The Secret of Starbucks’ Success in the Chinese

Coffee Market: Pricing and Marketing

Strategies Analysis

Junyou Liu(B)

Division of Undergraduate Studies, Pennsylvania State University, State College, PA, USA
[email protected]

Abstract. As one of the top three beverages in the world, the coffee industry is
maturing. Starbucks started as a small coffee shop in 1971. Today, Starbucks is not
only the largest coffee chain but also conveys an American coffee culture. With the
rapid development of China’s economy, people’s quality of life and consumption
level continues to improve, creating a coffee market with massive potential for
growth. For Starbucks, China has now become its fastest-growing and largest
overseas market. This paper uses a combination of theory and data to analyze
Starbucks’ pricing and marketing strategies in China to demonstrate the lessons
of its success, inspiring the world’s beverage companies.

Keywords: Starbucks · Pricing Analysis · Marketing Strategy · Price

Discrimination

1 Introduction
As a leading global coffee retailer, Starbucks has grown from a small coffee store in
Seattle to a multinational coffee chain with over 32,000 stores worldwide and a market
capitalization of over $100 billion [1]. With the rapid growth of China’s economy, peo-
ple’s quality of life and consumption level continues to improve, giving birth to a coffee
market with enormous potential for expansion.
In 1999, Starbucks opened its first store in Beijing [1]. Facing a traditionally tea-
drinking country, it only took Starbucks several years to successfully establish itself as a
leader in the Chinese coffee industry, achieve high brand awareness, and gain shockingly
huge success in China. To date, Starbucks currently operates more than 5,400 stores in
over 200 cities on the Chinese mainland, employing more than 60,000 partners [1].
Starbucks has become a cultural symbol, loved by the Chinese people, and its symbol
is no longer just a cup of coffee, but a brand and culture. For Starbucks, China has now
become its fastest-growing and largest overseas market.
This paper uses a combination of theory and data to analyze Starbucks’ pricing
and marketing strategies in China and present different strategies that Starbucks used
to successfully gain a seat at the table of the Chinese coffee market with the price
discrimination controversy. The research significance of this paper is to enlighten and
guide Chinese beverage companies as well as foreign beverage companies preparing to
open up the Chinese market.

© The Author(s) 2023

V. Gaikar et al. (Eds.): FMET 2022, AEBMR 664, pp. 571–577, 2023.
https://doi.org/10.2991/978-94-6463-054-1_62
572 J. Liu

2 Starbucks’ “Price Discrimination” Against China

According to Investopedia, price discrimination refers to setting different prices for the
same product to different groups of buyers in order to maximize sales and profits. With
Starbucks’ rapid growth in China in recent years, it has received public praise as well as
many debates [9]. In 2013, China Central Television (CCTV), a Chinese state-controlled
broadcaster, pointed out that Starbucks is suspected of profiteering by selling a cup of
coffee for tens of yuan, and this news has attracted widespread attention and discussion
[3]. According to the research, Starbucks pricing in the Chinese market is indeed more
expensive compared to other countries, but Starbucks’ price discrimination, as a form
of differential pricing, does not violate fair trade principles [2].

3 Factors Affecting Starbucks Pricing in China

3.1 Brand Positioning

When Starbucks first entered the Chinese market, it positioned itself as targeting middle
and high-end customers and tied itself to the “professional elite” image [5]. Starbucks
wanted to reflect the value of its premium brand through its high price. From the per-
spective of city distribution, the Starbucks stores in China show an unbalanced overall
distribution characteristic, with large cities and economically developed coastal areas
becoming its main targets of choice [8].

3.2 Production Cost

Cost is a key factor for a company’s pricing, as it is the lower limit for setting prices.
The composition of the cost of a cup of coffee includes not only coffee beans but also
hidden costs that are typically overlooked, such as renovations, labor, utilities, etc. In
today’s increasingly expensive land prices, especially in the busy commercial areas of
first-tier cities like Beijing and Shanghai, property rents are very high and often account
for a large percentage of costs [10].
Starbucks said that the Chinese market is still in its early stages of development
despite its huge potential [2]. Although the number of stores is increasing, the raw
materials, machinery, and equipment need to be imported in large quantities [2]. David
Wolf, head of public relations dialogue at Starbucks, has said that among the costs,
the real cost in China is logistics and transportation, where tariffs and other costs are
inevitable [2]. Therefore, the high prices of Starbucks in China are also meant to cover
the costs involved.

