How to sell cheap but still make a healthy profit

PUBLISHED : Saturday, 02 June, 2012, 12:00am
UPDATED : Saturday, 02 June, 2012, 12:00am


Suppliers have cut him off, wholesalers have nagged him over low prices and competitors call him predatory, but for this firm competition is all about flexibility and finding substitutes.

Coils Lam Wai-chun is the chairman of CEC International Holdings, owner of the '759 Store' chain of snack shops, which plans to open its 78th branch in Hong Kong by the end of this month. By next year the firm hopes to have 120 shops.

The chain's growth has been meteoric, considering that its first store opened not quite two years ago - on July 7, 2010. Lam has felt the sharp end of capitalism as well: he opened the snack chain to avoid sacking CEC employees amid the economic downturn.

But that growth has come at the expense of endless complaints from suppliers and competitors about underpricing, Lam says. Yet the prices of his products - from Japan, other Asian and European sources - remain low. He sells one brand of Korean instant noodles for HK$5.9 at his shops, while the same item sells for HK$16 at a department store chain.

'One sports drink supplier simply cut off our supply after telling me we were selling it too cheaply,' said Lam.

'I didn't make any pleas about it. I simply went to Japan to source two similar products, and their combined sales volume is exactly the same as the one we lost.'

Lam revealed the simplicity of his business formula: computer software that helps him set those low prices. 'I calculate all the prices by computer, calculating costs and setting a 37.5 per cent profit margin for all products - and 32 per cent for items on sale.' With margins like that, he asks, how can anyone accuse him of predatory pricing.

If Hong Kong adopts its proposed competition law, predatory pricing would be an offence under the second rule of conduct - 'abuse of substantial market power'.

But according to University of Hong Kong assistant law professor Thomas Cheng Kin-hon, predatory pricing is defined as shops selling products for less than cost price, followed by a price increase after their competitors have been forced out of business.

'Other small shops can follow the 759 Store model,' Lam said. 'It may be difficult for a small store to purchase shipments of different products as we do now. But why couldn't they locate one highly popular product and buy shipments of it?' I saw one shop in Tokyo that sold only packaged potato chips and freshly fried potato chips, and the queue always had dozens of people in it.'