Supermarket vouchers are often used as a sales incentive in HK, for anything from minibonds to TVs. The Government's last proposal for a competition law would still allow behaviour such as resale price maintenance, which the EU outlaws because it is "severely anti-competitive". Have you ever wondered how much those supermarket vouchers actually cost? A government tender to buy them reveals the answer.

Government supermarket vouchers
27 March 2010

HK residents are familiar with supermarket vouchers as a near-cash form of incentive. It's a symptom of resale price maintenance (RPM), in which a supplier tells its distributors and retailers that they cannot sell below a certain price. RPM is illegal in many countries with a competition law, but perfectly legal in HK, where we don't have a competition law, and even if we get one, the last government proposal was that it would still allow such price-fixing. RPM is outlawed in the European Union, where there is a block exemption for certain types of vertical agreements, but it specifically says:

"vertical agreements containing certain types of severely anti-competitive restraints such as minimum and fixed resale-prices, as well as certain types of territorial protection, should be excluded from the benefit of the block exemption established by this Regulation irrespective of the market share of the undertakings concerned." (emphasis added)

So rather than compete on price, retailers tend to hand out things you didn't really want, and the closer that thing is to cash, the better, because then you can exchange it for something you would have bought anyway, such as food.

Even between suppliers of competing products, such as unit trusts or unlisted "structured products", there is sometimes an industry practice that they won't compress distribution commissions by offering lower commissions, so instead, the suppliers themselves offer goodies, such as the famous TVs, digital cameras or ParknShop coupons handed out with Lehman minibonds (distributors had the discretion to give an equivalent cash rebate instead).

Now have you ever wondered how much the retailers and others pay for these supermarket vouchers? It's been something of a trade secret, but a close look at Government tenders reveals what the going rate is. On 11-Dec-09 the HK Government's Electrical and Mechanical Services Trading Fund launched a tender for the supply of supermarket gift coupons at face value of HK$50.

The result was disclosed in the Government Gazette yesterday (26-Mar-2010), with 54,670 vouchers with a face value of $50 each to be supplied by Wellcome supermarkets (owned by The Dairy Farm Co Ltd) for HK$2,542,155. That works out at $46.50 each, or a 7% discount. We have no idea why the Government is buying these vouchers - presumably they are going be handed out as some form of incentive or prize, but for what? Answers welcome. Maybe some of it goes in prizes for the Electrical Workers Safety Competition which promises prizes in the form of an unspecified coupon.

In fact, Government has been buying supermarket vouchers for several years, but the public information on such tenders often does not disclose the numbers of coupons or face value purchased, so it is impossible for the public to monitor whether the Government is getting value for money. One exception was a tender for Hongkong Post on 13-Feb-09 to supply $50 coupons. This was awarded on 31-Jul-09, with 36,000 ParknShop coupons for $1,681,200, or an average of $46.70 each, a 6.6% discount.

Hongkong Post uses these and other vouchers to incentivise customers to use their Speedpost service with a Bonus Point Scheme. You might wonder why they don't just charge lower prices for their services. They are probably exploiting an agency conflict between the person who decides on the supplier and the person who pays for it. In other words, a thinly-disguised kickback scheme for office workers who get to keep the vouchers and spend them at places like Cafe de Coral, Starbucks and so on. If the employer consents to this, then there is nothing wrong with it, although the resulting employee benefit is almost certainly not taxed, so it works against public policy (if the employee earns enough to pay salaries tax in the first place). If the employer does not consent, then it is corruption, because the employee is in effect receiving a bribe from a supplier.

Of course, all of this is small beer compared to what the airlines get up to. Recently Virgin Atlantic has been offering "Upper Class" (Business) passengers from HK to Sydney and back a HK$2,000 (US$258) shopping coupon, enough to buy a high-end iPod, and that's on top of the regular air miles. They could just offer lower fares, but that would be too competitive and would not exploit the agency conflict between passengers and their employers.

©, 2010

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