Monday, August 07, 2006

Who Really Profits from Starbucks

Originally uploaded by Drambuie_man.

Looking back on my post on "anti-import bias" I realize I gave short shrift to one line in the article:

According to Internet debate communities, the term was created amid debate over Starbucks coffee in Korea that is relatively more expensive than other countries.

Is Starbucks coffee in Korea more expensive in than in other countries? Thankfully the work is already done. In 2004 the Economist did a survey of the price of Starbucks coffee with the US price being the basis of an index (ie "0"). As you can see in the attached photo, in South Korea the price is about 6% more than the states, nowhere near as expensive as Europe, or even local markets like Hong Kong and Japan.

As noted in my previous post Starbucks coffee is taxed a 8% coming into the country. If roasted coffee was imported at the same tariff as green coffee the tariff would only be 2%. And conveniently the difference between the two is 6%, exactly the difference in price from the US. It's the same mercantilist tendencies that gave rise to the article that gives any credence to the argument that Starbucks is more expensive than other countries.

What are the other components of a cup of Starbucks? Well surprisingly very little may be given to the US branch. A Chosun report earlier this year estimates Starbucks receives about 200 won (20 cents) a cup. (In all fairness the article also says the US branck gets a bit more due to the business structure with their partner Shinsagae, but that is not directly tied to the price of the coffee).

Perhaps the people who are really making out in the deal are the building owners. This Korea Times article talks about how building owners with a Starbucks are raising their rates, which cuts into business and necessitates a move:

"In the contract renewal, the landlord doubled the monthly rent,'' a Starbucks Korea official said. "We decided to close the shop and relocate it to an adjacent area as it's difficult to make ends meet under the increased rent while maintaining service quality at the same time."

He declined to reveal the proposed rent, but industry sources estimate the raised monthly rent reaches around 100 million won ($100,000) with a 3 million won down payment, which the building owner recently proposed to coffee shop chain Java City Korea...

Early this year, the company also closed a branch near a movie theater inside COEX Mall in Samsung-dong.
Although the shop did well, ranking on the top ten list in terms of sales, the company said it had no choice but to shut down the shop as the rent was raised 300 percent.

The company filed a lawsuit to defend the shop, claiming that no city in the world would raise the rent 300 percent at once. (Welcome to Korea -DM)

According to Starbucks, the portion of rent to the total operating cost of a coffee shop accounts for 30 percent in Seoul, higher than 10 percent in the U.S. and 15 to 20 percent in Tokyo and Hong Kong...

Foreign retail shops are surprised by the expensive rent in Seoul and frustrated by excessive rent hikes of up to 200 to 300 percent at once when they start generating profits, a real estate consultancy in Chungdam-dong said.

Not that any of these facts are going to effect how Korea sees Starbucks. Not only do you have the orginaly KT piece at the begining, but you also have the the aforementioned Chosun article that ends in:

That is why complaints about the steep W4,000 price tag for what is after all merely a cup of coffee are getting louder. Starbucks Korea tries to head off such criticism by saying they hope ‚Äúconsumers take into consideration‚ÄĚ that it is offering dividends to shareholders for the first time this year."

Not to be left out the National Tax Service has done the ultimate pile-on in Korea. Yes, Starbucks Korea was selected for a tax audit in May.


At August 08, 2006 3:21 PM, Anonymous Anonymous said...

COEX rents space based on sealed bids. Clearly someone believed that they could pay more than Starbucks offered.

I'm curious who's there now, and how long they last.

For any "snack" food/drink place that wants to become known quickly, it's a good location: Captive audience, etc.

Stay a year, pay the rent, and consider it more advertising than rental fee...

At August 08, 2006 3:34 PM, Blogger Dram Man said...

Thanks for your comment.

Interesting, the news article did not note that.

Actualy I think I remeber that location as inside the CVG Theater itself. Perhaps the it was CGV that raised rents not COEX per se. Who knows my memory is cloudy on that.


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