3 Companies' Strategies for Higher China Prices

China’s upper class is a haven for American corporations charging price premiums. Will these three companies keep profiting big on China’s high prices, or will market forces push back?

Mar 22, 2014 at 4:25PM

Are higher prices in China an economic efficiency, or are they a devious ploy by American companies?

It doesn't matter what you think: it's what the Chinese consumer thinks that determines whether American companies like the coffee chain Starbucks (NASDAQ:SBUX), auto-maker Daimler (NASDAQOTH:DDAIF), and booze bottler Diageo (NYSE:DEO) can keep riding an Asian sales growth tsunami, fueled partly by higher prices charged in China.

Let's examine the benefits and threats posed to these companies by high China prices.

Costly cars
Millions of Chinese are striving to drive a Mercedes-Benz, made by Daimler. The fraction that can afford a Mercedes has shrunk even more thanks to Mercedes' higher prices in China, though.

Still, rich Chinese don't appear to mind Mercedes' high price tag (which is about 150% above U.S. prices.) In February, Mercedes roared past competitor Audi with a steep 74% jump in Chinese sales.

Tesla Motors' recent entry into China threatens Daimler's high-priced structure. Tesla, an electric carmaker, garnered favor from China's masses when it announced that its prices in China would be the same as those in the U.S. Does that mean Daimler should curb China prices?

Not necessarily. Mercedes will unveil several new models in upcoming years to target a younger Chinese audience, and Daimler's CEO has ambitions to surpass Audi and BMW's luxury car sales by 2020. Daimler can likely sustain higher prices for China's wealthy as it steadily rolls out models that snap up sales growth from sensible middle-class Chinese.

Pricey whiskey
$5,000 bottle of Scotch, anyone? There are plenty of takers in China.

Diageo markets smartly in China, and made its Johnnie Walker Scotch whiskey a premium drink there. To enhance its liquor's social status, Diageo focused on limited edition and personalized bottles that easily sell for $3,000 to $5,000 to status-conscious Chinese.

Who buys these premium-priced liquors? Chinese officials were core customers, and Diageo's sales have suffered as President Xi Jinping cracks down on party corruption.

But like Daimler, Diageo plans ahead. Diageo's already delving into lower-priced mid-market products, while specifically targeting China's wealthy through retail and online channels. There seems to be no reason why Diageo can't continue selling $5,000 whiskey to the upper class, even as it offers boozes with a wider price-based appeal.

Trickle-down pricing economics seems a viable strategy for American companies in China.

Lofty lattes
A poster child of price fixing to Chinese customers, Starbucks may have received unfair treatment from American and Chinese media. When Chinese Central Television "exposed" Starbucks' high prices last year, social media users poked fun at the state-owned network.

Given Starbucks' grande growth in China, consumers seem content with $5 Frappuccinos.

While Starbucks' drinks do cost about $1 more in China than America, the company's CEO claims that higher prices reflect China's distinct costs of business. Starbucks invested much in its Chinese infrastructure, and latte prices may fall as its China presence matures.

Besides, Starbucks does not have many price-pressuring rivals for premium coffee in China.

Foolish bottom line
While Chinese and American media outlets hype the higher prices that American companies charge Chinese consumers, these accusations may be much ado about little. Whether due to China's costs of business or less-elastic demand for luxury products, American companies like Starbucks, Daimler, and Diageo can and have charged more. In the longer term, China's prices will likely lower. Until then, these three companies seem to harbor strategies for selling pricey products alongside middle-class offerings in China.

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Glenn Singewald has no position in any stocks mentioned. The Motley Fool recommends Diageo plc (ADR) and Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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