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Dear MOF/MTI, Let Me Teach You a Little About Business

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While most of us normal alcoholics brace ourselves for an expected minor increase in alcohol prices in our favourite haunts, Daniel Goh, who runs The Good Beer Company, shares his thoughts on the hike in alcohol taxes from the perspective of a business owner and how the hike impacts businesses.

Of course the biggest shock over the weekend for most of us in the F&B industry was the Singapore budget announcement that will see duties on alcohol increase by 25%. Just when our beleaguered industry is reeling from manpower shortages and increased cost pressures from skyrocketing rent, the helping hand and largesse we were expecting from the government turned out to be a slap in the face.

As though stabbing us in our belly wasn’t bad enough, the authorities then twisted the knife by warning the industry against undue “profiteering”, that is – if the duty on a can of beer increases by 20 cents, retailers and on-premise operators should only raise prices by the same quantum.

Quoted in the above link:

“Based on the Ministry of Finance’s (MOF) assessment, even if the additional duty is fully passed on to consumers, the price of a typical can of beer (323 ml) should increase by about 20 cents, while a typical bottle of beer (663ml) should increase by only about 40 cents at coffee shops.”

 

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Excuse me? Do you know how business is run? Because it’s quite evident you don’t.

Let me explain.

The F&B business is exactly that, a business. And business runs on margins. Basically the idea is this – in order for a business to survive, it needs to maintain a certain price margin. This price margin is an invisible floor, a ratio where if your prices in relation to your costs go below that number, your business will go into the red. This magical number basically builds in all the costs – both fixed and variable – that the business incurs, which includes manpower, utilities, as well as the decor that goes into outfitting the business.

OK I’m no accountant, but if I understand it correctly the increased duties on alcohol essentially pushes up what in accounting they call Cost Of Goods Sold (COGS). COGS has an inverse relationship with margins, so the higher the COGS, the lower your margins. Businesses reach a price point for an item sold usually by considering COGS, and then putting a certain percentage mark up on it to achieve a certain margin. Successful entrepreneurs and business owners are those who watch their margins religiously. And margins are critical for the business because it is a hard-and-fast number for the business owner to control the variables that ensures that the business survives.

Follow so far?

If not, here’s an example. Assuming that COGS of, let’s say, to sell a beer in a restaurant is $5 per bottle, and the usual markup is 150% in order to arrive at a decent margin, the price charged should be $5 + ($5 x 150%)= $12.50.

So the additional duty on alcohol hits, and that 25% increase places an additional duty of 20 cents which means that the COGS of that product is now $5.20. According to what’s determined by MOF and MTI, this means this businesses should only charge $5 + ($5 x 150%) + $0.20 = $12.70.

But in order for this business to maintain the same margin, it actually has to charge $5.20 + ($5.20 x 150%) = $13.00.

And there’s that little thing called GST.

GST registered businesses also need to pay GST, and since the duty goes directly into the price of the product, the GST charged by the government also increases. If businesses simply increase price based on the quantum of the increase in duty, is MOF saying that businesses should absorb that GST increase?

As a consumer I agree that businesses shouldn’t take this opportunity to “unduly increase prices”. But for the authorities to point fingers at businesses and blame us for profiteering because we are increasing prices more than the quantum of the increase in duty is disingenuous at best, and dishonest at worst. It certainly does not take into account the realities of running a business.

I may be a hawker, but I wasn’t born yesterday.

The original post can be found on Daniel’s blog, The Beer Hawker, here.

 

What are your thoughts on the various vice tax increases announced in the 2014 Budget? Let us know what you think here.

 

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