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KNCCO discloses the result of the analysis of Starbucks’ price hike |
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#701 Seoul YWCA 20, Myeong-dong 11-gil, Jung-gu, Seoul, Korea
TEL.: 82-2-774-4050/FAX: 82-2-774-4090
KNCCO discloses the result of the analysis of Starbucks’ price hike
-Starbucks posted a 6.7% increase in its operating profit margin in 2013,
which was higher than that of the preceding year.
-In 2013, the price of Arabica coffee beans fell 10.4% in comparison to 2012.
– No proper reason for price hike.
-A continuative coffee price hike as occurred in 2012 should not be allowed.
On July 16, Starbucks Coffee Korea (“Starbucks”) raised the prices of 23 items sold by it by 100-200 won. The average price increase was approximately 2.1 % (i.e., from 3,900 to 4,100 won for an Americano [Tall]; from 4,400 to 4,600 won for a Café Latte). We at the Price Monitoring Center of KNCCO (President: Lee Deok-seung) would like to point out the following issues with Starbucks price hikes.
Starbucks pointed to a rise in building rent, labor expenses, facility management, and raw materials as the reason for its price hike, but we did not find these reasons to be persuasive at all. The average price of Arabica coffee beans stood at 4,179 won/kg in the first half of this year, which was an increase of 3,280 won from the corresponding period of last year. However, when Starbucks raised its prices, the price of Arabica coffee beans was a 10.4% decreased from 2012, and a 12.8% decreased from 2010. Starbucks posted an increase in its operating profit margin both in 2012 (6.3%) and in 2013 (6.7%), while its sales cost ratio fell from 45.6% in 2012 to 44.5% in 2013.
The alleged rise in building rent, which the business pointed to as a reason for its price hike, appears to be a flimsy excuse. Starbucks financial statements for 2013 show a rise in building rent by 16.2 billion won from the preceding year, but we found that this was due to an increase in the number of stores. The ratio of rent against sales dropped instead of increasing during the same period, which was due to an increase in sales by 91.2 billion won. The statistics provided by the Ministry of Land, Infrastructure and Transport (MOLIT) also show that building rent fell in this said period.
Recently, Starbucks raised prices twice in less than five years (i.e., in January 2010 and May 2012). Its average operating profit margin stood at a 7.5% level over the past four years and it is thought that the price hike this time is an attempt to maintain that level. Starbucks price hike in May 2012 resulted in a similar step by Coffee Bean, A Twosome Place, HOLLYS Coffee, and Angel in Us in July, August, September, and October of the same year. We are concerned that a similar thing may happen this time with the Starbucks price hike. We also suspect that the price hike was set in place in the summer, which is the high season for soft drinks, to avoid consumers’ resistance.
Many consumers think that coffee prices in this country are way too high. If prices being raised is inevitable, then coffee businesses should explain their reason for doing so more persuasively so that consumers will be able to understand why such a decision has been made.
Table 1. Starbucks Korea – Income-profit analysis
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Sales and general administrative expenses2)
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Notes: 1) Sales cost includes the cost of raw materials, labor expenses, building rent, depreciation costs, administrative expenses, utility expenses, etc.
2) Sales and general administrative expenses include labor expenses, building rent, depreciation costs, sales promotion expenses, utility expenses, consumable expenses, repair expenses, traveling expenses, intangible asset depreciation costs, education/training expenses, etc.
-----------------------------Partners of Korea National Council of Consumer Organizations------------------------------
National YMCA of Korea, Green Consumers Network in Korea, Korea Federation of Housewives Clubs, National Council of Homemakers Classes, Korea Consumer Education Center, National Council of YMCAs of Korea, Consumers Union of Korea, Consumer Affairs Institute, Citizens Alliance for Consumer Protection of Korea
Average Arabica coffee bean prices per kg: 4,793 won (=$4.14) in 2010, 6,514 won (=$5.88) in 2011, 4,666 won (=$4.14) in 2012, 3,280 won (=$2.99) in 2013, and 4,179 won (=$3.99) in the first half of 2014. (Source: International Coffee Organization [ICO]; Seoul Money Brokerage Services, Ltd.)
The number of Starbucks stores: 327 in 2010, 394 in 2011, 477 in 2012, 599 in 2013 (Source: Newsone, Dated 5/29/2014)
Trend in rents for store buildings (in Seoul; thousand won/㎡; based on the first floor; each quarter): 56.2, 57.1, 60.1, 60.0 in 2010; 60.3, 60.9, 61.4, 61.9 in 2011; 64.2, 64.7, 65.6, 65.9 in 2012; 58.9, 59.6, 59.3, 59.9 in 2013; 59.7 in 2014
“Coffee bean prices fell by more than half, but Starbucks prices remain fixed.” (Chosun Biz. Dated 9/2/2013)
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