Measuring the efficiency of retail and the possible implications

I read a beautiful BBC article today titled “How much will the technology boom change Kenya?

It is about how information delivered over mobile phones can improve people’s lives.  Here is an example:

“Ms Oguya, 25, is the creator of a mobile phone app called M-Farm, designed to help small-scale farmers maximise their potential.

Ms Oguya herself grew up on a farm. She realised people like her parents had two main problems.

Firstly, they did not always know the up-to-date market price for a particular crop.

Unscrupulous middlemen would take advantage of that and persuade farmers to part with their produce at lower prices.

Using M-Farm, a farmer can now find out the latest prices with a single text message.”

This reminded me first of all about the price of pomegranates in Bangalore.  A kilo of pomegranates costs Rs. 120 in Bangalore city.  The price at which traders buy pomegranates from farmers is Rs. 12 per kilo.  In other words, what the producer gets from the consumer is a mere 1/10 of the price a consumer pays for the product.

A year ago. I had written an article on an anti-corruption blog titled “Why Walmart’s measure of efficiency might be flawed“.

I quote from it:

“Walmart’s definition of efficiency is the cost of a product. They say they increase the efficiency of the entire market by lowering the cost of products (by getting an item manufactured in a low-cost geography).”

“However, in my opinion, there is a better way to measure efficiency, and I feel that retailers highlight lower prices as a measure of efficiency only because it is the only measure possible under the current conditions of lack of transparency in retail.”

“Take for example a $10 product that used to cost $5 to manufacture in the USA (potential profit margin of $5). Now, Walmart has a profit motive to move its manufacture to a geography where it costs less than $1 to manufacture if they can still charge $8 for it. Say, the transportation cost is $1. If the product sells for $8, they still have a profit margin of $6 which is higher than $5.”

“However, if I measure efficiency as the percentage of money paid by a customer that is being delivered to the manufacturer, there has actually been a drop in efficiency. The percentage of the price that went to the manufacturer dropped from 50% to only 12.5% (one dollar out of eight).”

“You would never donate your money to a charity without first asking what percentage of your donation was reaching the beneficiary, would you?”

Now let’s do the math for pomegranates.

By using the ratio of purchase price to sale price as a measure of efficiency, we find that the efficiency of the retail mechanism for pomegranates is a mere 10%.

If farmers became better informed, they might work to discover ways to improve the efficiency – either by bypassing middlemen – I remember the farmer’s market in Raleigh, NC, an amazingly simple idea, that did just that – or by negotiating better prices for themselves.

End consumers might also choose to patronize outlets that pay fairer prices to the producers if they could find out how much was really paid to the manufacturer.

That might also help bring back manufacturing to the USA.

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