A fierce price war raging among convenience stores, supermarkets and fast-food chains has pushed the prices of many staple items down to levels they were at a decade ago. Dairy Farm International Holdings' 7-Eleven chain fired the first salvo in the price war last month, offering HK$10 rice boxes. In response to this aggressive marketing strategy, the Li Ka-shing controlled supermarket chain ParknShop joined the battle, undercutting 7-Eleven by 10 HK cents on rice boxes. The low-price strategy has extended to fast-food chains Cafe de Coral and Maxim's which have now added HK$12 meals to their menus. The price roll-back underlines the deflation that bedevils Hong Kong's economy today. The steep reduction also reflects the desperation of Hong Kong's 10,500 retailers. Overall consumer goods prices have plunged about 30 per cent in the past four years while the cost of living has gone back to the 1990 level, according to retail industry leaders. And making life even more difficult for Hong Kong retailers are the shop owners in Shenzhen, already renowned for offering year-round cheap shopping. Some Shenzhen department stores are offering cash rebates of up to 50 yuan (HK$46.86) to every shopper who makes purchases worth 100 yuan. The three-day promotion by a department store reportedly attracted more than 300,000 shoppers, about 10,000 of whom were from Hong Kong. Back in Hong Kong, the greatest challenge facing retailers is consumers' reluctance to spend money. They have adopted a 'buy-later-it's-cheaper' attitude in the face of Hong Kong's floundering economy. Richard Yeung Lap-bun, chief executive of Convenience Retail Asia, which operates 160-outlet Circle K, said retailers had been hit hard in the past four years amid Hong Kong's deflationary economy. He said retailers' profit margins had been squeezed significantly by the weak purchasing power of consumers but the costs of doing business in the SAR remained among the highest in the world. 'We are being squeezed in both ways and it's really very tough for us,' Mr Yeung said. 'The consumers are king under the current adverse environment,' he said. To boost its sales, Mr Yeung said Circle K had to offer an average of 10 per cent discount on about 200 consumer items. The company would not be resorting to this 'crazy-sale' marketing strategy if the economy was performing well, he said. The extent of reductions in retail shop rentals, salary and wages and costs of utilities had not been as sharp as the drop in consumer goods prices, Mr Yeung said, which increased the burden on retailers. Rental costs still accounted for about 30 per cent of operational expenses, significantly higher than the 20 per cent that most retailers would like to see, Mr Yeung said. Cafe de Coral chairman Michael Chan Yue-kwong shares Mr Yeung's views. 'Offering significant discounts is the only alternative to get business going during economic hardships,' he said. 'We have no choice at all. If you don't cut your prices, you're bound to lose business to your rivals,' he said. Apart from retailers, both big and small, Hong Kong's deflation also created a major problem for the government and private sector enterprises, he said. 'It is hard to see how any government could tackle such long periods of deflation in the short term,' he said. Global fashion chain owner Esprit Holdings said its Hong Kong division, which accounted for 12 per cent of revenue, had dipped into the red for the first time during the 12 months to June 30. Chairman Michael Ying Lee-yuen said the company had already marked down prices to boost sales in Hong Kong. 'It is true we can achieve an increase in volume but the turnover will never be the same as before,' he said. Mr Chan said: 'Who can be the fastest in enhancing efficiencies and driving down costs will be the winner of this battle.' Cafe de Coral had been investing heavily in automation in the past two years in anticipation of increasingly difficult business conditions, he said. Mr Yeung believed the competitive environment would drive creativity and innovation, saying: 'Companies have to be leaner, highly efficient and customer-oriented. Those who fail to do so will be eliminated.'