Price controls look to be a likely measure we are going to have to contend with in the near future – and yet all entrepreneurs hate the concept of being controlled by a 3rd party, and by being limited in their commercial activities.
But price control is not a new concept – indeed it is operative in many countries in certain sectors, particularly in banking and utilities. So what are the best practices we need to manage this new implementation of an old measure?
- Conform and Collaborate
To enter into what is mandated collaboration with the authorities with an antagonist position is not going to work – and is likely to generate too much negative emotion and publicity. A smart move is for individual operators not to fight against the imposition of price controls one by one, but rather to work closely with the authorities – and let industry organizations and lawyers challenge the concept and the legality. Collaboration makes sense, where all aspects of operating costs can be presented, and the true cost drivers of products are understood.
- Build a Pricing Model
You need to go “open book”. It is essential to have a clear transparent model which takes into account all costs – direct material costs, freight and importation charges, insurance, handling and transport, warehousing and distribution, administrative overheads being some. And don’t forget your cost of capital! And wastage is an easy one to overlook. The devil is in the detail – and operators have far more insight and knowledge on that detail than the authorities. But this must be used wisely – trying to mislead or delude the authorities will backfire sooner or later and will undermine the trust you need to legitimately revise prices, and probably delay the lifting of the price control regime.
The key is to have an open and detailed breakdown of how you account for your operations, and how you build your pricing. Given the comprehensive disclosure involved, it would be sensible to have a formal Non-Disclosure agreement in place!
And do not be shy about including in your model your margin as a supplier – price control does not require philanthropic sacrifice. A business exists to make money – be clear on what you expect to make and indicate what is the minimum profit or return you can accept to continue to import or distribute.
- Build the Price Revision Mechanism with the authorities.
Operators need to agree what changes in the costs and margin levels trigger a revision of pricing. In the staple categories, where raw material pricing is one of the main product cost drivers, agree what percentage change – up or down – to this cost driver triggers a price revision. But also be clear how changes in other cost drivers can hit profitability, and have a trigger linked to your Net Profit – not your Gross Margin! Importers need to be very clear that currency movements have a major influence on margin – perhaps an element of anticipation (hedging) should be built into the model. Avoid linking price revision just to indexes such as the Retail Price Index – individual factors need to be dealt with pro-actively, not reactively.
But do not fall into the trap of agreeing a 6 monthly or 3 monthly review – commodity and crop prices move fast. Exchange rates are certainly volatile. Do not boxed in by committing to a calendar!
The essential is to be in constant discussion on cost drivers, and avoid the trap that discussions are negotiations – if you have agreed the model and review mechanism then the discussion becomes fact based, not a deal making exercise.
And signal an acceptance that when raw material prices or cost drivers drop, then you are ready to revise prices downwards.
N.B. It is going to be very interesting to see how Fuel prices are going to be revised in the next few months given the collapse in oil prices worldwide, and the implications for vastly reduced Govt tax incomes on fuel.
- Agree a Timeframe
Price control is an anti-competitive and exceptional measure – it should be time limited. Agree with the authorities for how long the measure will be in place, or, failing that, what are the determining factors which need to be in place to enable lifting of price control.
- Do Not Cross Subsidize
Do not fall for the “Canard” of accepting a reduced margin on price-controlled goods because you are able to make a higher margin on unrestricted goods and will therefore make a reasonable average profit. Unrestricted goods are subject to market forces and competition but are totally outside of the remit of the authorities. Restrict the focus to goods mandated to be price controlled
- Use your A team.
The best person to represent your enterprise is the CEO – delegation can be perceived as a lack of good intention or respect and authorities are unlikely to be able to build trust and transparency with just the accountant. And the CEO should be the best placed person to explain the facts and detail of the operation.
And remember a key risk is the Reputational Risk – there is something invidious about being placed under price control – it is essential that the CEO protects a company’s reputation whilst under a price control regime by working closely and amicably with the authorities. Again, it is essential that all information is honest and accurate – cheating is not an acceptable risk to take.
- Manage the Downstream Value Chain
In a situation where margin is tightly controlled is seems illogical for distributors to be discounting products and paying Modern Trade listing fees and RFA percentages. These need to be eliminated – or if deemed impossible – built into the pricing model.
- Prepare for more Product Standards and Testing
Price control will lead to a further pressure on costs and the authorities will be advised by their economists that there is a risk that product quality might be compromised. Now is the time to prepare for closer inspection of imports and finished goods, demands for ISO certification and documentation and tighter national standards in line with international food safety standards.
In conclusion, I would strongly recommend that operators work closely and collaboratively with the authorities to ensure that they have the right level of operating profit to continue business as usual under a price control regime, and have a clear mechanism for price revision – fact bound not time bound – which they learn to operate dynamically.