With everyone facing the same pressures of rising costs, why have some companies chosen to put up the prices of their products, while others have bucked the trend and put them down? The China Times newspaper put up its price by 50% from 1 January, yet McDonald's fast food chain, under its "new economic policy," has lowered its prices. These enterprises belong to different sectors of the economy and operate under different conditions, but nevertheless they make for an interesting comparison.

On 27 December last year, the China Times announced that it was about to put up its price. One copy of the newspaper was to go up from NT$10 to NT$15, a whopping 50% rise. A few hours later, after an emergency meeting, the United Daily News also announced that it was to follow suit, to the consternation of consumers. That day the sales department at the China Times logged more than 2000 telephone calls from readers, some of whom lambasted the paper roundly, while others, after a few words of complaint, said they would continue to support it as before; still others enquired whether there would be any special offers for existing subscribers.

System-wide price rises

Why did the papers put up their prices? Naturally, cost pressure was the main reason. China Times' general manager Simon Cheng has the nightmare of paper price fluctuations over the last two years still fresh in his mind: from the second half of 1994 onwards, the international price of paper pulp rose steeply and continuously from US$370 to some US$1000 per ton. Due to this rise, all kinds of publications, magazines, and newspapers such as the Commercial Times and the Economic Daily News went up in price over the course of the past two years. Every time the China Times' contracts with its various international paper suppliers came up for renewal, the price went up by leaps and bounds, first to over US$600, then to over US$800, and so on. There was also a period when there was a shortage of paper on the market, and every day they worried that after a few days they would have no paper to print on.

At that time, with everyone expecting international paper prices to continue rising, and especially as they could not take the risk of being left without supplies, Taiwan's newspapers had no choice but to put in high bids to the international suppliers, so that they all signed contracts at prices approaching US$1000. Simon Cheng says with frustration: "This is the tragedy of being a small country--in the eyes of the international paper companies Taiwan's newspapers are just small potatoes, and we have no leverage on prices."

But with the volatility of the international market, some of these high price contracts had barely come into force when the price of paper turned down again. This gave rise to the paradoxical situation of newspaper prices not rising until after the price of paper had started to fall. However, this was forced on newspapers by the situation at the time, and they see no point now in worrying about whether they paid over the odds. But how much will future contract prices go down? "This will depend on the international paper suppliers' Asia-Pacific strategy. It's too early to say just now," says Simon Cheng.

After news of the impending price rise broke, many consumers protested: "If paper's so expensive, why print 52 pages? I don't read the adverts anyway!" What these consumers don't realize is that if the paper only printed 28 pages of news reports without any advertising, the cost of bringing out the China Times would be more than NT$18 per copy, not even counting its fixed costs. It is the income from those 24 extra pages of advertising which makes it possible for readers to buy the paper for NT$15. From the third quarter of last year, the volume of advertising decreased steadily, and in particular large property ads dried up almost completely. This was a major reason why the China Times decided it "could not survive without a price increase."

Moreover, the newspaper industry is an enormous system. Any price hike has a knock-on effect throughout the system. Simon Cheng points out that when the newspaper sold for NT$10, NT$3 of this went to the newspaper distribution companies and paper carriers. The paper carriers are paid NT$2.5 for each paper they deliver, so if they deliver 200 a day they still earn less than NT$15,000 a month, and this causes the distributors to complain vociferously. Now that the price has gone up they naturally feel there ought to be something in it for them. On a price of NT$15 they demand a cut of NT$4.5, and to keep readers the paper puts on all kinds of promotions with gifts and prizes. So in fact when the China Times put its price up by NT$5, the increase it actually received itself was probably less than NT$2.

The pressure of rising costs also affects the ROC's biggest fast food operator, McDonald's.

McDonald's looks to the lunch box

"For the past few years, the price of local agricultural produce has been going up all the time, whether it be vegetables the year before last or pork last year, or the recent wave of price hikes for flour and bread," says Wu Hsin-hao, assistant vice-man-ager of McDonald's planning department. However, from the standpoint of a global fast food chain, what causes Taiwan McDonald's its biggest headaches is actually the ROC's protectionist policies on agriculture.

"With protectionism the cost of food in Taiwan really is too high," says Wu Hsin-hao. He says that in Hong Kong, for example, McDonald's prices to the public are only about half those in Taiwan, but its profits there are better than here. Hong Kong has no agricultural industry of its own, but it is a free port. Good-quality foodstuffs, such as chicken meat from mainland China, can be imported from anywhere in the world at the lowest prices, and are not subject to any tariffs. But in Taiwan, chicken and pork cannot be imported at all, and flour is subject to import controls. Food costs account for a high proportion of McDonald's total costs, so they are a crucial factor affecting pricing.

