Rising costs put manufacturers in dilemma
By Kang Ye-won
A recent price hike by McDonald’s has backfired, spurring consumers to post angry online messages and media to criticize foreign multinationals for not being mindful of the latest government efforts in clamping down on surging consumer prices.
Starting this month, the prices of certain McDonald’s products, including those for the McMuffin and Bulgogi Burger and McCafe’s Americano coffee, each rose by 200 won, and so far customers seemed to still be buying them.
“I just noticed the price had risen when I got my breakfast today,” said one customer named Kim, at a McDonald’s restaurant near Seoul National University.
The 32-year-old programmer, who often grabs a quick bite at the fast-food chain, said his regular choice, now at 3,400 won, is still affordable.
“It’s a trend now, I’ve seen prices shoot up across the board so I don’t just blame the fast-food chains,” said Choi Ku-ho, a 42-year-old in construction. Choi, who always gets a double Bulgogi Burger, said he didn’t notice the latest price change.
A McDonald’s representative in Korea said the price hike was inevitable considering the continuous rise in commodity prices since last year.
“The company has been putting off raising prices but figured it could not delay anymore and decided to take action this month,” said Ryu Ji-eun, a communications consultant for McDonald’s. “It’s a small change, about 1.2 percent.”
But some consumers said they still feel the pinch.
“A rise of a couple of hundred won matters to students, many of whom live off fast food,” said Lee Sun-hwa, 23, a Seoul National University student.
“If (McDonald’s) at least told us before (it) raised the price, I would’ve felt a little better,” Lee said.
Seo Young-kyo agreed that the price increase without prior notice is somewhat offensive.
“But what are you going to do? Consumers have never had a say in companies’ price hikes,” said the 31-year-old who’s currently job-hunting.
Economists say that, historically, once companies raise prices, they rarely come back down.
“In a bad economy, people tend to respond more sensitively to a price bump, especially when it’s done by large corporations. But in a capitalist society, consumers just criticizing price hikes would not be the answer,” said Lee Myung-hwal, a senior research fellow at the Korea Institute of Finance (KIF), a quasi-government think tank.
It would be illegal if companies cooperated in price-fixing or considered illegitimate if increases were “absurdly high” compared to raw material costs. Companies can legitimately raise prices without advance notice, Lee said.
Consumer goods makers’ dilemma
When a company is deciding on how much to raise prices, there is no clear cut answer, experts say.
“Companies consider oil and other commodity prices from the last three to six months when considering price hikes and they often benchmark against the consumer price index,” said Karen Choi, a consumer analyst at HSBC in Seoul.
Simply looking at the numbers, McDonald’s 1.2 percent lift is within the range of the consumer price increase. In January, the consumer price index jumped 3.4 percent compared to the same month a year earlier.
Regarding the continuous rise in costs, manufacturers have shouldered the burden, Choi said. It’s reflected in the average price-to-earnings ratio of the consumer sector, which has come down to 10 percent most recently from 30 percent, she said.
Similar to fast-food giants, candy makers such as Orion and Lotte Confectionery faced harsh criticism last year when they raised prices, squeezed by surging commodity and fuel prices.
“This year, manufacturers feel even more pressed to minimize price hikes under the Lee administration, which aims to control inflation with the general election coming up,” Choi said.
In 2008, President Lee Myung-bak selected 52 daily essentials, including general commodities and consumer goods and ordered their prices be put under close watch.
But critics claimed the policy placed an extra burden on manufacturers, already under pressure in a sluggish economy.
Beverage manufacturers such as Oriental Brewery (OB) have been bearing the pressure over the few past years but will soon bump up prices, Choi said. One way for companies to make up for losses is to release new products with elevated price tags, she added.
Price hype in Asian markets
Because of growing demand for foreign brands, Asian markets have often been the first target of price hikes, Choi said.
At the beginning of February, Starbucks increased all coffee drinks by two yuan or 32 cents across stores in China.
The Seattle-based coffee chain now has 550 stores in China and plans to have 1,500 by 2015.
Due to roaring costs worldwide, Starbucks upped coffee prices by an average of about 1 percent this January in the Northeast and Sunbelt regions in the United States. But stores in China still charge more than double the amount U.S. consumers pay. A 12-ounce tall coffee in New York City costs about $1.85 whereas it’s sold at $3 on average in China, according to a Wall Street Journal report.
McDonald’s in China also lifted the price of certain menu items last month.
The ever-expanding demand is what sustains the price hype in China, Korea and other Asian markets, said Lee with the Korea Institute of Finance.
“It’s a basic market principle; supply and demand determine prices,” he said.
But when companies raise prices simply for the purpose of maximizing profits, consumers can still pressure them by making mindful consumption choices, he went on to say.