international marketing 5

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12GLOBAL PRICING

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CASE 12-1 STARBUCKS IN HOT WATER IN THE UNITED KINGDOM AFTER TAX-RELATED CUSTOMER REVOLT

Starbucks opened its first U.K. shop in 1998. Over the 14 years that the chain had operated in the United Kingdom, Star- bucks had paid just £8.6 million despite £3 billion sales. One Labour MP (member of parliament) who had campaigned against companies that use tax avoidance techniques com- mented: “The fact they [Starbucks] have paid 0.3 percent tax on their turnover is utterly scandalous. If they didn’t think they could get away with it, they wouldn’t dare it.”

The main reason why Starbucks had avoided paying taxes for a 3-year string in the United Kingdom was a complex transfer pricing scheme for transactions within the company. Starbucks UK had incurred losses due to a 4.7-percent pre- mium paid to the Netherlands division where the coffee is roasted and another 20 percent premium to Switzerland where it buys the coffee beans. The claim of losses, however, was contradicted by statements that corporate executives made to analysts about the U.K. business. For instance, in 2010, John Culver, the president of Starbucks international division, said: “We are very pleased with the performance in the United Kingdom” in spite of filing a £33 million loss.

When news about Starbucks low tax contributions spread in 2012, pressure groups and British MPs called for an inquiry into the company’s tax affairs. UK Uncut, a grassroots group that targets companies that it accuses of tax dodging in the United Kingdom, called on the government to change the law to stop what it described as “unfair and unjust behavior.” Other multinationals, including Google and Amazon, had also been attacked for using arrangements that channeled profits to European subsidiaries based in countries where taxes were lower.

Sources: “Starbucks to Pay £20m in Tax Over Next Two Year After Customer Revolt,” http://www.guardian.co.uk, accessed Jan- uary 14, 2013; “Starbucks ‘pays £8.6m Tax on £3bn Sales,’” http:// www.guardian.co.uk, accessed January 14, 2013; “Starbucks Pays Up to Avoid Boycott,” http://www.ft.com, accessed January 14, 2013.

In December 2012, surprised by the public outcry, Star- bucks UK announced that it would volunteer to pay £10 million in taxes in each of the coming 2 years even if the coffee chain failed to make any profits. Kris Engskov, man- aging director of Starbucks UK, stated in an announcement made at the London Chamber of Commerce: “I am announc- ing changes which will result in Starbucks paying higher cor- porate tax in the United Kingdom—above what is currently required by law. Specifically, in 2013 and 2014, Starbucks will not claim tax deductions for royalties or payments related to our intercompany charges. In addition, we are making a com- mitment that we will propose to pay a significant amount of corporation tax during 2013 and 2014 regardless of whether our company is profitable during these years.”

UK Uncut was not pleased however. It claimed that the voluntary tax Starbucks offered to pay was still far less than the taxes paid by the chain’s closest competitor, Costa Coffee. It vowed to continue organizing a protest action planned in Starbucks stores around the country in December 2012. According to the organization’s spokesperson: “People will be transforming Starbucks stores into refuges, crèches, and other services which the government are cutting with their unjust and unnecessary austerity plans.”

DISCUSSION QUESTIONS

1. Explain why transfer pricing is so complicated especially for a company like Starbucks. 2. The case mentions that Starbucks UK’s decided to pay a voluntary tax of £10 million per year in 2013 and 2014 in wake of the protests and tax dodging allegations. Google and Amazon, who were also accused of dodging taxes, declined to follow Starbuck’s example, insisting that they paid the correct level of tax. Evaluate Starbucks’s decision vis-à-vis Google’s or Amazon’s.

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2 • Case 12 • Global Pricing

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CASE 12-2 STARBUCKS UNDER FIRE IN CHINA OVER ITS PRICING POLICIES

On Sunday, October 20, 2013, CCTV aired a report that accused Starbucks of charging its customers in China much higher prices than in other markets, helping the coffee retailer to achieve fat profit margins. The news report claimed that a medium-sized latte in Beijing cost 27 yuan ($4.43), one-third more than at a Starbucks store in Chicago. In the report, Wang Zhendong, director of the Coffee Association of Shanghai, told CCTV that “Starbucks has been able to enjoy high prices, mainly because of the blind faith of local consumers in Starbucks and other Western brands.” (See https://www.youtube.com/watch?v=wPxH2PQcLt4)

PRICE OF A STARBUCKS GRANDE LATTE City Local currency U.S. dollar equivalent

Beijing RMB30 $4.84 Chicago $3.95 $3.95 Mumbai Rs. 135 $2.44

Sources: “Starbucks Under Media Fire In China For High Prices,” http://www.reuters.com, “5 Ways Starbucks Is Different in China,” http://www.businessinsider.com.

