Wednesday, May 21, 2008

How much for a cafe mocha?

I blogged about this last October.

Again, Seoul is ranked high when it comes to consumer prices. What's funny is a lot of people think you can roll into Seoul and get things on the cheap.

Okay, low-quality knockoff DVDs? Sure. But, as the article notes, a cup of coffee from one of the international chains doesn't come cheap. That's the same for quite a few things here.

I've never expected, however, to get international goods here that weren't more expensive than back home. What's interesting is when the prices of things that you'd think would be less expensive like rice, a national staple, are more expensive. That's due to a lot of things from politics to nationalism and economics.

However, the issue is without other things to balance it out like the culture, ease of doing business, openness to foreigners, etc. it's hard to see what South Korea is seriously doing to increase its level of international competitiveness. This is particularly so when other countries in this region are also upping their game to attract foreigners and the investment and businesses that come with them.

Koreans Pay Among World's Highest Prices, Survey Shows

The coffee at Starbucks in Seoul is more expensive than in 11 major cities around the world, relative to overall price levels. That's according to the Korea Consumer Agency, which on Tuesday released the results of a price comparison of seven items -- coffee, golf green fees, imported canned beer, snack cookies, cosmetics, books, and orange juice -- between Seoul and other cities in North America, Asia and Europe.

◆ Coffee, beer costlier in Seoul

A cup of Cafe Americano sells for W3,300 (US$1=W1,045) at Starbucks in Seoul, while the same drink sells for W2,280 in U.S. and Canadian cities -- meaning Koreans pay a full W1,000 more. "When compared arithmetically, Seoul turned out to have the highest prices except for European cities where prices have risen with the recent rally of the euro," the KCA said. Prices generally tend to be higher in countries that have strong currencies, but comparing by purchasing power parity (PPP) removes that factor. Based on PPP, Seoul had the highest coffee prices among the 12 surveyed cities.

By PPP, the price of a 355 ml can of imported Budweiser beer was also highest in Seoul. Compared arithmetically, the beer, which sells for W800 in China, costs nearly double in Korea at W1,500. In imported cosmetics, Korea ranks eighth in the price of lipstick based on the simple market exchange rate, but highest based on PPP. Korea ranks seventh in the price of snack cookies based on the simple exchange rate, but the relative price is higher than in other major Asian nations.

◆ Why are prices so high in Korea?

The price differences between Korea and other countries are determined by various factors, such as government policies, taxes, logistics expenses, labor productivity, and prices of raw materials. Jang Soo-tae, an official at the KCA, said, "High prices are determined by structural factors, including complicated distribution systems, high tax rates, and excessive government regulations, and natural factors, including economic causes of high costs and low efficiency, poor land conditions and lack of resources."

The high coffee prices, for example, are the result of a "high cost structure, including high shop rents and a 5 percent royalty, and the consumer trend for foreign-style coffee shops," Jang explained. As for imported beer, that product suffers a tax-price ratio of 53 percent in Korean, much higher than in the U.S. (14 percent), Germany (15 percent), and France (18 percent).

The KCA pledged to look out for unfair trade practices for surveyed items that cost much more in Korea, and it will also urge government agencies to overhaul the high tax system. But high prices are not limited to the items on the survey. "In addition to the seven items surveyed, there are many others whose prices are higher than in other countries," said Park Sang-yong, a professor of business administration at Yonsei University. "It's dangerous to make a hasty decision, but the government needs to take fundamental measures to address issues such as monopolies and oligopolies, and taxation."

◆ Taxes inflate wine prices

Wine is one such item that was not on the survey but is generally much pricier in Korea than elsewhere. For example, a bottle of Mouton Rothschild 2004, a special-grade French wine that was imported recently, sells for W970,000 on average at Korean wine shops. But the same wine costs 39,900 yen (about W400,000) at Enoteca, a wine shop in Tokyo -- nearly half the price.

Wine in Korea costs nearly double than in Japan because Korean importers seek higher profit margins, but also because the two countries apply very different tax rates. Korean importers pay a 15 percent import tariff, a 30 percent liquor tax, a 10 percent education tax, and a 10 percent value-added tax on wine. That means the more expensive your wine, the more tax you pay. In contrast, Japan imposes a flat tax rate on all wines, whether they cost W1 million or W10,000 a bottle. Hong Kong, meanwhile, imposes almost no taxes on imported wine. Korea levies high taxes to protect local wines, typically the traditional Korean style. But many people are calling for an overhaul of the tax system since imported wine has become so popular.

More links:
Chosun Ilbo: Seoul Prices Remain Exorbitant
The Economist: Big Mac Index

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