Price gap calls increases into question

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Price gap calls increases into question

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Food and beverage price hikes are hitting consumers’ wallets harder than ever. Food production companies blame the skyrocketing cost of raw ingredients, labor and transportation. But a growing divergence between the price of regular products and big retail’s in-house private brands has consumer groups questioning those rising prices.

So-called private brand (PB) products refer to brands created by retail conglomerates and sold only in their stores, but produced by smaller manufacturers instead of being made directly by the retailer. The more streamlined production process means that private brands are usually cheaper than regular, brand-name products.

For example, Korea’s largest sweets company, Lotte Confectionery, raised its prices an average 9.2 percent at the beginning of October.

Its Ghana Chocolate brand jumped 14 percent to 1,500 won ($1.39), while the Monchelle chocolate cake and Margaret cookies went up 11 percent.

However, Lotte Mart’s PB line, Lotte Choice L, which is made by the same company that makes Monchelle, is much cheaper.

A box of 12 Monchelle chocolate cakes costs 5,400 won, and that will rise to 6,000 won in November. But the Lotte Choice L chocolate cakes retails for 3,850 won.

That is a price difference of 28.7 percent, rising to 35.8 percent after the November price hike. Dairy companies also raised prices 10 percent on all products in early October.

But while Seoul Milk costs 2,520 won per liter after that hike, Homeplus’s PB milk label costs just 1,500 won - that’s 40.5 percent cheaper. The difference had been 34.8 percent before Seoul Milk raised its prices.

The widening price gap between the regular brands and retailers’ PB brands has led consumer groups like the Korea National Council of Consumer Organizations to demand for companies to open up about why prices are rising.

“The price difference between regular brand products and PB stems from the retail process,” said a source at Korea National Council of Consumer Organizations. “The main problem of retail structure should be taken care of fundamentally by the government and industry. Any burden from those problems shouldn’t be passed over to the consumers.”

But retailers insist that the price difference boils down to rising expenses.

“We haven’t been able to raise prices to keep up with rising ingredient prices so far, and the costs for sales management, retail and transportation have also risen. So hikes were inevitable,” said a source at Lotte Confectionery.

For Lotte, sales management costs increased 16.5 percent in 2012 alone. Compared to the previous year, costs for promotion and sales events rose 157.7 percent, while overall rent costs, including display stands at large discount chains, was up 50.9 percent and labor costs for sales staff increased 17 percent, the company said.

The food industry says it is difficult to radically reform its retail structure, for example, by reducing fees that go to distributors.

“Franchise distributors end up with 4 to 5 million won a month after paying their office rent and taxes, even if the agency makes monthly sales of 40 million won,” said a dairy company employee. “That income level is about as low as possible for the agents, who lack any employee benefits, such as retirement pay, a pension or medical insurance.”

The retail giants are also concerned about maintaining full control over prices to conduct whatever marketing events they want, such as buy-one-get-one-free promotions and the like.

Furthermore, they insist that changes in raw ingredient prices are the major reason for the consumer price hikes. Because so little corn, wheat and beans are produced domestically - all less than 10 percent of the national usage - Korea is constantly vulnerable to international prices.

“Food prices are sensitive to fluctuating international crop prices,” a food industry source said.

However, consumer groups again question this logic, pointing out that international crop prices have dropped recently.

According to the Korea Rural Economic Institute, international crop prices dropped this year. Wheat now costs $368.60 per ton compared with $406 per ton at the end of last year.

Feed grains, which are responsible for most of the production cost of raw milk, fell from $329.80 per ton in January to $303.90 per ton in August. And bean fodder also has fallen from $684.10 at the end of 2012 to $584.30 eight months later.

“When considering a link with raw ingredients, the prices of ramen, snacks and bread should have gone down, but none of them got any cheaper,” said Han Seok-ho, a researcher at Korea Rural Economic Institute.

“While food products made with these ingredients account for almost 40 percent in the consumer price index, the prices have never dropped. Consumers obviously feel price goes up so sharply.”

By KOO HEE-RYEONG, PARK TAE-HEE [jiyoon.kim@joongang.co.kr]

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