If you are an avid ice-cream lover and a frequent traveller to Malaysia, you will have realised the significant price disparity of the cost of the relatively humble luxurious Magnum ice-cream stick. You can enjoy this delectable treat at RM3.90 (S$1.50) a pop, while waiting for your fellow travellers to clear customs. Compare that to Singapore, where a Magnum ice-cream stick retails at upwards of S$3.90, or even more if you fancy getting a customised version of the ice-cream at the Magnum Pleasure Store at Vivocity.
So why are Magnum ice-cream sticks so much more expensive in Singapore compared to countries around us?
Before we get into it, we like to introduce an economic theory.
The Big Mac Theory & the Purchasing Power Parity
For those who stayed awake during economics lessons in university (yes, I wasn't one of those cool kids sleeping in class), the Big Mac theory should be a fairly familiar concept. The Big Mac Theory, first introduced by the The Economist in 1986, is an extremely simple yet relevant way to understand the concept of Purchasing Power Parity (PPP). PPP basically states that exchange rate should adjust such that identical goods in different countries should cost the same, when expressed in a common currency.
Since the unassuming Big Mac burger is recognised as a highly standardised product that offers consistent quality regardless of where you are, hypothetically the price of the burgers should be similar anywhere in the world. The same logic can be applied to other goods such as a can of Coke, an Apple iPhone or for our case, a Magnum ice-cream.
In reality though, we all know that is not the case. A Big Mac is more than twice as expensive in Singapore as compared to our neighbouring countries, similar to our earlier example of the Magnum ice-cream stick. If you are interested to know more about the different prices of Big Mac in various countries, here is a list of prices of Big Mac you can refer to.
Why are prices never the same in reality?
There are basic economic reasons why goods such as a Big Mac or a Magnum ice-cream stick will never cost the same, even when compared to neighbouring countries. Here are 4 easily comprehensible reasons that will explain why.
The government enforces tax on goods. In Singapore, the "sin tax" is a good example. Due to hefty levies on alcohol and cigarettes, we are one of the most expensive places in the world to have a night on the town. It is also the reason why purchasing duty-free alcohol in the airport and an open pack of cigarettes (although this is now also illegal) whenever you return home from an overseas trip is a must.
2. Transport cost
Even if you could import goods without incurring any government tax, you will still incur some logistics related costs. As a country that imports most of our perishable goods, it is inevitable that we will pay more due to additional costs incurred from transportation. This will be reflected in the prices of our goods.
3. Presence of competition
In some countries, there will be intense competition which help keep the prices of certain goods in check. A good example is the Platinum Mall in Bangkok, which is filled with hundreds of shops selling clothes that are essentially substitutes for one another.
Alternatively, a lack of genuine competition within a market will enable prices to be marked up, as business owners take advantage of the situation to maximise their profit by artificially inflating prices. That is why a monopoly in the market will never be good for consumers. (Even though in theory they could be)
4. Varied cost of inputs
There are additional cost factors to be taken note of when comparing prices in different places. Labour cost is a main factor. For example, hiring a salesperson to run a shop will be more expensive in Singapore compared to Malaysia, even if both salesmen have similar skillsets.
Rental is also another key factor. Renting at Bugis Street is going to be far more expensive than renting at Platinum Mall. All these additional costs have to be made up from somewhere, and it is through selling a similar product at a higher price that the differences in costs are covered.
Are our Magnum ice-creams sticks overpriced or correctly valued?
The Magnum brand falls under the ice-cream brand Wall's, which is owned by Unilever, an extremely established company from Europe. Unbeknownst to many, Unilever also owns a separate ice-cream brand which is also very familiar to us, Ben & Jerry's. And having spent millions in the process, Unilever is also an expert when it comes to marketing.
Magnum positions itself as a premium ice-cream brand. You will not see Magnum ice-cream sticks selling at a price lower than your primary school ice-cream cup, even if they could do so without making a loss.
How Unilever price their Magnums in the various countries will depend largely on how much they believe people would be willing to pay for it. In Malaysia, the price is lower. Since it is going to be very difficult for anyone to attempt to buy ice-cream in large bulk, and then transport it to Singapore without it melting, Unilever is thus assured that consumers cannot work around the two different prices sufficiently to exploit the price disparity.
For us, let's take heart from the fact that the Magnum we have in Malaysia is the same, and that it is indeed a great deal whenever we get to enjoy one on a holiday there.
DollarsAndSense.sg is a website that provides bite-sized and relevant articles to help Singaporeans make better financial decisions.