5 Minutes With… Leong Sze Hian on NTUC discounts

TOC spends 5 minutes with Leong Sze Hian and asks him for his views on the issue of NTUC FairPrice’s discount vouchers for needy Singaporeans.

(Reference: Straits Times report – “FairPrice extends 5% discount to end-July”.)

TOC: In the Straits Times report – referenced above – NTUC Chief Lim Swee Say announced that NTUC Fairprice will be extending the discounts on NTUC housebrand products till the end of July this year. He said that “the discounts cost the supermarket chain $4.5 million in all” and that “it was a ‘big stretch’ on FairPrice’s bottom line.”

Is it true that the $4.5m it costs FairPrice is a “big stretch on FairPrice’s bottom line”? What was Fairprice’s profits last year?

Sze Hian: NTUC FairPrice’s profits increased by 89 per cent from $53 million in 2006 to $100 million in 2007. (Fairprice.com – pdf file)

NTUC itself had about $4.5 billion in revenue last year, up from $4.14 billion the previous year, an increase of 9 per cent. What is the figure for NTUC’s profits? I am not sure. The information is not easily available.

I would like to suggest that one perspective to look at, may be to ask the question – Does the $4.5 million discount, which is only a drop in revenue of only 0.1 per cent ($4.5 million divided by $4.5 billion), translate into a significant profit drop for NTUC?

With the discounts, in a way, free advertising to buy from FairPrice, will the higher sales volume generate perhaps even more profits to offset to some extent the $4.5 million discount?

TOC: Looking at the 5% discount itself, what comes to your mind?

Sze Hian: I would ask: Will FairPrice still make a profit? What is the cost of purchasing the products from the suppliers? How much will such profits amount to in total?

TOC: The discounts, according to news reports, are only for NTUC’s own housebrand products. Why do you think NTUC is limiting the discounts to only its own housebrand products?

Sze Hian: One possible reason may be that house-brands have, in a sense, a unique edge from a marketing perspective, because unlike branded items, it may not be easy to make any meaningful comparison on the pricing, quality, etc, relative to other supermarkets and retailers. To illustrate this point, for example, if we are buying X brand rice, we can check different places to compare the price, and the quality would be the same. If N Supermart and S Supermart sell their own house brands, it may be harder to make any apple-to-apple comparison.

TOC: In conjunction with the launching of NTUC’s new logo, Minister Lim Swee Say said that it will always start with the interests of workers and end with the interest of workers.

Sze Hian: Such words may perhaps be best translated into action, by extending the discount.

Is this small sum (relative to our $6 billion surplus, and NTUC’s revenue of $4.5 billion), too much to ask for, to help workers and Singaporeans cope with another 26-year high inflation?

TOC: The ST reported that, “Coffee at NTUC Foodfare’s food courts, for example, will remain at between $0.70 and $0.90 despite higher bean prices.”

Sze Hian: I think $0.90 for a cup of coffee may be a bit on the high side compared to some coffee shops and food centres. However, compared to air-conditioned food courts, I believe the price of $0.70 and $0.90 is good value. I think just like the FairPrice profits issue, perhaps an alternative perspective may be to look at the total profits of NTUC Foodfare, whether they have increased, and if so, by how much, rather than just focusing on the price of 1 item like a cup of coffee.

TOC: But even NTUC FairPrice’s housebrand products seem to be increasing in prices, in some instances, by up to 60%. In a letter to the Straits Times forum page on May 1 2008, a Mdm Lily Cheong complained about this.

NTUC FairPrice increased the price for a 5kg bag of rice from $8.50 to $10.80 or $11.80 a week ago. On Tuesday, the price shot up again to $13.80. The two price rises amount to an increase of more than 60 per cent.

She also added this about FairPrice’s own housebrand cooking oil at FairPrice’s outlets:

For a 2kg bottle, the price rose from $2.35 to $5.25 or $5.35 a week ago. On Tuesday, the price spiked again to $5.90… And this was for cooking oil sold under FairPrice’s house brand, which has been labelled as a ‘low-price item’ for the past six months.

