been quick to address the concerns.

Mr Culver also oversees new brands and distribution channels for Starbucks worldwide. Asked if he expected the criticism to be a prelude to official action against Starbucks, he said: “We have ongoing relationships with the government and we want to make sure that we are very respectful of them and that we have a very open and honest, and again, a very factual dialogue.”

He declined to comment on whether Starbucks had already had conversations with government officials on coffee pricing.

Asked if Starbucks was willing to reduce its prices, he did not give a direct answer, but said Starbucks felt it had “the right economic model” and had won the loyalty of customers, while stressing that it would respect “local laws and customs”.

Starbucks likes to be seen as a good corporate citizen and the Chinese criticism recalled a furore last year over tax in the UK, where Starbucks caved into public pressure and volunteered to pay more tax even though the law did not require it.

A Starbucks spokesman said the two situations were “completely different”. It was “apples to oranges,” he said.

Below Mr Culver in the Starbucks hierarchy is Jeff Hansberry, president of China and Asia Pacific, who is based in Hong Kong. Reporting to him is Belinda Wong, president of Starbucks China, who is based in Shanghai.

Seeking to scotch a “misnomer” that China was a relatively low-cost place to do business for Starbucks, Mr Culver said that at store level its investment and labour costs, including staff training, “approach the levels of what we see in the US”.

He said that in the past year Starbucks had invested $100m in the country.

“The bottom line operating margin in China is in fact not any higher than what we see in the US,” he said.

He would not provide a number because Starbucks does not report on individual countries publicly. Even so, during the UK tax controversy, in a failed attempt to neutralise criticism, it revealed it had made losses for many years in the UK