THE COST CULPRITS

Shipping often
blamed, but study
shows otherwise

Research done in 1996 found
that transportation accounts for only
5 percent or less of the cost of
goods sold in Hawaii

Justifying Their Prices

By Rob Perez
Star-Bulletin

The cost of shipping.

It's often cited as one of the major reasons consumer goods cost more in Hawaii.

After all, we have to ship the vast majority of products to the islands. And moving freight thousands of miles over water is costly.

But a little-known study commissioned in 1996 by several shipping companies suggests transportation costs aren't as great a factor in retail pricing as some might think.

Mercer Management Consulting Inc., an international consulting firm, found that the price of ocean transportation typically accounts for only 5 percent or less of the cost of goods sold in Hawaii.

A can of green beans that sold for $1.39 in Honolulu, for instance, cost 5.3 cents to ship here from the mainland, or 3.8 percent of the retail price, according to Mercer.

The retail price, however, was 54 percent greater than the price in Los Angeles, Mercer said.

Likewise, a 12-pack of beer that sold for $18.99 locally cost $1.032 to ship here, or 5.4 percent of the retail price, the company said.

But the price was 138 percent greater than what the beer sold for in Los Angeles, Mercer said.

The numbers indicate that other factors besides shipping accounted for most of the substantial price differences between here and Los Angeles.

The Mercer study didn't explore the other reasons.

Retailers, though, say another major factor is the higher cost of doing business in Hawaii, especially the cost of land and rent.

When the Star-Bulletin in June compared prices between three West Coast markets and Honolulu, retailers here charged as much as 200 percent more than at their mainland outlets.

Yet the cost of doing business in Honolulu is only slightly more than the cost of doing business in those three West Coast markets, according to a study by a Pennsylvania economic research firm.

Based on an analysis of labor costs, utility charges, office rents and taxes, Regional Financial Associates determined Honolulu in 1998 was the 12th most expensive metropolitan area in the country for running a business.

But, according to the RFA analysis, Honolulu's cost of doing business was only 6 percent to 7 percent higher than that of Sacramento and Orange County, the two California markets the Star-Bulletin surveyed.

Honolulu's business costs were 13.7 percent higher than costs in Seattle, the third market the newspaper checked.

When the Star-Bulletin asked several retailers that charge substantial paradise premiums how much more their Hawaii stores cost to run, they declined to provide comparisons.

The factors that affect retail pricing:

Cost to make/purchase product

Cost of running store (land/rent, labor, utilities, warehousing, etc.) and over what sales volume those costs can be spread. The higher the volume, the lower the cost per dollar of revenue.

Cost of transporting product to Hawaii

Competitive level of the market

Whether consumers have alternatives

Supply and demand for product

Customers' willingness to pay

Perceived value or quality of product, brand, service, selection

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Justifying Their Prices

It's one of the major disadvantages of living in paradise: We pay among the highest prices in the nation for some key goods and services. But as the Star-Bulletin has found in periodic looks over the past two years, some of those prices reflect retailers charging unusually stiff premiums.

Gasoline: Hawaii gas prices for years have been the most expensive in the nation. Only last month did the state lose that distinction, falling to No. 3 behind California and Nevada, according to the American Automobile Association. The state last year filed a $2 billion antitrust lawsuit against the major oil companies, claiming they earned excessive profits by overcharging Hawaii consumers for at least a decade. The industry says Hawaii's prices are reasonable and based on competitive forces.

Auto insurance: Hawaii's auto insurers the past several years have charged among the nation's highest premiums, earning what one mainland expert called wildly excessive profits. It's so high Hawaii's top regulator recently threatened to order rate reductions if the companies don't voluntarily cut prices. The industry says rates are fair and companies already have been reducing premiums, saving customers millions of dollars.

Milk: Honolulu consumers last year paid the highest prices in the country, with a gallon of 2% milk costing an average of $5.44, according to a survey of 42 markets nationally. The next highest city: Seattle, at $3.08. Retailers say the high prices reflect Hawaii's high cost of doing business. Analysts say we're being gouged.

Car loans: For new and used cars, the state's major banks easily charge the nation's highest loan rates. For new cars, for instance, the average last month was 10.67 percent, according to Bank Rate Monitor. The next closest state: Louisiana, 9.32 percent. The national average was 8.29 percent. The banks say the survey doesn't reflect the kinds of rates most consumers actually get.

New cars: Hawaii is one of the few states where dealers routinely add significant markups -- sometimes thousands of dollars -- to the manufacturers' suggested retail prices for new cars. Dealers say the high cost of doing business here makes the practice essential, though dealers in many high-cost markets on the mainland don't do it and manufacturers frown on the practice. Bottom line: Local consumers who aren't savvy negotiators end up paying huge premiums.

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TO COMMENT ON THIS SERIES We would like to hear your opinion on this series or general comments on prices in Hawaii. Send your comments by: E-mail business@starbulletin.com Mail What Price Paradise? Letters to the Editor Honolulu Star-Bulletin P.O. Box 3080 Honolulu, Hawaii 96802 Fax (808) 523-8509