Why Starbucks is so expensive?

India, a vast and diverse nation with a population exceeding 1.3 billion and a GDP surpassing $2.7 trillion, has a unique beverage culture. Unlike many other countries, coffee is not the preferred drink for most Indians; instead, tea holds that distinction.

Euromonitor International’s 2019 report reveals that the per capita consumption of coffee in India was a mere 0.03 kg, significantly lower than figures in the US (4.2 kg) and Brazil (5.5 kg). Furthermore, India’s coffee culture is heavily influenced by South Indian filter coffee, renowned for its robust and milky flavor. This traditional brew differs significantly from the espresso-based drinks offered by Starbucks. With this cultural backdrop, Starbucks, a globally recognized coffee chain, entered the Indian market in 2012 through a joint venture with Tata Consumer Products, resulting in a 50:50 partnership. Presently, Starbucks operates over 300 stores across 36 cities in India.

Despite its widespread acclaim, many Indian consumers express concerns regarding the perceived high cost of Starbucks compared to other available coffee options. For example, a cup of cappuccino at Starbucks is priced at around ₹200 (US$2.7), whereas a similar beverage at a local coffee shop may cost as little as ₹50 (US$0.7).

This blog aims to explore the factors contributing to Starbucks’ perceived high pricing in India. We will delve into the reasons behind it and uncover why Starbucks is considered expensive in this market.

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Why Starbucks is so expensive in India?

Many people have raised questions about why Starbucks is expensive in India. If we compare prices to those in the USA, we find that Starbucks is more expensive in India even after accounting for currency exchange rates. The prices of Starbucks in India are significantly higher than those in the USA.

For example, a tall cappuccino in India costs Rs. 200, which is approximately $2.70, while a tall cappuccino in the USA costs $2.95. This means that a cappuccino in India is about 91% of the price of a cappuccino in the USA, despite the per capita income in India being significantly lower than that of the USA.

Similarly, a tall frappuccino in India costs Rs. 250, which is approximately $3.37, while a tall frappuccino in the USA costs $3.75. This means that a frappuccino in India is about 90% of the price of a frappuccino in the USA, again, despite the income gap between the two countries.

There are several reasons why Starbucks is pricier in India, but a big factor is how it’s perceived. In the USA, Starbucks is mainly seen as a place to get coffee, but in India, it’s more about showing off your status. Having Starbucks coffee suggests you’re doing well financially.

In India, Starbucks is often seen beyond its role as a simple coffee shop; it’s considered a symbol of wealth and social status. The presence of a Starbucks outlet in a neighborhood or city is often seen as a sign of modernity and sophistication. Consequently, visiting Starbucks and purchasing its products can be seen as a way to showcase one’s social status and ability to afford luxury goods.

Starbucks’ branding and marketing strategies in India reinforce this perception. It positions itself as a lifestyle brand catering to discerning customers, offering an upscale atmosphere, stylish decor, and premium pricing. This approach not only justifies the higher prices of its products but also enhances the perceived value and exclusivity associated with the Starbucks brand.

In addition, Starbucks’ aspirational appeal in India plays a significant role in its popularity among urban middle and upper-middle-class consumers. These individuals aspire to emulate Western lifestyles and consumption patterns. For them, consuming Starbucks products goes beyond simply enjoying a cup of coffee; it represents participation in a globalized consumer culture and a statement of identity in a rapidly evolving society.

However, There are various other factors that also impact the pricing of Starbucks items in India, ranging from import expenses to premium positioning. Let’s look to them :

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Factors Affecting Starbucks Coffee Prices

Cost Factors

Starbucks has to incur various costs for sourcing, operating, and expanding its business in India, which are reflected in its prices. Here are the key factors:

Import and sourcing costs

Starbucks relies on global suppliers for its coffee beans, sourced from countries like Colombia, Brazil, Ethiopia, and Indonesia. After roasting and blending in facilities located in the US, China, and Switzerland, the coffee is shipped to India. This process incurs significant transportation, logistics, and customs expenses, which inflate the coffee’s price. Additionally, Indian regulations mandate Starbucks to source at least 30% of its raw materials locally, adding complexities and potential discrepancies in quality and consistency compared to global suppliers.

Real estate and overhead expenses

Operating in prime locations across major Indian cities comes with steep real estate prices. Starbucks must allocate substantial funds for rents, leases, or royalties for its stores, known for their spacious layouts and modern amenities. Moreover, the company shoulders utility, maintenance, security, and other overhead costs, all of which are notably high in India. These expenses are reflected in the prices customers pay.

Taxation and regulatory challenges

Starbucks faces various taxes and duties imposed by the Indian government, including GST, income tax, corporate tax, customs duty, and cess. The rates vary based on the type, quantity, and value of goods and services sold. For instance, coffee is subject to an 18% GST rate, higher than that for tea, which is 5%. Moreover, compliance with food safety, hygiene, labeling, packaging, and licensing regulations adds further complexity and uncertainty, particularly given variations between states and frequent regulatory changes.

Labor costs and wage demands

With a workforce of over 2,000 employees in India, Starbucks prioritizes competitive wages and benefits, along with investments in training, development, and welfare. However, employee expectations for higher salaries, bonuses, incentives, or promotions contribute to the overall labor costs, influencing Starbucks’ pricing strategy in India

Operating Expenses

The operational costs associated with running Starbucks stores in India impact product pricing. This includes expenses such as rent, utilities, maintenance, salaries, and taxes, which fluctuate based on store location, size, and footfall.

Starbucks is also obligated to pay a royalty fee to its US parent company for utilizing its brand name and intellectual property.

Calculated as a percentage of the stores’ sales revenue, this fee, along with profit-sharing with joint venture partner Tata Consumer Products (which owns 50% of the business in India), diminishes Starbucks’ profit margin in India, consequently influencing product pricing.

