Facing inflation, foreign companies in China have raised prices despite government pressure. Wang Fangqing reports from Shanghai
The Chinese government has made it clear that controlling inflation is one of its primary goals, well aware that consumer societies hate price increases, especially for commonly used items such as personal care products. And with Beijing never afraid of government intervention, it has pressured major companies in the sector not to raise prices, especially for toiletries and soaps.
But the results of this government pressure have been unpredictable.
In May, Unilever became the first major company in the China personal care products market to increase prices. Lux anti-dandruff shampoo, for example, is now priced at Chinese yuan renminbi CNY53.90 (US$8.30) for a 750ml bottle, up 8% from the previous CNY49.90 ($7.70). For the same amount of Hazeline body wash, consumers now have to pay CNY24.90 ($3.80), up from the previous CNY22.90 ($3.50). Unilever’s skin lotions and body soaps are also more expensive than three months ago.
The price hike has been fuelled by soaring production costs in China. Unilever has moved its production base inland from Shanghai to Hefei, Anhui province in east China to reduce these costs, but even in Anhui labour costs have also been rising. In July 2011, the provincial government raised the monthly minimum salary to CNY1,010 ($156.80), up 14% from CNY720 ($111.70) in 2010. The minimum hourly wage was raised to CNY10.60 ($1.60) from CNY7.50 ($1.10) last year.
Input costs are also rising. Essential materials such as vegetable oil, petrochemical products and salt have all become 40% more expensive this year compared to 2010, according to Beijing-based China Cleaning Industry Association.
However, Unilever’s price hike has stirred a nationwide debate as it came shortly after Unilever was fined CNY2mn ($310,513) for “spreading information of raising prices to disturb the market competition order” (essentially promoting panic buying) by the Shanghai Municipal Development & Reform Commission, a local arm of the National Development & Reform Commission (NDRC) in Beijing, which oversees important price changes.
In March 2011 Zeng Xiwen, vp of Unilever China, told Chinese local media that Unilever was planning to “adjust prices”, and if the cost continues to rise, “chances are we are going to raise prices more than once this year”. He added that the industry is entering a “price hike cycle”, which was quickly followed by a nationwide surge in purchases of Unilever products.
According to China’s price law, spreading rumours or information of potential price hikes can spark fines of up to CNY3m ($465,769), though Unilever’s fine is the largest so far.
The company said in a statement that it “fully understands China’s national conditions” and “respects the decision of the Chinese authorities”. The fines must have hurt though.
Also these fines make management tough. Shadowing government pricing expectation policies is a prominent challenge for foreign companies doing business in China, says Clare Cheng, ceo of Shanghai-based marketing agency 4 In Group. “Increasing prices or not, for example, should be ultimately decided by the market rather than the government,” she says.
This was the second time Unilever paid major regulatory fines this year. In April, Unilever and its American rival Procter & Gamble were fined t315.2m ($449.9m) by the European Commission which alleged price fixing for price manipulation in the European washing powder market.
But P&G has learned its lesson and it kept its mouth shut in China. In May, Robert McDonald, ceo of P&G, told Chinese local paper the 21st Century Business Herald that P&G will not disclose any information to the media if there are changes in pricing.
“The Chinese authorities have been supportive to our business in China, and we will try everything we can to lower the cost. But we are not going to rule out the possibility of raising prices,” he says.
China is the second largest market for P&G, contributing about $5bn in annual sales, says McDonald.
Of course there are other ways to raise prices, and these are anticipated. For instance launching newly packaged lines and building in more profit margin. And although Chinese consumers tend to be more price sensitive during inflationary periods, multinationals don’t need to worry too much about losing consumers, says Cheng.
“Consumers buying foreign brands tend to have higher brand loyalty, therefore they are not likely to change brands easily just because they have to pay several yuan more,” she says.
Chinese consumers are particularly loyal to shampoos, with value being set on a variety of functions such as anti-dandruff and nutrition fortification, which enhance their bond with the regular users, she adds.
Huang Gangwei, analyst at the IMC Group, another marketing consultancy in Shanghai, agrees, adding that multinational brands have the growing power in China.
“According to our research, even consumers in small cities or even rural areas are attracted to foreign brands,” he says.
Not surprisingly, P&G has already been working on a Chinese government-backed project, which aims to enrich the rural market. P&G’s ceo McDonald says China’s vast rural areas will be the next focus of the company.
Since pricing is the key for Chinese companies to compete against multinationals, it is rare to see Chinese companies increase prices in an aggressive way. In fact some of them even decided to hold their current prices this year, despite rising production costs.
In April, Ge Wenyao, president of China’s leading personal care products and cosmetics manufacturer Shanghai Jahwa, told Chinese local media that the company is not going to raise prices, at least “in the near future” as the company still has materials purchased in 2010 in stock.
According to Jahwa’s annual report, it spent more than CNY317m ($49.2m) on materials in 2010, up 18.5% year-on-year.
But IMC’s Huang says it is a short-term strategy to soothe consumers.
“Multinationals have more spending than their Chinese counterparts, especially on management and human resources, so they usually initiate the price hike. But eventually, Chinese companies have to follow to survive,” he says.