3.3 Competitive Environment

As the Chinese market continues to open up, the huge potential of the Chinese coffee
consumption market is constantly explored. In 2006, COSTA entered the Chinese coffee
market with its first Shanghai outlet [3]. However, its marketing is out of place and its
product reputation is lacking due to COSTA’s positioning in China has always floated
 The Secret of Starbucks’ Success in the Chinese Coffee Market 573

in the upper echelons. Despite aggressive store expansion, it has never been as good
as Starbucks. Meanwhile, there is competition from brands such as Pacific Coffee and
McCafé, and Starbucks felt threatened but failed to be shaken until the emergence of
Luckin Coffee in 2017 [3].
With the rise of Chinese local coffee brands over the years like Luckin Coffee, not
only have a more youthful and personalized brand positioning, but the price is also
very pro-people [4]. At Starbucks’, the average price for a cup of medium coffee is 28
RMB, corresponding to around 4.30 USD [3]. Compared to Starbucks coffee, the price
advantage of Luckin Coffee is undeniable. It has accumulated numerous young groups
over the years, especially students who do not have much income [4]. For Starbucks, the
competition with local Chinese brands represented by Luckin Coffee has made it lose a
large number of young customers, while an emerging Chinese coffee brand expanding
its stores at an amazing speed is able to bring pressure [8].

3.4 Global Epidemic

Generally speaking, the rising price of coffee beans is one of the unavoidable cost
challenges for all coffee brands. Brazil, the world’s largest producer and exporter of
coffee beans, has seen a large-scale production reduction due to the pandemic. In addition
to Brazil, Vietnam is also closed to domestic management affected by the epidemic, and
the export rate of Vietnamese coffee has also been significantly reduced. As the external
supply of coffee beans has fallen sharply, the price of coffee has naturally risen. The
global epidemic situation fluctuates. Due to the lack of capacity, port congestion, and
labor shortages, the freight, and labor costs of sea transportation have increased, so the
price of raw materials in the entire coffee market has gone up. Instead of incurring further
losses, Starbucks has counted the rising costs on consumers.

4 Starbucks Pricing Strategies in China

4.1 Skimming Pricing Strategy

According to Investopedia, skimming pricing is the practice of setting the price of a

product high at the beginning of its life cycle in order to achieve maximum profit.
Starbucks gained bargaining power in China by using skimming pricing. When it entered
the Chinese market in the early stage, most Chinese people had never drunk coffee. Due
to special social conditions, scarcity became a powerful tool for Starbucks. As an old
Chinese saying goes, things are precious because of their scarcity. Taking advantage of
the dividend of the rapid development of Chinese consumption, Starbucks adopted the
skimming pricing strategy, which enabled the coffee to sell at the highest price in this
country where the coffee culture has not yet formed and continues to this day.

4.2 Prestige Pricing Strategy

According to Oxford Languages, prestige pricing is a method of consciously setting a

high price for a product in order to enhance its status. When Starbucks entered China,
574 J. Liu

it portrayed itself as an “affordable luxury” brand, reflecting its high price level, which
enabled customers to distinguish Starbucks coffee from other generic coffee brands [5].
In other words, what Starbucks sells is not only coffee but also identity. Starbucks tends
to satisfy people’s inner vanity and self-esteem because a good brand makes customers
feel that using the brand represents who they are [5]. People don’t care about whether
the coffee is worth the price, but whether they are happy and satisfied when they hold a
cup of Starbucks coffee.

4.3 Perceived-Value Pricing Strategy

According to The Economic Times, perceived-value pricing refers to the price which
customers are willing to pay for a particular product or service based on their knowledge,
feelings, or understanding of the product. Starbucks’ business philosophy is dedicated
to providing customers with a first-class coffee and consumer experience. Specifically,
Starbucks not only focuses on offering coffee and other beverage options, but also a
variety of delicious pastries, relaxing music, air conditioning, charging sockets, and Wi-
Fi access to add value to the coffee experience. As a result, customers are less sensitive
to price, so the perceived value of the product has been greatly enhanced. That’s why
even though the price of a cup of coffee is so high in China, there are still a lot of
loyal customers who come to consume it. Undoubtedly, the perceived value pricing has
created a huge profit margin for Starbucks.

4.4 Marginal-Cost Pricing Strategy

According to Britannica, marginal-cost pricing is the practice of setting the price of a

product equal to the extra cost of producing an additional unit of output. The common
Starbucks cup types are medium cup, large cup, and extra large cup, with capacity
codes of 354ml, 437ml, and 591ml, and prices of 27 RMB, 30 RMB, and 33 RMB,
respectively [7]. The difference in cost between medium and extra-large cups is only
a partial increase in water, coffee, sugar, and milk [7]. From a cost perspective, these
increases are almost negligible. Starbucks’ biggest costs are fixed costs such as rent,
utilities, and staff management. Therefore, selling a smaller cup of coffee for less money
implies much lower marginal revenue. Starbucks doesn’t want customers to buy cheaper
coffee because it would lower their marginal revenue. That’s why Chinese Starbucks
servers are willing to continuously promote cup upgrades, because as marginal costs
decrease, the more cup upgrades, the higher the profit, the better for Starbucks in terms
of limited space, time, in-store consumers, and other key elements.

