Getting More Complicated

If you tell people that the world in general, and the world of business in particular, are becoming more complicated all the time it’s unlikely that anyone will argue with you. Just in our lifetimes – and I’m not really all that old – we’ve seen things like the fall of Soviet Communism, the rise of e-commerce, and the development of a truly global economy, just to name three examples from the last twenty years. There was a time when all an American company needed to do in order to be considered a success was to develop a product (or reverse-engineer an existing one) and then sell it for a better price or with better features and quality for the same price than the competition. Today we have to contend with such diverse problems as the socio-political impact of our success or failure, whether our business is culturally, ethnically, ethically or ecologically sensitive, whether there is any way that our business could be considered a security risk by either Homeland Security or the NSA, and whether the Chinese government has decided to pick on our pricing decisions…

In case you missed it, you can find the original story on the Wall Street Journal site here; they have some good commentary and support information. Apparently, China’s state-run broadcasting network has started airing a 20-minute program attacking Starbucks for allegedly charging higher prices and gaining higher profits in China than they do in other parts of the world. Starbucks has replied that its pricing is based on a variety of factors, such as labor, real estate, and infrastructure in the country in which they are operating. The article doesn’t mention it, but given the company’s usual strategy involves moving large amounts of product from Seattle to wherever their store is, and requires a number of local commodities (notably water) that can be difficult or expensive to obtain in other parts of the world, they may even be telling the truth. What is unusual about the situation is that it’s a national government doing the criticizing, as opposed to the citizens voting with their feet…

Most places in the world that have free-market economies also have limitations on what price you can charge for goods and services – occasionally governmental regulations, but mostly just what customers are willing to pay for that product. You couldn’t get away with charging $500 a cup for coffee in the US – not because that’s illegal, but because no one would pay that. As I’ve observed in earlier posts, there are a few places in the US where you can find specialty coffees going for as much as $10 or $12 a cup, but that’s rare, with $2 to $3 being more common. Some people refuse to pay even that much, considering that they can make their own coffee at home for as little as a few cents a cup. But that’s because in the United States coffee is a staple food item that most people take for granted as part of their regular diet; in China things are a bit different…

Several of my colleagues from China have told me over the years that in their country, Starbucks is a luxury product, and indeed a status symbol. If you are drinking Starbucks in China you are clearly a person of sophistication and taste, not to mention wealthy and powerful enough to be able to afford a cup of coffee that costs as much as some people make in a whole day! The equivalent in our terms might be people spending $200 on a bottle of champagne – it’s an example of conspicuous consumption, if not outright wretched excess, but ultimately no better or worse than squandering your paycheck on any other high-status but non-essential purchase. If people in China are willing to pay those prices for the product then it is difficult to fault the company for charging them, and if people in China were not willing to pay such prices the company would have to lower them until a new price point appeared…

In a free-market economy, the idea of not charging more for a product in a place where people will pay that higher price literally makes no sense – this is why cups of beer that cost less than a quarter are sold for $7 at sporting venues, for example. If Starbucks was offering sub-standard products, or ones that were actively hazardous to their customers then the government would certainly have a point. But unless I’m missing something in the article, all the company is doing here is selling customers a product that they wish to purchase at a price that they are willing to pay. And yet, a national government is still taking them to task over it…

No doubt about it; the world is getting more complicated again…