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Local Market dynamics

In addition to the aforementioned factors, certain local market dynamics play a role in shaping the perception of Starbucks as expensive in India. These dynamics encompass:

Exchange Rates

The pricing of Starbucks products in India is influenced by the exchange rate between the Indian rupee and the US dollar. Given that Starbucks predominantly imports its ingredients and pays royalty fees in US dollars, any fluctuation in currency value can impact the overall cost of products.

For instance, in 2018, a depreciation of about 10% in the Indian rupee against the US dollar led to increased import costs and royalty fees for Starbucks. Consequently, Starbucks found it necessary to raise its prices by 3-5% in India to counteract the currency impact.

Consumer Perception

Another factor contributing to the perception of Starbucks as expensive in India is the consumer belief in foreign brands as premium. Many Indian consumers associate foreign brands with high quality, status, and prestige, and are willing to pay a premium for these perceived attributes.

This perception is further influenced by the popularity of Western coffee culture among the urban and young population in India. Starbucks, viewed as a symbol of modernity, sophistication, and aspiration, attracts consumers who seek the overall experience rather than just the coffee.

While these consumer perceptions generate a demand for Starbucks products in India, they also establish a high pricing expectation for the brand.

Read: How much does swiggy charge from restaurants?

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Competition in the Indian coffee market

Another determinant impacting the pricing of Starbucks products in India is the competitive landscape within the Indian coffee market. Starbucks contends with both local and international coffee chains, including:

Comparison with Other Coffee Shops:

Starbucks encounters substantial competition from indigenous coffee establishments in India. Local coffee shops present a diverse array of coffee options at more budget-friendly prices.

Starbucks faces competition from several key players in India:

1. Costa Coffee: This British coffee chain entered India in 2005 and has expanded to over 100 stores across the country. Positioned as a premium brand, Costa Coffee offers a wide range of beverages and food items, priced similarly to Starbucks. For example, a tall cappuccino at Costa Coffee costs around Rs. 180, comparable to Starbucks’ Rs. 200.
2. Cafe Coffee Day: Originating in India in 1996, Cafe Coffee Day has grown to over 1,700 stores nationwide. Targeting the mass market, Cafe Coffee Day offers a variety of beverages and food items at lower prices than Starbucks. A regular cappuccino at Cafe Coffee Day is priced around Rs. 120, significantly less than Starbucks.
3. Barista: Established in India in 2000, Barista operates over 200 stores in the country. Positioned as a mid-market brand, Barista offers a range of beverages and food items at moderate prices. For example, a regular cappuccino at Barista costs around Rs. 150, slightly below Starbucks’ pricing.

These competitive coffee shops expertly adapt to the diverse tastes and preferences of Indian clients, who frequently enjoy robust and sweet coffee. They also serve a variety of snacks and culinary products, including samosas, sandwiches, and cakes, in addition to their coffee.
These small coffee businesses have built a devoted client base thanks to their cost, convenience, and familiarity, attracting customers who prefer their offerings to Starbucks’.

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Positioning against Other International Chains

Starbucks faces competition from other international coffee chains operating in India, including Costa Coffee, Dunkin’ Donuts, and McCafe. These chains provide a diverse range of coffee products along with food and beverages, all at competitive prices.

Each international chain adopts distinct positioning strategies in the Indian market, emphasizing aspects such as value, convenience, or innovation. For example, Costa Coffee positions itself with a lower price point compared to Starbucks, while Dunkin’ Donuts distinguishes itself with an extensive selection of food options like burgers, pizzas, and donuts.

McCafe, on the other hand, offers a drive-through service for the convenience of customers on the go. The presence of these international chains poses a potential threat to Starbucks, as they have the capacity to attract customers seeking alternatives to the Starbucks experience.

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Strategies for cost-conscious consumers

Despite the perception of Starbucks being costly in India, there are practical strategies for budget-conscious consumers to relish their coffee without exceeding their budget. These include:

Loyalty Programs and Discounts:

Consumers can economize on Starbucks products by enrolling in the Starbucks rewards program, which extends an array of benefits and discounts to its members.

This program allows customers to accumulate stars with each purchase, redeemable for complimentary drinks, food items, and merchandise. Additionally, members receive personalized offers, birthday rewards, and complimentary refills.

Seasonal promotions and periodic offers, encompassing festive discounts, happy hours, buy-one-get-one-free deals, and limited-edition products, further present opportunities for consumers to access discounts and enhance the value of their purchases at Starbucks.

Alternative Ordering Options:

Another avenue for consumers to manage the cost of Starbucks products involves selecting simpler and smaller menu items. Opting for plain coffee or tea instead of pricier flavored or blended beverages, as well as choosing smaller sizes like short or tall over larger options such as grande or venti, proves to be a cost-effective strategy.

This not only saves money but also reduces calorie intake, providing consumers with alternative ordering options that align with their preferences.

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Conclusion

Starbucks coffee prices are influenced by a multitude of factors, reflecting the complex interplay between global market dynamics, operational considerations, branding strategies, and local consumer preferences. The sourcing and pricing of coffee beans, coupled with operational expenses and brand positioning, play a significant role in determining the final retail price of Starbucks products. Additionally, factors such as product differentiation, seasonal promotions, economic conditions, supply chain costs, consumer demand, and competitive pressures further shape Starbucks’ pricing decisions. By carefully balancing these factors, Starbucks aims to maintain its position as a leading premium coffee brand while remaining responsive to evolving market conditions and consumer expectations. Ultimately, understanding the intricate interconnections among these factors is essential for Starbucks to effectively navigate the complexities of the coffee industry and sustain its success in the global marketplace.

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