Are businesses monitoring their margins adequately amid greater price scrutiny?
THE increase in prices has been making headlines in Malaysia.
Like many other countries, Malaysia is not spared from the economic fallout from the pandemic in the form of supply chain disruptions, increased commodity prices and labour shortages, exacerbated by the ongoing Russia-ukraine conflict.
As businesses grapple with the rise in costs, the obvious strategy to mitigate the impact of cost increase is to pass on the costs to customers.
On the other side of that coin, consumers are losing their purchasing power as a result of wages increasing at a slower rate compared to costs.
Think about the last time you were in a supermarket, or when you were out for dinner – did you notice that you were paying more than what you used to for the same product?
Given the cost pressures faced by the rakyat, the Domestic Trade and Consumers Affairs Ministry (MDTCA) may well be stepping up enforcement to ensure that businesses are complying with the Price Control and Anti-profiteering (Mechanism To Determine Unreasonably High Profit) Regulations 2018 (PCAP Regulations).
Typically, the MDTCA relies on complaints lodged by members of the public to enforce the PCAP Regulations.
Given the high cost of living experienced by many, there is a higher likelihood of customer complaints lodged with the MDTCA if customers feel the price paid is excessive.
Simply saying the “selling price is increased due to increase in the cost of raw materials, fuel, transport” and so forth, is unlikely to be justified for the purpose of PCAP.
Businesses need to be able to demonstrate that the increase in selling price will not result in a breach in the allowable margin and mark-up.
The Price Control and Anti-profiteering Act 2011 and the PCAP Regulations have been around for quite some time now. The expectation is that businesses in Malaysia are complying with the PCAP legislation.
Domino effect
An investigation conducted by the MDTCA as a result of a complaint may have a domino effect throughout the entire supply chain.
This means it is crucial for businesses to ensure that any selling price revision undertaken to mitigate the impact of cost increase is in line with the PCAP Regulations.
For instance, an increase in the selling price of chicken in a supermarket could result in the MDTCA investigating the wholesaler distributing the chicken, if the price charged by the wholesalers are identified as the trigger.
If a more thorough investigation is needed, the entire supply chain right down to the farmers will be investigated until the MDTCA is able to identify the source of the price increase and ascertain whether the increase in price is justified.
A point to emphasise is that the PCAP Regulations are not put in place to govern the price of products or the margin/mark-up earned.
The purpose, in its simplicity, is to ensure that any increase in price will not result in an excessive margin/mark-up – i.e. anything above the allowable margin/mark-up (which a business needs to compute based on the PCAP Regulations).
A balance is required between consumer protection and protecting the continuity of a business – which is how the anti profiteering legislation should be applied.
The methodology of computing unreasonable profit may, on the face of it, seem too simplified.
The method does not take into account other economic factors that may force a business to increase the selling price above the allowable margin/mark-up – a drop in sales volume, the marketing strategy (for example, luxury products), the type of goods and services on offer, whether it is discretionary spending or essential) and other factors which may not be cost related.
Insufficient understanding or awareness of the PCAP legislation may result in businesses being caught breaching the PCAP Regulations. It is important for businesses to be aware of:
> how the products are classified,
> the costs factored in at the time the selling price was determined,
> how these costs are being allocated to specific Skus/products and
> any other factors that were taken into account in computing the margin/mark-up.
This should be applied consistently when monitoring the margin/mark-up to ensure that any change in the selling price is still in line with the PCAP Regulations and any deviations are substantiated.
In light of the rising inflation impacting the cost of living and the government’s focus on improving the people’s well-being through increased income and social protection, greater scrutiny of prices by the MDTCA can be expected.
The key takeaway for businesses is to ensure that the PCAP Regulations are taken
into account as part of business planning and a factor in your regulatory risk management.
This is to ensure that any decision undertaken by a business to increase the selling price complies with the PCAP Regulations and businesses are able to justify and substantiate the margin earned.