How can local firms cope with price competition in EAC common market?

Local manufacturers face the unwelcome decision to either slash prices of their products or adopt vigorous marketing strategies to keep pace with the growing competition that is dominated by more affordable alternatives from regional companies. The latter alternative in itself is costly as it means having to spend big on marketing. Mount Meru Soyco Ltd (MMSL), Rwanda’s only producer of edible oil, has been forced to slash prices of its products by Rwf200 to survive on a local market that’s flooded with more affordable imported cooking oil. “We are operating at a loss, we have cut product prices just to maintain a market presence but we know it’s not sustainable; cheap imports are hurting us,” said Mayur Shrotriya, the firm’s head of sales and distribution. MMSL’s flag product, Star Goldy cooking oil, is a 50/50 mixture of palm and soya. A twenty-litre jerry can sells for Rwf22,300 on the market, a little more costly than alternatives from the region, such as Bidco and Mukwano, that go for Rwf21,900. Despite having a superior product, clients tend to go for the cheaper option, leading to a drop in demand for Star Goldy. The manufacturer was then forced to slash prices to attract clients. At Quartier Mateus, Kigali’s central trading hub, wholesalers said price plays a major role, and clients will always go for the cheaper option. “One can’t complain about prices. It’s a global phenomenon. Clients and dealers are attracted to the cheaper options,” a wholesaler, only identified as Charles, said. MMSL officials claim that their regional rivals are involved in under-declaration of goods at the customs, a claim they’re yet to prove to Rwanda Revenue Authority (RRA). “We have reason to believe that most of these imports under-declare their value at the customs, this enables them to pay less tax and sell their products cheaply on the market,” Mayur said. Suchir Bhatnagar, the general manager of SRB Investments, a local paperbag manufacturing firm, has made a similar allegation to this newspaper before. Both SRB and Mount Meru said they have shared their suspicions with RRA for possible investigations. However, William Musoni, the deputy commissioner for customs, asked for the one thing that has always lacked: evidence. “Tell them to give me that information; we are battling such malpractices on a daily basis but without tangible information or evidence, we can’t do much,” Musoni told The New Times. Teklay Teame, from GPS suppliers – a firm contracted to supply the local market with cooking oil manufactured by Bidco, told this newspaper that he is confident that his client is clean. “I am 200 per cent sure that Bidco is not involved in such malpractice; in fact, we have complained to Bidco that their products are still expensive compared to recent commodity price declines,” Teklay said. In the absence of evidence or any other policy framework to protect local industries, price will remain a determinant factor to remain competitive. “We have set a new factory price of Rwf21,700 for distributors of Star Goldy and we are also giving ‘credit facilities’ which allows distributors to pick products and pay later after selling,” Mayur said. But these are kneejerk reactions targeting short-term gains. For instance, Rwf21,700 is still more expensive than Rwf20,000, the price at which Haya edible oil from Egypt sells on whole sale even after paying import-duty as a non-EAC or Comesa member. Common market effects The headache of cheap imports is not limited to Mount Meru Soyco. Other local manufacturers such as Cimerwa, Rwanda’s only cement maker, compete with cheaper alternatives from Uganda, Kenya and Tanzania. Experts say these are early effects of the EAC common market, which came into force on July 1, 2010, following ratification of the protocol by all the five Partner States, Burundi, Kenya, Rwanda, Tanzania and Uganda. The protocol provides for “four freedoms” namely; the free movement of goods, labour, services, and capital that are aimed at boosting intra-regional trade and investments and make the region more productive and prosperous. A major challenge, even in other economic blocs around the world, is the competition that tends to overwhelm member countries with smaller economies; in EAC’s case, Rwanda and Burundi that have relatively younger private sectors and small industrial base. Experts say any move for protection could be seen as being against integration. John Bosco Kalisa, a senior programme manager with TradeMark East Africa (TMEA) Rwanda, said even if government was to protect the local producers, the efforts would turn out to be futile since the local firms may not have the capacity to produce and satisfy the local demand. “It’s a matter that requires delicate balancing. The point here is that you don’t want to protect young manufacturers at the expense of consumers who would be denied an opportunity to have a variety of product options at competitive prices,” he said. Eng. Fred Rwihunda, the president of the Engineers Institute of Rwanda, said the only way government can help local producers is not to protect them but to lessen their cost of doing business and allow them to be competitive enough. This would build on the proximity advantage. “In a situation where you have a variety of commodities of almost similar quality, the consumer will always go for the least expensive ones, it’s the case with imported cement which is cheaper than that made in Rwanda,” he said. A bag of local cement is priced at Rwf10,000 compared to Rwf9,500 for the imported brands. “Cement is a primary factor in construction, its price significantly affects a lot of things, so even if it was a difference of Rwf100, it actually makes a huge difference, especially for firms buying in large volumes,” he said. Other observers say for local manufacturers to get more competitive, they also need to expand their product lines so as to benefit from economies of scale. “Mukwano, for instance, has dozens of products. If you look carefully, the price of their soap is relatively higher, which means they can afford to sell cheap edible oil and make amends from their other products,” said Fidel Kamana, a sales expert. Efforts to get a comment from the Ministries of Trade and Industry as well as that of East African Community Affairs were futile by press time. ************ Price war When companies continuously lower prices to undercut the competition. A price war may be used to increase revenue in the short term or as a longer term strategy to gain market share. Price wars can be prevented through strategic price management, thorough understanding of the competition, or even communication with competitors. When a company wants to increase market share, usually the easiest way is to reduce prices, which increases product sales. The competition may be forced to follow suit if its products are similar. As prices get lower the quantity of sales increases and customers receive the benefits. Eventually, a price point is reached that only one company can afford. Some companies will even sell at a loss in an attempt to eliminate the competition completely. editorial@newtimes.co.rw

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How can local firms cope with price competition in EAC common market?