RUSSIAN SOAP SALES

(Cincinnati, Ohio) This story in the Cleveland Plain Dealer discusses the success that the Procter and Gamble Corporation has achieved in sales of their products in Russia. It indicates that the company is realizing a sustained 50 percent per year growth in sales of detergent, diapers, and other products. It's good news, but not too surprising since the marketplace in Russia continues to open up to American products. The reason I write about this is because the following paragraph in the story caught my eye.

A box of Tide that might cost $5 or $6 in the United States, for example, costs 35 rubles in Moscow, slightly more than $1.

Nothing in the story explains or even hints at the reason for the gross disparity in price. If anyone has a clue why two packages of the same product have such an incomprehensible difference in price, please leave a comment.

[Update: 10/10/03 at 1045am, EDT] For some unknown reason, readers have been posting comments and they are not being properly recorded. I've included them below with minor grammatical changes not affecting content. Where known, I've included a link to the commenter.

Comment from Hope, dated 10/8:

Because they couldn't sell it for $6 there. Companies price things based not just on what their own costs are, but how much the market will bear. Here, it will bear more because we have more disposable income.

Comment from John Anderson, dated 10/8:

A possibility is that export items may bypass a number of taxes. Back when bread was 22 cents a loaf, Reader's Digest had an article that 21 cents of that price was traceable to taxes.

Comment from Alexei, dated 10/8:

What puzzles me is why no one seems to be buying detergent in Russia and reselling it in the US given the price differential. But since this is not happening, there must be a good reason -- transport costs perhaps? And if there is no real arbitrage opportunity, the Russian/East European detergent market is driven by local demand, local supply and imports.

That demand for detergent in Russia is weaker than in the US is no wonder -- Russians are poorer. It's also not surprising that local producers' costs are low, as labor is relatively cheap, and so are some of the supplies. Therefore, producers are ready to sell for less, and, as a result, the equilibrium price is lower than in the US.

I am not sure what the price of detergent was before P&G, Unilever, Colgate Palmolive and other big names arrived, but I don't think there was a shortage (Indian-produced Tide, as far as I remember, was available back in Soviet years). Most likely, Russian-made detergents used simpler, less effective formulas. P&G would sell anyplace where they could get a positive margin, but it's hard to imagine it cost them less than $1 to produce a box of Tide in the US or EU -- the technology is not unique, so competitors would have quickly undercut their 400% margin. So P&G would be in the red unless they went local, which they did by taking over an large chemicals production facility. On the other hand, they had no local competitors in the diaper market, so when they started selling Pampers in the former USSR, it must have been a success from the start.

Comment from Travis, dated 10/9:

i think there could be a couple of reasons for the price difference. first, the stuff is being produced at the plant in novomoskovsk. there probably aren't very many government regulations in place (to protect the environment, etc) like there are in the US (all of which are costly to the manufacturer). P&G saves on that, plus the wages of the workers are probably lower there than in the US. second, having lived overseas for a couple of years, i can say that the quality of the product/materials may be lower, even though it bears the same name as the US product. as hope noted, the US market will accept certain costs. the market in russia will accept a lesser product if that product is still the best thing available.

Comment from Alexei, dated 10/10:

I'm sure I commented on this two days ago, but the comment seems to have disappeared... I can repeat the main points if Mike doesn't mind.

First, why doesn't anyone buy soap for $1 in Russia and sell for $5 in the US? There must be a good reason such as transport costs or trade barriers; but since this is not being done, we can assume that the two countries' detergent markets are separate.

Now, there the demand side and the supply side. Demand is weaker in Russia because it's poorer. Production costs are lower because labor is cheaper, some materials may be cheaper, and overheads like environmental costs and various insurances are lower. So producers are ready to sell for less than their US counterparts. No wonder the equilibrium price is lower, too.

It's be interesting to know where P&G produces the Tide it sells in the US. If it's Mexico, production costs could be as low as in Russia, so it's the difference in demand that matters.

Another factor is P&G's market power and competition in both markets -- I have no idea how they differ. Taxes? Russia has a 24% corporate income tax and a 39% payroll tax payable by employers; plus, a VAT of 20%. How does that compare with US taxes?

I'm trying to resolve whatever the problem is. Until then, I'll continue posting comments received.