Sari sari shop owner evaluating price/SKU
When I think about my time in the Filipino village last year, the most significant learnings from the field are the ones I never really wrote about or pondered deeply at that time. They were too specific to retail, I felt, or business management, and while this shop was one of the sources of income for the household I was living with, was it crucial for cash flow or simply something for Fe to do in her spare time?
I had lots of time in the evenings since there was no internet access nor much to do here in the village and I thought I’d entertain myself by evaluating the inventory management, pricing and profit margins for the shop. After all, it wasn’t part of the main focus on the research but could provide insights into what it was like to run a shop like this.
Accompanying Fe to the nearest town where she stocked up on supplies at retail prices was an eyeopener. Sachets and single serve packages, small tins of food or even diapers – none of them was priced to be beneficial to the final reseller, instead their pricing was calculated on the assumption that whoever bought the product at the end of the manufacturers supply chain was the actual end user or household consumer. They are also buying here directly, sure, but I would wonder at the percentage of sales actually being made by sari sari, spaza or kirana type shops which are so ubiquitous among the BoP.
I found that standard practice is to simply add an affordable 2 to 3 peso markup to the product, rather than basing it on any percentage of the cost of the item or total cost of purchase. After all, when we went to stock up this shop, it cost us 7 peso each to reach the town, then spend another 15 or 20 hiring a modified motorcycle tricycle taxi to bring us back with the shopping all the way off the main road into the cluster of houses in the rice fields.
The shop was not making any money at all and just about staying in the black. It was a diversion for Fe, and I suspect a disillusioning disappointment as well, since she’d gone to the trouble of taking out a micro-finance loan to start it up. Although in this case, I’d arrived in late February and the region was still recovering economically and socially from the worst typhoon in 80 years which hit the previous June in 2008.
Analysing the situation I found that while she’d had first mover advantage in the walkable distance with her shop and also priced competitively with the main road shops further away, neighbours saw her success and rapidly copied. There were two other shops within hailing distance, neither of which was critical to their owner as a source of income. There’s a subtle hierarchy developing in this part of the The Philippines, based on the status of the migrant worker supporting the local family – was your remittance coming from a merchant seaman or a domestic servant?
Then I looked at the products themselves, trying to find a markup on the cost that would not only be reasonable and even attractive compared to “competition” but still offer some returns on the investment. That’s when I found that there was no rational basis for the pricing of sachets by P&G or Nestle vis a vis quantity available and purchasing frequency patterns of the local populace.
There were maximum constraints on pricing purely due to the “closed” customer base and their cash flow and income, so how else to discover a cost advantage? I looked for an “economic order quantity”. I found that shampoos and coffee sachets could be bought 6 at a time, sold with a reasonable markup and covered the cost of all 6 by the time 4 were sold. So these 6/4 sachets became group A and were primarily fast moving. Then you got the powdered milk and diapers, you could only afford to buy 4 at a time and were only able to cover the cost of all 4 when you sold 3 sachets. And so on and so forth.
But after all that, the bottomline didn’t change much, it might have only eased the cash flow/inventory purchase cycle but there really wasn’t anyway to generate a significant increase in income as it was.
At this point I want to say that if MNC brands like Nestle and Proctor & Gamble really want to effect positive change among the BoP, one thing that they can do is design their sachets, pricing and sales material to target the BoP small shopkeeper, not just the retailers and traders within their existing sales and distribution channel.
Literally a few cents difference in pricing here or there, along with an increased focus on the shopkeepers – training, pricing, margins – could make a significant difference in their livelihood and income.