Critics say consumers are taken
By Rob Perez
for a ride by some Hawaii retailers,
with prices up to 200 percent higher
than on the West Coast
Star-BulletinBroccoli crowns -- 200 percent more.
Eye exams -- 76 percent more.
Pizza -- 42 percent more.
While the influx of national discounters in recent years has brought mainland-like prices to Hawaii, examples still abound of hefty paradise premiums.
Consider this late-June snapshot:
Customers at Safeway on Oahu paid $2.39 for a pound of broccoli crowns -- 203 percent more than the 79 cents charged at several Safeways on the West Coast.
From grocery items to gasoline, consumers still can find unusually high prices -- the kind that generate sticker shock -- in pockets of Hawaii's retailing sector.
The premiums are all the more surprising given that other retailers are able to hold the line on isle prices, charging close to or the same as what they do at their West Coast stores, especially for nonfood items.
A Star-Bulletin survey of 30 national and regional retailers in Hawaii found that several had no or nominal paradise premiums, and two even had slightly lower prices compared with their West Coast outlets. Others had local prices that averaged around 30 percent more -- or even higher.If some retailers can deliver mainland-like pricing, why can't the others? Are companies charging more because they have to -- or because they can?
Critics who question the high paradise premiums say consumers are being taken for a ride.
Because Hawaii is a small, isolated market, some retailers -- especially those in industries without vigorous price competition -- are able to charge well beyond what is needed to cover costs and generate a reasonable return, critics say.
Many consumers feel used
Many consumers, in turn, feel used and abused."Prices seem so out of whack," said Diane D. Ackerson, 58, a Hawaii Kai resident who believes gouging is common. "Every single one of us is aware of what the stores are doing."
Retailers deny any overcharging. Their prices, they say, simply reflect the high cost of doing business in Hawaii, where the vast majority of goods and supplies must be shipped from elsewhere.
"We're doing everything we can to give consumers the very best value in Hawaii," said Debra Lambert, spokeswoman for Safeway, the state's second-largest grocer behind Foodland Super Markets.
But "our operations in Hawaii have such a greater cost structure," Lambert said, and those added costs are reflected in higher prices.
Like the $4.79 Safeway charged Oahu customers in June for a 10-pound bag of Russet potatoes. On the West Coast, Safeway customers paid $1.99 for that same bag.
Price gouging or not?
The debate has raged in the islands for years.
Constant reminders
People are reminded of it whenever they pay nearly $6 for a gallon of milk or more than $5 for a box of cereal -- prices that usually astound mainland visitors.They're reminded of it when they hear that companies have made extraordinary profits in Hawaii while charging local consumers some of the highest prices in the nation, as has been the case with gasoline suppliers and auto insurers in recent years.
They're reminded of it when local auto dealers routinely add thousands of dollars to the manufacturers' suggested retail prices of cars, even though the suggested prices already include cushions for dealer overhead and profit.
They're reminded of it when Hawaii's major banks easily charge the highest interest rates in the country for new and used car loans. Hawaii's average is so much higher some mainland banking experts say they haven't a clue about possible justifications.
Then there's the anecdotal evidence.
When the Star-Bulletin, for instance, questioned Safeway about the huge disparity between its broccoli crown prices here and on the West Coast, the grocer immediately lowered the local price by close to 50 percent, acknowledging that the original amount was out of line.
When the Star-Bulletin questioned Daiei, another major grocer, in March about its $6.19 price for a gallon of brand-name milk, it immediately dropped the price by 21 cents a gallon. At the time, Daiei's price was the highest among the major grocers in a state that already had the nation's most expensive milk prices -- by far.
Adding even more intrigue to the long-running gouging debate are the differences between Hawaii and West Coast prices.
Economists, retail analysts and marketing specialists say they aren't surprised that prices are higher here than on the West Coast. What's surprising, they say, is the huge disparity in Hawaii markups among the retailers the Star-Bulletin surveyed.
Drawing conclusions from such differences would be difficult without delving into the many factors that affect pricing at the industry and even product level, the retailing experts say.
But the differences raise interesting questions.
"The most obvious explanation is there's not real competition in these markets," said Carl Bonham, a University of Hawaii associate professor of economics.
Robert Skylar, senior consultant for Econ One Research Inc. in Los Angeles, said the survey results combined with other retailing research he's done would lead him to believe that some companies are charging stiff premiums.
"I think to some extent they've determined they have a captive market," Skylar said.
Retailers deny gouging customers
Retailers strongly deny charging excessive prices.They say pricing here reflects not only the higher costs but also competition in the marketplace. They also say comparing one retailer's Hawaii premiums to another's can be misleading because of vastly different cost structures.
Safeway's Lambert said her company shouldn't be compared with Costco because the latter is a mass merchant retailer, which is much different from a supermarket operator.
In the Star-Bulletin survey, Safeway's Hawaii premiums averaged between 25 percent and 31 percent, while Costco's was about 2 percent.
A supermarket chain typically has margins -- how much a product is priced over cost -- of only 2 percent to 3 percent, giving the operator little flexibility in pricing, Lambert said.
