Starbucks takes heat for higher prices in China

Starbucks, the world's largest coffee chain, is the latest foreign company to come under fire from official Chinese media, which have targeted other prominent foreign names like Apple Inc(AAPL.O), and it comes amid a pricing crackdown by regulators.

CCTV, in a report that aired on Sunday, said a medium-size latte at the U.S. coffee house in Beijing costs 27 yuan ($4.43), or one-third more than at a Starbucks in Chicago.

"Starbucks has been able to enjoy high prices in China, mainly because of the blind faith of local consumers in Starbucks and other Western brands," Wang Zhendong, director of the Coffee Association of Shanghai, told CCTV. The report echoed a critique by the official China Daily newspaper published last week.

Starbucks said its prices reflect higher costs in China, for expenses ranging from coffee and milk to rent and supply chain operations.

"It is true that a Starbucks latte is more expensive in China than in the United States," John Culver, president of Starbucks' China and Asia Pacific region, told Reuters.

He said Starbucks' pricing in China is competitive and that margins from its roughly 1,000 China cafes are not greater than margins on U.S. sales.

Higher food costs, coupled with significant investments for items such as training employees and securing ample and safe locally sourced ingredients means that "our bottom line operating margin is not any higher than what it is in the United States," Culver said.

Starbucks, which estimates that China will be its second-biggest market after the United States by 2014, does not break out operating margins by country, though it does break out margins on a regional basis.

In its fiscal third quarter ended June 30, Starbucks' most recent results, the company had an operating profit margin of 36.2 percent in the China-Asia Pacific region; 22.3 percent in the Americas; and 3.2 percent in Europe, the Middle East and Africa.

Starbucks cafes in China tend to be much larger than in the United States because most Chinese customers tend to linger, while 80 percent of U.S. customers take their orders to go, Culver said.

"Our stores are crowded and they need to be bigger," he said.

Imported products often cost more in China because of high import duties and tax rates. Roasted coffee beans, for example, draw an import duty of 15 percent and a sales tax of an additional 17 percent, according to DutyCalculator.com.

China has been cracking down on pricing in markets ranging from milk powder to drugs, with the high premiums enjoyed by imported goods attracting much of the ire from local watchdog groups and media.

Apple has also come under criticism in China for high prices, and the company was stung in a media report last year that said it treated Chinese consumers differently from those from other regions.

COFFEE CULTURE

Retail sales of coffee in China grew more than 90 percent between 2007 and 2012, hitting 7 billion yuan ($1.15 billion) last year, according to data from Euromonitor.

The China-Asia Pacific region led sales for Starbucks in 2012, and company is considering opening 600 new outlets in the region this year, targeting 1,500 stores in China alone by 2015.

Analysts said while Chinese consumers were becoming increasingly price aware, the latest reports were unlikely to dull demand for high street coffee in China anytime soon.

"Consumers are increasingly aware of these prices differences. It's become a very hot (topic) and is really common knowledge at this point," said James Button, Shanghai-based senior manager at SmithStreetSolutions. "But branded coffee is something people are treating as a luxury and they are willing to pay for that luxury experience."

China's influential netizens seemed to support Starbucks.

"Those who are saying Starbucks is expensive are probably those who don't drink much coffee," said user Wang Shuo on China's Twitter-like microblog Sina Weibo. "The prices are competitive and the quality makes people feel safe."

($1 = 6.0968 Chinese yuan)