The $1.20 Coffee War: How Starbucks Fights Discount Rivals

In 2007, frequent visitors to Starbucks locations across China began noticing changes: plastic stirrers replaced wooden ones, milk switched to a local brand, even the coasters got cheaper. More than the material downgrades, though, was the shift in atmosphere—cafés filling with loud, smoking youngsters, and long-time customers feeling the soul of the 'third place' had vanished.

The short answer? Intense price competition, especially from 8-yuan ($1.20) budget coffee chains like 85°C, forced Starbucks to cut costs while struggling to justify its premium pricing. Meanwhile, rivals used food sales to drive beverage revenue, leaving Starbucks caught in a battle it wasn’t fully prepared for.

The Starbucks Identity Crisis

Former Starbucks CEO Howard Schultz highlighted the issue in a February 2007 internal memo: “Stores have lost their soul. They no longer embody the warmth and community of a neighborhood shop.” Customers noticed. Longtime fan Liu Xiping complained about Starbucks’ high prices in China—around 29–30 yuan ($4.50–$4.80) for a medium Milk Tea Frappuccino, compared to just $24 RMB equivalent (including tax) in Cincinnati, Ohio. Even the launch of Starbucks’ own instant “VIA” coffee was seen as a sign the brand was moving away from its craft roots.

What Starbucks Tried – And What Backfired

In response to criticism, Starbucks spokeswoman Li Jing defended VIA as a strategic move to tap into the global demand for convenient, high-quality instant coffee. The company also experimented with heavy localization: mooncakes, zongzi, tofu vegetable rolls, mango chicken wraps, green tea Frappuccinos, and tea lattes. Seasonal items like zodiac piggy banks and mugs appeared, and stores in Shanghai’s Yu Garden, Beijing’s Tian He Fang, Chengdu’s Jinli and Kuanzhai Alleys echoed local architecture. But these moves didn’t fully resolve the core issue: value for money.

The Real Threat: 8 Yuan Coffee

The bigger competitive threat didn’t come from McDonald’s or KFC, but from budget chains. UK-based Costa, Japan’s DOUTOR, Taiwan’s 85°C, and Shangdao Coffee all challenged Starbucks. In 2007, 85°C made headlines in Shanghai by selling coffee at just 8 yuan, using a strategy where high-margin food (55% gross margin) drove beverage sales (65% margin). Its first Shanghai store reportedly hit 1.8 million yuan in monthly revenue. By year-end, 85°C planned to expand to 91 stores on the mainland, according to regional head Wang Jianyao.

Why Customers Stayed... Or Left

Market researcher Lan Jianxia observed that eight out of ten Starbucks customers brought laptops, staying around two hours per visit. Yet the chain failed to convert that dwell time into extra sales. “A coffee takes 15–20 minutes, but getting up to reorder with your laptop open and bags on the floor is a hassle. Staff often seem annoyed if you ask for anything,” she noted. That customer experience gap made it easier for rivals to lure patrons away with cheaper drinks and better service efficiency.

Starbucks’ Fightback Strategy

To fight declining profits and improve the in-store experience, Schultz rolled out a series of initiatives: new espresso machines, enhanced loyalty perks, the MyStarbucksIdea online community, and partnerships with international organizations. Whether these efforts could fully restore the brand’s premium appeal—or fend off the discount coffee onslaught—remained uncertain. But one thing was clear: the days of unquestioned dominance were over.

Frequently Asked Questions

Why did Starbucks change its stirrers, milk, and other materials in China?

In an effort to reduce costs, Starbucks in China switched from wooden to plastic stirrers, changed its milk supplier to a local brand , and even used cheaper coasters and desserts produced in Dongguan. These were cost-saving measures, not quality improvements.

What was the “VIA instant coffee” and why did it upset Starbucks fans?

VIA was Starbucks’ instant “ready-brew” coffee, sold as low as $1 per packet. Loyal customers saw it as proof the brand was abandoning its premium, handcrafted image in favor of mass-market convenience products.

How did 85°C undercut Starbucks on price?

85°C launched in Shanghai in 2007 selling coffee at just 8 yuan (about $1.20), using a business model where high-margin food items (with 55% gross profit) drove sales of higher-margin beverages (65% gross profit). This approach allowed them to offer cheaper drinks overall.

Did Starbucks try to localize its offerings in China?

Yes. Starbucks introduced localized foods such as mooncakes, zongzi, tofu vegetable rolls, and mango chicken wraps, plus drinks like green tea Frappuccinos and tea lattes. It also rolled out seasonal items like zodiac-themed collectibles and designed stores to match local architecture in cities like Shanghai, Beijing, and Chengdu.

Why couldn’t Starbucks make more money from laptop users?

Research showed that while 80% of customers brought laptops and stayed about two hours, Starbucks failed to encourage additional purchases. The awkwardness of getting up to reorder, combined with unfriendly service, meant missed opportunities for extra sales during long visits.

What steps did Starbucks take to win back customers?

CEO Schultz implemented new espresso machines, expanded loyalty program benefits, launched the MyStarbucksIdea online forum, and pursued global partnerships. These were part of a broader effort to improve customer experience and respond to criticisms, though their long-term success was still unfolding.

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