But a store like Costco sells nonfood items with margins that could be in the 10 percent to 15 percent range, giving it the ability to subsidize food items to keep those prices down, she said. "That's the Wal-Mart strategy."
Richard Galanti, Costco's chief financial officer, said his company doesn't use pricing to subsidize products. "That's absolutely not the case," he said.
Lambert said Safeway regularly surveys its main competitors -- the other supermarket chains -- to check pricing for about 5,000 items, and Safeway consistently is lower by as much as 5 percent.
What's more, Safeway's discounted specials are a critical part of the company's pricing structure, she said.
Despite all that, Lambert said profits at the Hawaii stores are comparable to profits at California stores, even though the cost of doing business is significantly higher in the islands.
Cost of doing business cited
It's that latter point that retailers in widely different businesses repeat again and again to explain Hawaii's high prices.Most cite shipping expenses and the higher cost of land and building rents, though none of the retailers would provide specific comparisons.
Hawaii's labor costs, on the other hand, are fairly comparable to West Coast levels, especially given the booming mainland economy and a stagnant local one.
Jeff Martin, Blockbuster Entertainment Inc.'s regional director of operations in Hawaii, said his company has to use air freight to get movie videos to Hawaii in time for national release dates. On the mainland, Blockbuster uses ground transportation -- a less costly mode.
"Our freight charges are absolutely huge over here," he said.
Despite that, Martin acknowledges that Blockbuster's Hawaii stores are slightly more profitable than its mainland outlets -- largely because there is no other major video chain to offer competition. "We have different price structures in competitive markets," he said.
What that boils down to is some of the higher premiums in the Star-Bulletin survey. Renting a new movie, for example, costs 50 percent more here than in Seattle: $2.99 vs. $4.49.
At Sears, where independent vendors run the optometry outlets, Dr. Carlene Ozaki-Morishige said she charges the market's going rate -- $79 -- for an eye exam at the Pearlridge store. At a nearby Eye Exam 2000, the exam was $79.99 in late June.
Asked why the price was so much higher than on the West Coast, Ozaki-Morishige cited the cost of doing business here. For specifics, she referred questions to Dr. Alan Serikawa, head of the Hawaii Optometric Association.
Serikawa blamed high overhead costs, saying rent typically is double what it is on the mainland. In Hawaii, optometrists are lucky to keep as their income 15 percent to 20 percent of revenue, whereas mainland colleagues earn 30 percent to 35 percent, he said.
Serikawa charges $65 for a basic exam.
Charitable contributions a factor
Leah Allen, spokeswoman for Theo H. Davies & Co., which runs the state's Pizza Hut restaurants, likewise blamed Hawaii's high business costs but mentioned another factor: charitable contributions.Because Pizza Hut participates in a two-pizzas-for-the-price-of-one literacy program, and contributes money to it, Theo Davies can't be too aggressive with pricing, she said.
Charity isn't the only unusual factor that can contribute to the paradise premium. Sometimes time can play a role.
As part of the June survey, the Star-Bulletin obtained estimates for a brake repair job from a Goodyear garage in Honolulu and three on the West Coast. The estimate was significantly higher here largely because the time estimated to do the job was nearly twice that of two of the West Coast garages.
Jim Davis, a Goodyear spokesman on the mainland, said the shops use labor guides that give specific time estimates for specific jobs. In most cases, he said, there shouldn't be much variance.
The Honolulu garage, however, gave a quote based on a 1.8 hour job. Two of the mainland shops estimated the job would take one hour.
Frank Young, a local Chevron dealer, likewise said his garage would charge customers one hour for the job.
Dereck Bradley, manager of the Honolulu Goodyear that was surveyed, later told the Star-Bulletin that his shop apparently quoted an incorrect estimate over the phone. He said the proper one -- 1.6 hours -- would have been given when the car was brought to the shop.
Some remain skeptical
Though the high cost argument is almost universally blamed for the paradise premium, there are skeptics.The oil companies cite Hawaii's high costs to justify local gas prices, which on a statewide basis are among the highest in the nation.
But the state, which has sued the companies for $2 billion, claiming they conspired to set prices artificially high, says the cost of refining oil in Hawaii is about the same as on the West Coast.
While the state accuses the industry of acting illegally to set prices, a charge the companies deny, no one has accused other retailers of similar collusion. Instead, some retail experts say, the more apparent explanation for unusually high premiums is a lack of aggressive price competition.
Paul Brewbaker, Bank of Hawaii's chief economist, said the companies with the higher premiums generally tend to be longtime retailers that have relied on high markups for their profits.
"They're kind of the holdovers from BC -- Before Costco," Brewbaker said, referring to the 1988 entry of the first Big Box player to Hawaii.
"It's not a bad thing, an insidious thing (to have high markups). It just goes to a pricing philosophy in retail distribution," Brewbaker said.
Economic consultant David Ramsour said people shouldn't be surprised if retailers push the pricing envelope.
"If they think they can make a buck, they'll do it," he said. "That's what they're in business for."
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