How bubble tea conquered United States market?

Bubble tea is a dessert drink that has been invented in Asia in 1980s. Many famous Asian bubble tea brand came to United States recent years, and became one of the popular place in many small and large cities such as New York, San Diego, and Los Angeles.

While people define Starbucks as a luxury coffee brand, bubble tea’s price are usually higher than Starbucks. However, people did not treat bubble tea as luxury, and they are willing to buy it sometimes once a day. The following picture showed the price of a famous bubble tea company named Kung Fu Tea. A classic kung fu milk tea starts with $3 in small size, and it take extra $0.50 for the bubble.

Normally, bubble tea company focuses on the original asian tea elements that people could not find in Starbucks or other coffee house. Plus, bubble tea company is trying to provide the great service to make their customers forget they are just ordering a to-go tea. The company decorated the house, put asian elements in it, provide hand made tea, offer a wide range of choice and you can mix match the tea with coffee, milk, boba, jelly.

iPhone’s pricing strategy

According to bloomberg’s news, Apple became the first U.S. company with a market value of more $800 billion and this amount is expecting to increase since the next iPhone is about to come. In the past years, people could not image how technology companies can play a role in the center of the global business world, and obviously Apple’s rise as one of the top company around the world marked the emergence of the technology.

Tim Cook, as the current CEO of Apple, stated that apple never had an objective to sell a low-cost phone and the primary objective of Apple is to sell a great phone and provide a great experience. Apple’s skimming pricing strategy allowed apple to increase their profit as selling a high price. Although this skinny pricing strategy made apple sacrifice their sales for these low-budget customers, the large profit helped Apple to invest more into the new products.

The premium pricing strategy also helped Apple to build and maintain a  loyal customer group. These customers normally believe they pay a high price for Apple because they receive a exceptional product with the best quality.

To conclude, it is not easy for apple to stick with the premium pricing strategy since sometimes customers would choose a lower cost phone due to the budget. However, Apple’s exception design and quality still helped Apple to be the one and only technology company all over the world.

Starbucks pricing strategy in China

As one of the historical coffee shop chain, Starbucks has already developed a mature system for its pricing strategy in order to build its affordable luxury brand image. While there are many cheaper coffee chains like Dunkin Donuts, Starbucks use its minimalist store decorations, loyal rewards, great product package to keep its own consumers. After reached a huge success in U.S, Starbucks expanded its market to one of the largest consumption country China in 1999.While the price in U.S. is already higher than other coffee chains, Starbucks even has a much higher price in China while China has a cheaper labor comparing to U.S.

According to Jim, a medium size latte cost RMB 27 in China, compared with RMB 19.98 in Chicago,RMB 24.25 in London. The following chart shows the price of a Starbucks grande latte.

Even though the price level in Starbucks China is the highest among all countries,  Starbucks did received a huge success in Chinese market. After twelve years, according to the data, Starbucks has successfully opened more than 570 stores in 48 cites. I believe their success has several key reasons. Firstly, Chinese people are willing to spend large amount of money on consumption especially brands from western countries. In some cities, drinking Starbucks is a symbol of having a luxury life. Plus, Starbucks made many products which were related with Chinese culture. The last but not the least, Starbucks promote its brand and products via different social platforms to attract its consumers.

 

Why luxury brands set a higher price in China compare to Europe?

The key and only reason for such a large number of Chinese consumers choose to purchase luxury goods overseas is the greatly difference between the price in China and Europe. There are two major reasons why the luxury companies establish a higher price in China. Firstly, the high tax in China leads to the higher price on luxury goods. The following is a chart of Chinese luxury good taxation.

Product Tariff Value-added tax Consumption tax Total
Jewelry 0%-35% 17% 10% 27-62%
Watches 11%-23% 17% 20% 48%-60%
Clothes 14-20% 17% N/A 31%-37%
Handbags 10%-20% 17% N/A 27%-37%
Cosmetics 6.5%-15% 17% 30% 53.5%-62%

Source:luxe.co

 

Another reason for the high retail price is the majority luxury and affordable luxury brands charged a high premium to not only achieve a high profit but also maintain a luxury brand image for Chinese market. With the relatively low rent cost, cheaper labor cost and higher premium, luxury brands achieve a great profit to make up its loss in either Europe or U.S. market.

The following chart stated the percentage of luxury brand’s price premium on Chinese vs us site. As we can see, almost one third of the pure luxury brands charged at most 16% to 25% higher price in China compared to their U.S. price. Famous accessible luxury brands especially Michael Kors and Calvin Klein charged at least 36% and at most 50% more premium on some specific item in Chinese market compared to U.S. sites.

To attract Chinese consumers to shop in the local boutique other than wait for overseas trip, it is important for luxury brand companies to rebuild their pricing strategies.

Luxury Brands’ Pricing Strategy in China

With the economic boom, Chinese customers are becoming one of the significant groups for luxury companies among all different kinds of area from fragrance to cars. In the next five years, with the disposable incomes of consumers rising, the demand for premium brands had grown. However, the high import taxes, unstable currency and the huge difference between the retail price in China and Europe, more than 70% Chinese choose to buy luxury brands in other countries rather than in their local boutique.

Due to the large number of customers choose to purchase luxury good overseas, many luxury brands are facing difficulties in developing in China and received profit losses. Additionally, the huge difference in price created another industry called Daigou. Specifically, Daigou means Chinese who either live in Europe or United States, they helped their customers to purchase luxury goods and ship it to China via post. They declared the value of package on purpose in order to avoid the custom tax of Chinese government. This industry has been in the Chinese grey luxury market for years. In order to maintain a healthy relationship between the luxury brands and Chinese consumers, the government established laws specifically to prevent the increasing number of daigou industry. Firstly, Chinese government opened more than 30 duty free shops at airports and borders to try to attract travelling consumers back to speding at home. Moreover, Chinese customs announced new import duties on popular luxury brands and established stricter customs checks at airport and border patrols for travelling consumers.

For the luxury brands, it is a challenge for them to set their retail price in China since it will significantly affect their future growth. Apparently, different luxury companies chose their own methods and regulations to the Chinese market. For example, although Louis Vuitton still raised their retail prices in China compared to Europe, CHANEL decided to narrow the range between China and Europe retail prices. The following charts describes several brands for the price differences.

Hence, how to properly define the retail price in China is a essential question for all luxury companies.