2006_04_01_archive

Cheaper Nescafe?

It's in a company's interests not to let on that we could be paying

less for its goods.

ALL over Sydney we're getting our Nescafe out of different, cheaper,

jars. Blend 43 costs somewhere between $6 and $7 for a 150-gram jar.

But for the past few months it has been possible to buy instead a

200-gram jar of Nescafe Matinal or Classic Deluxe for only $4.69.

These Nescafes are in similarly coloured (although different-shaped)

jars to Blend 43 and they taste much the same, if not better. They're

available at Aldi and at small supermarkets in Chinatown...

The only disconcerting thing, as you unscrew the lid, are the words on

the jar reading: "For sale in Indonesia only." At Aldi there is also

an extra sign saying: "Whilst the blend is different to the locally

sourced product we believe that the quality of the product is as

good."

The company that makes Nescafe in Australia is upset. It has cut off

supplies of products such as Milo to Aldi in retaliation. Which is odd

because it is also the company that makes the product that it doesn't

want Aldi putting on its shelves.

Nestle Australia and Nestle Indonesia (and also Nestle Brazil, from

whom some of the coffee is sourced) are all subsidiaries of Nestle SA

in Switzerland.

Nestle's official line is that it doesn't object to Aldi selling

coffee from its Indonesian subsidiary, as such. (This sits oddly with

the injunction it has printed on its jars of Indonesian coffee.)

It says what it does object to is the "confusion among consumers" that

will result from an extra two varieties of Nescafe being on display on

the supermarket shelves. This from a company that, when it can,

displays about a dozen varieties of Nescafe on supermarket shelves.

In seeking approval from the Australian Competition and Consumer

Commission to maintain its ban on supplying to Aldi, Nestle Australia

says it has received a number of consumer complaints about the

imported Nestle coffee.

It is reasonable to ask, what could possibly be wrong with imported

Nestle coffee? Nestle Australia's answer - delivered, deadpan, in its

letter to Aldi - is that the imported Nestle coffee "has not been

blended specifically for Australian tastes".

It's the sort of explanation we are used to hearing from

multinationals that want to stop the movement of their product between

nations. Remember the fuss made by the record companies that managed

for years to ban imports of records they had made for sale overseas?

They said it was about piracy and copyright, nothing to do with price.

DVDs and computer games are region-coded, making it difficult to play

those bought in the US in Australian machines. According to the film

companies, it is done to ensure a money-saving staged release of films

to cinemas. They say if the films are shown in the US first, the same

copies can later be flown to projectors in other parts of the world.

But this doesn't explain why they also region-code classic and

direct-to-DVD movies. Nor does it explain the ferocity with which

software companies have used the courts in an attempt to stop

Australians modifying their games machines so they can play games

purchased overseas.

An economist would guess the surprising xenophobia of multinational

corporations such as Nestle, Universal Music and Sony is really all

about price - in particular, a practice known as "price

discrimination".

In business it rarely makes sense to charge all of your customers the

same price. If you set that price high and charge the most that an

eager customer will bear, you will miss out on sales to a larger

number of not-so-keen, or poor, customers.

If you set the price low in order to maximise your sales, you'll be

giving away your product to the keen customers for much less than they

would be prepared to pay for it.

Companies such as Nestle and Arnott's get around this by making two

sets of products: one for people who are prepared to pay a lot, and

the other for buyers who are canny or short of funds. They make the

cheaper product less attractive in order to encourage buyers who can

afford it to buy the higher-priced product and not the cheap one.

It is no accident that the packaging on International Roast coffee and

Sunshine Biscuits is particularly ugly. International Roast is

Nestle's second, cheaper brand (nothing on the packet tells you that -

even the manufacturer's address is different). Arnott's makes Sunshine

Biscuits, although it tries to keep that fact to itself.

The more you think about it, the more examples of price discrimination

you find. Banks do it by offering discounted loans to new customers

but not to the ones they've already got: new customers are looking for

a good price; existing customers usually can't be bothered.

Cinemas do it by offering special prices to students - not because

they have a love of education, but so they can move tickets they would

not have been able to sell to these regular customers at a higher

price.

Price discrimination works best when the people who are prepared to

pay more don't get to find out about the cheaper price being offered

to others.

In his book Retail Pricing Strategies and Market Power, Gordon Mills

notes that in April 2000 a Sydney supermarket was selling special

three-kilogram "budget bags" of apples for less than $3. The packaging

made it hard to see what was inside. The apples were as good as those

that were selling, loose, for up to $6 a kilogram. For the strategy to

work, it was essential that the customers who were prepared to pay the

high price could not find out.

That might be the real reason Nestle is so keen to discourage chains

such as Aldi from displaying jars of its products at something

approaching Indonesian prices: we might think we're being overcharged.