China takes on Starbucks, biting a hand that feeds it, analysts say

The price of a Starbucks latte is at the center of a new dispute in China's highly publicized anti-corruption campaign, and analysts say its resolution could affect crucial international investment.

On Sunday, national television station China Central Television (CCTV) aired a hidden-camera expose that claimed Starbucks earns larger profits in China than at its stores in the United States. A grande — or medium — latte costs $4.43 in China, a third more than in Chicago, CCTV reported.

But on Monday, as it seemed Beijing was rearing to take the U.S. coffee giant to task for hustling Chinese consumers, state news agency Xinhua gave Starbucks the floor. The coffee company reported that while the latte is more expensive in China than in the U.S., not all Starbucks products are more expensive in China. He added that the cost of operating in China is also higher than in other markets.

"The price of our Starbucks latte, the centerpiece of some of the initial coverage, is more expensive than in the U.S., but the prices of other products than the latte are comparable or in some cases even lower than our competitors'," Starbucks spokesman Jim Olson told Al Jazeera.

And he said that although in 2014, "China will be the biggest market (for Starbucks) outside of the U.S.," profit margins there are "not as high as they are in the U.S." because of high operational costs.

Because Chinese customers, unlike their American counterparts, often consume Starbucks food and beverages in the stores, Starbucks spends a significant amount on store location and design, Olson said.

Analysts say there are other costs associated with doing business in China.

"Foreign enterprises in China are going to be subject to a wide variety of fees that domestic Chinese companies may not have to deal with," said Arthur Dong, a business professor at George Washington University specializing in trade with China.

Importing coffee beans, since China is not a producer, and likely milk, given China's food-safety scares in recent years, may also drive up Starbucks' costs.

Dong explained that China has levied high taxes on a number of imported goods that have been deemed not essential to the Chinese economy and that Beijing sees as competitors to domestic products. Dairy goods — like the ones that find their way into China's Starbucks drinks — have been hit with huge taxes in recent years, in what is likely a measure to protect Chinese dairy farmers.

But many argue that as economic policymakers aim to shift the Chinese economy away from a production-intensive model to a consumer model, taxes on foreign goods are hampering consumption — which represents a starkly low percentage of China's national income. 

The seemingly incorrect CCTV report on Starbucks' high profit margins in China comes amid Beijing's sweeping anti-corruption campaign, which has targeted international companies like Western pharmaceutical giants AstraZeneca and GlaxoSmithKline — in what several analysts say have also been gestures to spur confidence in domestic industry. 

"For some industries in which some state-owned companies face competition from foreign firms, targeting the latter can be viewed as a form of protectionism," said Kevin Tsui, a business professor at Hong Kong Polytechnic University. He said that there is debate over whether China is trying to protect its interests but that it's hard to see why Starbucks, for example, might seem like a threat to China.

"In the case of Starbucks, I'm not aware of any large local coffee chain stores, so it's unclear to me what's going on."

Nevertheless, Dong said Beijing's media establishment may be driving away investment amid an economic rebalancing act that demands global investment.

China is "heavily reliant on FDI," foreign direct investment, he said. "Anything that detracts from that as (China makes) a transition into a consumption-based economy will take a toll. (FDI is) one of the things they must rely on in the interim, and they must make sure it is continued at a sustained rate."

Posturing against international companies like Starbucks "discourages foreign companies from making investments. Every Starbucks store goes into China's calculation of FDI. I don't think the central government wants to discourage that."

Starbucks opened its 1,000th store in China last week and, according to Olson, is expected to open 500 more within the next year.

For the time being, Starbucks doesn't look as if it will address Beijing or the CCTV report in any way that Dong indicated would hurt its growing business interests in the People's Republic.  

"We're continuing to invest and grow that market," Olson said.