Because of high costs, when the first McDon-ald's outlet opened in Taipei 12 years ago, its prices were high too. The price of NT$85 for a Big Mac attracted sharp criticism from consumer organizations, and in successive customer opinion surveys since then, price has always been the point on which customers express the greatest dissatisfaction.

In response to patrons' hopes for more reasonable prices, three years ago McDonald's set itself a long-term goal of gradual price reductions. For instance, a Big Mac has come down from NT$85 to NT$65, and a children's Happy Meal has gone from NT$79 to NT$70. On the one hand, the company has established mutually supportive partnerships with local produce suppliers, giving them guidance to help them improve quality and increase the quantity of produce supplied under contract, in order to reduce McDonald's exposure to price fluctuations. On the other hand the number of branches has increased rapidly, topping 100 last year, and this gives the chain enough economic scale to share and reduce all kinds of costs. Nonetheless, this price reduction policy has inevitably eaten into McDonald's profits. Their gross profit has gone down by a surprising five percentage points over the last three years.

New prices, new positions

For McDonald's, whose sales have been increasing year by year, to cut prices of their own accord is naturally good news for consumers, but the price- cutting goal the company has set itself is also quite surprising: "We hope to come closer and closer to the price most people expect to pay for a boxed lunch meal, or even go below it." Wu Hsin-hao observes that 10 years ago, a boxed lunch cost NT$40-50, while a meal at McDonald's cost over NT$100. But from this year, since the launch of the new set menus, one can buy a hamburger meal at McDon-ald's for NT$55 or NT$75. Compared with boxed lunches, which have been growing dearer year by year, the difference between the two has been growing smaller and smaller.

As its prices have gone down, naturally the way McDonald's defines its position in the market has also changed. In the past, eating at McDonald's was a fashionable thing to do--it was a place where friends would arrange to go specially to eat out or for a get-together. But what of the future? "McDon-ald's can't always be fashionable--we're not a chain of fashion boutiques or expensive theme restaurants. We have an extremely uniform and standardized product. In other countries, McDonald's positions itself as supplying a cheap, popular meal in a friendly, hygienic environment. It's a place where thrifty housewives take their children or where office workers grab a relaxed lunch," says Wu Hsin-hao. He is not sorry to see the back of McDon-ald's previous high-class status in the Taiwan market, for he sees its market potential after its prices come down: "In the USA there is a McDonald's outlet for every 20,000 people on average, but in Taiwan today there's only one branch for every 200,000 people. There's still a great deal of room for growth in this market."

In contrast to McDonald's with its strategy of low-margin, high-turnover operation and using price reductions to win mass consumer hearts, the China Times after its price rise is looking to reposition itself in the market as a "high-price, high- quality" product, to try and differentiate itself from such papers as the Independence Morning Post and the Liberty Times, which have proclaimed a position of not raising their prices.

"In future, newspapers should be competing on quality, not price," says Simon Cheng, observing that compared with major newspapers overseas which cost at least NT$30-40, newspapers in the ROC have always been cheap. When a number of honestly-run newspapers in Hong Kong were forced out of business by cutthroat competition in a price war last year, it was the readers who suffered in the end. The China Times decided to "take a risk" on whether readers in Taiwan are willing to pay a little more to buy a newspaper with an obviously richer content.

The price/value seesaw

How will these different pricing policies affect sales?

For McDonald's, following the launch of its new low-price hamburger meals, in January the average customer expenditure per visit (based on till receipt records) was some NT$10 lower than last year, showing that after the price reduction the cost to consumers really has fallen. But the number of customers visiting outlets has increased by a substantial 20%. And what about the China Times? In January the number of copies sold over the counter fell by some 10%, but happily readers' reaction was prompt, and the reduction was concentrated in the first few days of the month. After a few days the decline stopped and sales stabilized. "As long as the decrease doesn't continue every day and gradually snowball, then we're OK," says Simon Cheng. However, this is only a small hurdle. Eighty percent of the paper's circulation goes to subscribers, and because their subscriptions are paid in arrears, many have not yet felt the effects of the price rise. Thus whether it will have a gradual effect over the coming months is still quite a worry.

"Price cuts attract, price hikes repel." This is an iron rule of the marketplace which is hard to buck. But a price change takes place at a particular moment in time, and once consumers get used to the new price they will mentally reappraise the relationship between a product's price and its perceived value. Perhaps that is the moment which is really crucial to its success or failure.

By moving from a high-price, fashionable position in the market, to one of striving to get close to ordinary consumers' daily meal budget, McDonald's is bucking the general price trend. The company's strategy gives much food for thought.