How does FairPrice justify raising the prices of its products – including its housebrand ones – and say that they’re giving discounts to consumers? What’s going on here?

Sze Hian: Well, I think if you raise the price of rice by $5.30, which is an increase of about 60 per cent in just more than a week, this is, by any measure or reasoning, still a hefty increase that deserves some explanation from those who are accountable.

Also, this is in the context of announcing the generosity of giving a discount of 50 cents for every 10 dollars spent, or asking MPs to purchase the 5 per cent discount vouchers for “non-union member” needy Singaporeans.

The example given for FairPrice’s cooking oil is an increase of about 150 per cent in a week or so.

Mdm Lily Cheong who wrote to the Straits Times made a very good point in that since we were told that we don’t have to hoard rice, because there is a three-month stockpile, why are prices being raised so soon and rapidly for what was possibly purchased three months ago when the price was still much lower?

Is this a case for the Committee Against GST Profiteering (CAP) or the Ministry for Trade and Industry to investigate? Like the “Jack and the beanstalk” story, the trust and faith that Singaporeans have may now be diminished.

I think there may be an issue of transparency here – what is the cost, the mark-up, profit, total profits due to higher sales volume because of all the media coverage, the total profits derived from the “discounted items”, overall total turnover profits, etc?

If I may use an analogy, if the HDB housing grant is increased, but say the price of new HDB flats increase more than the grant increase, is it really a grant, a subsidy? By the same token, if the price increase is more than the discount or the 2 per cent GST absorption, perhaps we need to ask to what extent has the discount been discounted?

TOC: NTUC announced recently that it will be setting up low budget retail stores for the poor.

Sze Hian: Why does it take more than nine months to do this? By next year, inflation may well have subsided. How about setting up a low budget section at selected stores now, to help the poor?

TOC: In the ST report mentioned above regarding FairPrice extending the discounts period, Mr Lim was reported as saying:

Our view as the labour movement is that by growing our social enterprises, not only will they have greater resources to do more good for union members and workers, but more importantly, serve as a very effective tool to check against profiteering.

Your view on Mr Lim’s statement?

Sze Hian: How effective are those who are doing the check and balance on profiteering? I understand that the Committee Against GST Profiteering (CAP) has yet to take anybody to task for profiteering, and the Ministry for Trade and Industry (MTI) recently replied in newspaper forums that it has yet to receive any complaints from anyone on profiteering from the rise in the price of rice.

The question that may need to be asked is – when a social enterprise’s profits increase by 89 per cent in a year, is it too much? How (and what proportion) are profits being returned to the people?

When a social enterprise has revenues of $4.5 billion and say profits of about $250 million (I don’t know the figure, and am just giving an estimate assuming the same profit to revenue ratio of FairPrice), is terminating the discount in July really necessary? If it’s $4.5 million in all, how much money are we talking about for every month’s extension? What’s the point of growing to have greater resources, and then cutting back when so little (relatively) is involved, at a time when another 26-year high inflation for March has just been announced?

In a sense, isn’t the fact that inflation keeps hitting 26-year highs an indication of the effectiveness (or ineffectiveness) of social enterprises – such as FairPrice – “serving as a very effective tool against profiteering”, as the minister said? Of course, it may be debatable whether price increases are or are not, and to what extent, profiteering.

In this context, I think the reference to profiteering may perhaps be more appropriately described as “curbing price increases”, rather than “profiteering” per se. Or, could it be that the effectiveness is so great, that no one has been able to find a single case of profiteering?

Perhaps an independent Committee of Inquiry (COI) could be formed to examine pricing policies.

By the way, the $4.5 million it costs FairPrice for the discounts is just over twice the minister’s annual pay.

Read also: “NTUC’s “gift” – helping the poor or blatant exploitation?” by Leong Sze Hian and Andrew Loh.

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Update: Straits Times, May 3, 2008, “Rice and cooking oil lead price rise”:

“The FairPrice brand of fragrant rice, for example, increased from $5.75 to $6.50 per 5kg bag, an increase of 13 per cent.”

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