5 Starbucks Marketing Strategies in China

5.1 Co-branding Marketing Strategy

As the main beverage of Starbucks, the most important and direct symbol carrier of
coffee is the coffee cup. In order to meet the trend of young people, Starbucks has tried
to cooperate with different brands and resources in different forms without departing
 The Secret of Starbucks’ Success in the Chinese Coffee Market 575

from the core of coffee culture. Since the first set of holiday cups was launched in 1997,
Starbucks has continuously displayed its own creativity on coffee cups every year to
serve every customer [7]. Limited edition themed cups are also launched every year,
such as the Constellation Mug, Cat Paw Mug, Mid-Autumn Rabbit Mug, etc. [7]. In
June 2016, Starbucks cooperated with Jay Chou and Vivienne Tam to launch a co-
branded collection, which integrated Starbucks into the Chinese style [7]. In addition to
collaborating with designers, Starbucks has also partnered with Tingyi to jointly launch
bottled Frappuccinos [7]. Starbucks uses these fancy and creative cups to keep attracting
potential consumers. Starbucks is not only empowered by the high-quality products but
also able to accurately grasp the psychology of consumers and constantly innovate in
common and viable areas. Starbucks’ dominance also demonstrates that, while brands
do an excellent job with their products, paying more attention to how to have more and
better interactions with customers is a critical factor in brand success.

5.2 Digital Marketing Strategy

With the rise of e-commerce in China, Starbucks entered the WeChat platform. Star-
bucks’ corporate development strategy has been focused on digital and social media,
being on the cutting edge of technology. After partnering with Tencent in 2016, Star-
bucks launched the WeChat mini program [6]. Through the applet, users can view the
digital menu, place orders for delivery, and search for the nearest Starbucks stores based
on location, schedule, and event offers [3]. The applet is also connected to Starbucks’
rewards program, so members can access and enjoy their benefits through the WeChat
platform [3]. In 2017, Starbucks launched “Say it with Starbucks”, which is a new social
gifting feature on WeChat [1]. WeChat’s users can visit the “Say it with Starbucks”
section at any time and choose from a wide range of Starbucks gifts to express friend-
ship and love instantly, depending on the target audience or the occasion. These gifts
and wishes will be stored in each other’s WeChat accounts and can be redeemed at any
time in Starbucks stores to enjoy a warm and unique Starbucks experience [6].

5.3 Localization Marketing Strategy

Starbucks has been so successful in the Chinese market because of its continuous inno-
vation and integration in China itself. Starbucks has fully adopted a localized marketing
strategy in the Chinese market. In order to cater to the tastes of Chinese consumers, Star-
bucks has highly localized its beverages and won the approval of Chinese consumers. To
begin with, Starbucks has taken domestic consumer tastes into consideration by offer-
ing a dazzling array of beverage choices and a wide variety of delicious pastries. For
instance, Starbucks has combined the Chinese tea culture to introduce a new style of
Biluochun tea and leveraged the platform of traditional Chinese festivals to push the
envelope, typically with special moon cakes for the Mid-Autumn Festival and Zongzi
for the Dragon Boat Festival [3].
Moreover, Starbucks has incorporated Chinese elements in its store design. Starbucks
opened a Reserve Roastery on Qianmen Street in Beijing, which combined traditional
Chinese culture with modern western fashion [1]. Inside the Qianmen store of Starbucks,
a strong Chinese culture is conveyed, such as traditional and elegant window panes, dark
576 J. Liu

Chinese tables and chairs, antique mugs and postcards, and Starbucks employees wearing
Chinese-style work uniforms. All these fully reflect the ancient Oriental culture of China
and attract many Chinese consumers. It can be seen that Starbucks has made great efforts
to achieve a perfect combination of the western brand and local Chinese culture.

6 Conclusion
Pricing has the power to make or break a business. If done correctly, it can build an empire
like Starbucks. Otherwise, it can haunt a business for life. By taking coffee as the carrier,
differentiation as the basis, and corporate values as the core, Starbucks successfully sells
the best coffee at the highest price and brings substantial competitive advantages and
profit margins to the company. Former Starbucks CEO Howard Schultz said Starbucks’
growth and success are not only because the coffee is good, but also because people trust
in such a consumer brand.
The fact that Starbucks offers products, services, and experiences that meet the needs
of its target group and that consumers recognize its brand values and are willing to pay is
an important reason for its success. In pursuit of profits, companies should never forget
to provide excellent products and services, just like the “We proudly serve” printed
on every Starbucks cup. The study has some limitations. The weakness of this paper
is that although it mentions some strategies used by Starbucks in China, it is still not
comprehensive enough. Future studies can complement and elaborate on the basis of
this study. Furthermore, there is no model to analyze and demonstrate. Future research
can focus on using models to justify.

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