New rule seeks tighter grip on milk product prices

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Milk products in Vietnam seem to have developed a strong immunity to government efforts at price control.

They keep posting irrational price hikes despite inflation-control moves by the government seeking to regulate prices of essential goods and services.

The Ministry of Finance is expected to introduce new price management regulations at the end of this month to deal with the issue more effectively.

Milk firms have increased their prices twice since the beginning of this year.

Since early this month, distributors of major brands like Mead Johnson, Abbott, Dutch Lady and Arla have raised their milk prices by 5-18 percent, citing the weaker Vietnamese dong and higher input costs.

Nestlé Vietnam was the sole exception, reducing the price of formula milk for infants by 4-5 percent.

Milk producer Vinamilk said the prices of sugar have doubled and that of imported milk material has increased by 50 percent since last September.

Nguyen Anh Tuan, vice head of the Price Management Department under the Ministry of Finance, said the prices of many imported products, including milk material, have increased after the State Bank of Vietnam devalued the dong by 3.4 percent against the dollar last month. Thus, the hike in the retail formula milk prices was unavoidable.

However, economist Ngo Tri Long said "huge advertising and marketing fees" are a main factor in the price hikes. The Finance Ministry has said that the advertising and marketing expenditure of some milk firms have accounted for more than 30 percent of their total costs, much higher than the 10 percent ceiling fixed by the government.

Mind games

Nguyen Duc Thanh, director of the Center of Economic and Policy Research at the University of Economics, said that in effecting irrational price hikes, firms are exploiting the mindset of some parents that the higher a milk product for children is priced, the higher its quality is.

He also attributed the price hike to the monopoly characteristics of the milk market, as some firms hold a dominant position and use this to set prices.

Statistics from milk producer Vinamilk show that the domestic dairy market was worth VND8 trillion (US$410.3 million) in 2008, with foreign producers holding an 80 percent market share.

Foreign milk producers often choose only one distributor in Vietnam, so the two sides can easily set the prices they want, Thanh said.

Trinh Viet Hung, a representative of distributor of Namyang milk brand X.O, said higher salaries for employees have also contributed to increasing the products' cost.

However, he admitted that huge advertisement expenditures have also contributed to the higher price of milk products in the domestic market.

His firm's milk products used to be priced 45-70 percent higher than those of its rivals when it entered the Vietnamese market five years ago. But now they are priced on par with other firms' due to smaller spending on advertisements, Hung said.

New regulation

Under existing regulations there has to be a minimum interval of 15 days between price hikes and the maximum allowed hike in prices is 20 percent.

However, milk firms exploit this loophole by making sure their price hikes remain below 20 percent every time, so authorities have no legal ground to intervene.

The Ministry of Finance is expected to issue a new circular late this month which regulates the price of some products, including milk. The Price Management Department said that under the new circular, price stabilizing measures will be taken based on input costs.

The new circular is also expected to regulate that all dairy firms will have to register prices of products being sold in Vietnam to ensure more stable retail prices for consumers. At present this is only required of firms in which the state holds more than a 50 percent stake.

After the new circular comes into effect, firms will have to inform relevant agencies of input cost structures, including transportation costs, import taxes and other fees, and this is expected to inhibit irrational increases in prices, Tuan said.

"However, it is very difficult to manage the advertisement expenses of the firms, as it is difficult to separate them from other expenses," Tuan admitted.

In order to avoid the government's ceiling on advertising expenditures, some firms have reported parts of their advertising costs as transport costs, commissions paid, and costs incurred in appointing more agents.

Other firms ask their mother companies overseas to offset part of their advertising costs by reporting higher material costs.

Thus, authorized agencies cannot assess their real spending on advertising.

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