[The Editors' Verdict] The Art of Price Increases in an Era of Low Growth

Starbucks Joins '3 Trillion KRW Club' Last Year
Minimizing Consumer Resistance to Price Hikes
Ultimately, Prices Are Determined by Consumer Choice

Global number one coffee specialty store Starbucks raised coffee prices in the domestic market last August. This was due to a sharp rise in international coffee bean prices caused by ongoing droughts in major coffee-producing regions such as South America and Africa, driven by climate change. Although most coffee brands hesitated to raise prices in the fiercely competitive domestic coffee market, often called the 'Coffee Republic,' Starbucks, the industry leader, took the lead.

As a result, SKC Company, which operates Starbucks in Korea, saw its annual operating profit approach 200 billion KRW last year, an increase of 51 billion KRW compared to the previous year. Emart, which recorded its first loss since its founding in 2023, turned to a 100 billion KRW profit on a consolidated basis last year, with Starbucks being the main contributor. Emart is the largest shareholder holding 67.5% of SKC Company’s shares.

From the beginning of the year, criticism has grown as food companies have successively raised prices. The criticism is that raising product prices only fattens corporate profits while increasing the burden on consumers. However, price increases cannot be seen as inherently bad. Price increases are a sophisticated management strategy. Japanese sales expert Akira Ishihara stated in his book “The Art of Price Increases That Never Fail” that “raising prices is the only way for companies to overcome recessions.” Since consumers consider not only price but also the value of products when making choices, companies should secure profitability through price increases and pursue product innovation and service improvements.

In the case of Starbucks, last year’s sales increased by more than 5%, surpassing 3 trillion KRW for the first time since entering the Korean market. Starbucks, which pursues a premium strategy, maintains high price policies worldwide, and consumer resistance to price increases in the domestic market was relatively low.

Advanced marketing techniques also played a role in the price increase process. When Starbucks first raised prices last August, it froze the price of the most sold tall size but raised the prices of Grande (473ml) and Venti (591ml) sizes by 300 KRW and 600 KRW respectively. Additional costs for espresso shots and other drinks were also increased. In November of the same year, prices of 11 iced beverages were raised by 200 KRW each. Last month, prices of 22 tall size beverages, which had been frozen for three years, were increased. As a result, the price of a tall size Americano rose from 4,500 KRW to 4,700 KRW.

With Starbucks, the number one coffee company, settling on price increases, followers also began to raise prices. Paul Bassett raised prices of 28 products by an average of 3.4% last month, and Compose Coffee raised the price of iced Americano by 300 KRW from the beginning of this month. Compose also used the technique of freezing the price of hot Americano.

However, price increases without improvements in product quality or service can face strong consumer resistance. Especially during periods of prolonged low growth and high inflation like recently, excessive price hikes can backfire. For example, Kyochon Chicken faced a backlash of 'consumer boycott' after raising chicken prices by up to 3,000 KRW in April 2023. Although Kyochon’s sales dropped by more than 10% compared to the previous year in the first year of the price increase, operating profit tripled during this period by defending profitability through price hikes. However, the effect of the price increase did not last long. Last year’s sales (480 billion KRW) slightly increased but did not reach the peak of 2022 (510 billion KRW). Operating profit fell by 38%.

The food industry’s price increase relay at the beginning of the year has recently slowed down after the government hastily requested restraint earlier this month. However, corporate pricing policies are ultimately determined by consumer choice. The government should focus on closely monitoring whether companies deceive consumers and make excessive profits through price collusion during the price increase process, rather than simply suppressing price increases themselves.