Rising cost of ingredients and operating costs - a concerning issue among coffee shop owners

Nowadays, main ingredients such as condensed milk and evaporated milk to make coffee or tea, vegetables, poultry, eggs and other food items are becoming more expensive.

According to Bukit Bendera Member of Parliament (MP) YB Wong Hon Wai, the price of a cabbage had gone up from RM7 to RM16 per kilogramme (kg) and “sawi pendek” at RM9 from RM3 per kg previously.

Not only did the price of vegetables witnessed a 200% increase recently, but the price of chicken also rose from RM8 to RM10 per kg.

While the price of grade A eggs had been pushed up from RM10 to RM12 a tray, Yip Yoon Chong, a coffee shop owner based in Ipoh, informed The Star on November 24, 2021, that the price of a carton of 48 cans of condensed milk increased by RM10, which is from RM100 to RM110.

In addition, the Malaysia Singapore Coffee Shop Proprietors General Association President Wong Teu Hoon revealed the foreign worker salary has risen from RM1,200 to RM1,650. And the annual agency fee has shot up from RM6,000 to RM9,500.

As operating costs ranging from salaries of employees, rent, utility charges and cooking gas are relatively higher, coffee shop owners, in general, are not motivated to hire local workers under the current climate. Local workers will demand higher monthly salaries than foreign workers as they still have car and housing loans, for instance, to pay off.

Continuously rising cost of ingredients and operating costs have left coffee shop owners with no choice – but to increase the price of beverages by 60 sen the most from January 1, 2022 onwards.

Coffee shops in rural areas will increase the price of their beverages by 20-30 sen whilst the coffee shops in urban areas are anticipated to go for an increment of 40-60 sen.

As more money is required to spend essential items (i.e., food, water and shelter), hardcore poor and B40 households in the urban areas might choose not to order drinks in coffee shops. Unlike rural citizens who still could earn their livings through farming, urban citizens are relatively vulnerable in securing jobs with decent pay during the on-going uncertainty.

Hence, there is an increasing concern that when people have less money to spend out of their pocket, they would be less likely to visit coffee shops for more expensive meals. When fewer customers dine in at coffee shops, owners could probably only break even from the daily sales or continue to suffer losses.

Sabahans and Sarawakians, in particular, are feeling the pinch even more as the cost of living in both Sabah and Sarawak is relatively higher than in the Peninsula.

Even though the cabotage policy was rescinded in 2017 in Sabah and Sarawak, which allows foreign vessels to land at Sabah and Sarawak ports directly, this has not resulted in a lower cost of living.

Foreign ships from the Far East such as South Korea, Japan, Taiwan and China with smaller quantities of exports destined for Sabah and Sarawak still have to transit in Port Klang, the national shipping hub first before heading to Sabah and Sarawak.

This implies a higher cost as the foreign cargo meant for Sabah and Sarawak have to go through a longer supply chain transporting fast-moving consumer goods (FMCG), which includes shipping agents and forwarders, truckers and shipping lines.

As a result, the prolonged process of delivering goods from the Far East to Sabah and Sarawak has, in turn, dampened cost competitiveness, which contributes to raising the cost of living in Sabah and Sarawak up to 30 per cent compared to the prices in Peninsula due to higher shipping freight costs.

Besides a smaller trade volume, other factors contributing to higher price levels in Sabah and Sarawak are weak distribution channels, high handling charges, inefficient inland transportation, the inefficiency of port operations and underdeveloped infrastructure in Sabah and Sarawak.

Although the issue of cost of living has been brought up by industrial players, opposition parties and even non-governmental organisations (NGOs) in Sabah and Sarawak for years, the price disparity between East and West Malaysia still persists.

By narrowing the pricing gap between East and West Malaysia, the coffee shop owners in Sabah and Sarawak could enjoy lower ingredient and operation costs, giving them the chance to recover losses from previous lockdown measures.

During these unprecedented times, EMIR Research would like to suggest to the current administration to implement the following policies to reduce the financial burden among coffee shop owners in terms of ingredients and operation costs:

1. Increase crop diversification and produce high-quality agricultural products within Malaysia to reduce dependence on high-valued imported ingredients. Sabah and Sarawak, which covers 60% of the nation’s cumulative land area (i.e., 198,354sq km), could potentially develop as Borneo food hub to fulfil local demand.

2. Provide seeds, fertilisers and pesticides related subsidies paid directly to the farmers through a coupon system.

For instance, the paddy farmer can use the coupon to buy high-quality seeds from any vendor or company. The vendor also can use the coupon to claim payment from the government. Not only this approach would create healthy competition among vendors, but it also would stimulate agricultural activities. At the same time, it would motivate farmers to produce high-quality agricultural products with sufficient quantities for domestic needs, especially among coffee shop owners.

3. The Federal Agricultural Marketing Authority (FAMA) and related government agencies can assist rural farmers in transporting agricultural products to major cities of Malaysia.

4. Upgrade Sepanggar Bay Container Port (SBCP) in Sabah and Bintulu Port in Sarawak as National Load Centres (NLCs) by creating a dual gateway policy with Port Klang covering the western hemisphere and both Sabah and Sarawak covering the east.

5. Implement a freight equalisation programme like Tasmania, Australia, to reduce the price of goods in Sabah and Sarawak.

Hopefully, Prime Minister Datuk Seri Ismail Yaakob would also address the critical issue of the price disparity between East and West Malaysia as Chairman of the National Action on Cost of Living.

Lastly but not least, the government should also ensure that the Jualan Keluarga Malaysia also extends to coffee shops and food and beverage businesses that mainly service the B40 and lower M40 consumer segment groups in the Klang Valley, Penang and other urban conurbations.

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Amanda Yeo is Research Analyst at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.