Starbucks was the latest multinational doing business in China that was being accused of price gouging by the Chinese media. Earlier in 2013, Apple and Nestlé were also criticized for their high prices or poor customer service.

Starbucks has been rapidly expanding in China. It antic- ipated China to become its second-biggest market by 2014, overtaking Canada. The pricing story quickly became a lead- ing topic on China’s social media such as Sina Weibo, China’s version of Twitter. However, many discussants took Star- bucks’s side. One user observed: “Those who are saying Star- bucks is expensive are probably those who don’t drink much coffee. The prices are competitive and the quality makes people feel safe.”

DISCUSSION QUESTIONS

1. Why do you think multinationals often come under scrutiny in Chinese media for their pricing practices? 2. Is Starbucks pricing practice in China unfair? What could explain the higher prices? 3. How should Starbucks cope with the CCTV story? Should the company lower its prices? Why or why not?

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CASE 12-3 CARLSBERG MALAYSIA—SELLING BEER IN A 60 PERCENT MUSLIM NATION

Malaysia’s beer market has been under heavy pressure lately. From 2004 to 2006, the industry saw heavy increases in excise duties. With an excise duty of RM7.40 (US$2) per liter, Malaysia now has the second-highest beer tax in the world (Norway ranks first). The price increases have narrowed the price gap between beer and other alcoholic drinks such as wine. Beer drinkers have balked: consumption dropped from 1.4 million (2004) to 1.2 million hectoliters (2006) as a result of the price increases. Many beer and stout customers have turned to wine and liquor due to the narrowed price gap for these products with beer.

The tax increases have also reshaped the competitive land- scape. Carlsberg bore the brunt of the price increases. Until

Sources: www.euromonitor.com/Beer_in_Malaysia; “Guinness Confi- dent of Warding Off Newcomer,” www.theedgedaily.com, accessed February 19, 2009; and “Malaysian Beer Brands Facing Pricing Prob- lem,” Media, November 27, 2008, p. 21.

recently, two big brewers carved up Malaysia’s beer market: Carlsberg, which has been operating in Malaysia for over 35 years, and Guinness Anchor Berhad (GAB), the maker of Guinness, Tiger, and Anchor beer. In 2000, Carlsberg had a 55-percent market share while GAB had the remaining 45 percent. By mid-2006, GAB’s share had risen to 55 percent. In 2007, a new local beermaker under the name of Napex Corporation joined the two brewers selling a beer named Jaz Beer. Differences between the brand portfolios of GAB and Carlsberg partly explain the market share reversal. GAB sells pricier brands such as Guinness and Heineken while most of Carlsberg’s sales came from the lower-priced Carlsberg green label. Buyers of premium brands are wealth- ier and less price sensitive than cheap beer consumers. Soren Jensen, managing director of Carlsberg Malaysia, explained the situation as follows: “Once you have high duties, you don’t have much cheap beer. The premium brands have strengthened because the relative price difference is smaller”

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Short Cases • 3

(Media, November 27, 2008). Charles Ireland, the head of GAB, said: “We sell premium brands, they sell brands which are of lower prices; we have different business models and our consumer markets are different” (www.theedgedaily.com).

To shore up Carlsberg’s position, the firm overhauled its brand stable by adding new high-end offerings such as Tuborg, Skol Super, and Carlsberg Gold as well as importing Corona from Mexico. GAB also outspent Carlsberg in advertising during 2007: RM10.4 million ($2.8 million) for GAB ver- sus RM6.8 million ($1.8 million) spent by Carlsberg on its core brand (see Table A). Television, radio, and outdoor are not used. Print accounts for 70 percent of all advertising spending, cinema 19 percent, and point-of-sale 11 percent. Other promotional activities include relationship marketing, trade promotions, and sponsorships. Global brands such as Heineken and Carlsberg also get exposure through global sponsorship activities: Carlsberg with Liverpool, Heineken with the UEFA Champions soccer league.

TABLE A TOP FIVE BRANDS BY ADSPEND (000S)

Carlsberg RM6,780 (Carlsberg) Heineken RM5,867 (GAB) Tiger Beer RM2,967 (GAB) Skol RM1,884 (Carlsberg) Anchor RM1,603 (GAB)

DISCUSSION QUESTIONS

1. What do you see as the main challenges that Carlsberg is facing in Malaysia? 2. From 2004 to 2006, the beer and stout market in Malaysia saw heavy increases in duties. Carlsberg bore the brunt of these increases, losing market share to GAB. What strategic initiatives would you recommend to Soren Jensen to meet the challenges Carlsberg is facing?