Private Service Providers: Family Oriented, Fragmented Business Environment

HAATbazaarNepalOptThe support services in most direct contact with smallholders are the village based private service providers including private traders. These individuals are often condemned as being major exploiters of smallholders. Outwardly, when observing the tripling of tomato prices between the producers, such as those in the Terai of Nepal, and consumers in Katmandu, this appears justifiable. However, the traders are also members of the same community, friends and neighbors of the smallholders, and are providing essential services which may actually be the most cost effective service providers. They are still operating in a financially-suppressed economy in which there are few discretionary funds available. Even with the tripling of the retail price of tomatoes in Katmandu, the prices are still only 1/5th of the supermarket price in Fort Collins, Colorado.

The primary problem with the private traders is they operate in a highly fragmented business environment in which there are a large number of family enterprises doing similar activities with few businesses larger than what can be managed by a family assisted by only casual piecemeal laborers such as porters and repackers. The large number of individual family enterprises encourages competition between them for the services provided, and like competition everywhere provides a favorable environment for the producer and the consumers. However, the large number of businesses also means each business has only a limited market volume. For this reason, there are limits to how much these enterprises can discount their services due to competitive pressures and still make enough from their mark-ups to meet their modest living costs. An example would be the tomato marketing in Nepal as shown in the photo. These are the buying wholesalers in the Terai. They have a family member partner in wholesale market of Katmandu selling and distributing the tomatoes to the vendors scattered through Katmandu and who then sell directly to the consumers. Thus, two families are dependent on the one wholesale enterprise, a collecting wholesaler in the Teri and distributing wholesaler in Katmandu. The average daily volume per business is only 20 crates as shown in the middle of the photo with each crate holding approximately 28 kg of tomatoes.

Thus, what is the minimum mark-up on 20 crates or approximately 560 kg of tomatoes that will allow two families a modest living worth the risks involved in dealing with perishable commodities? The trucks shown in the background, which will transport the tomatoes on the 14 hour trip to Katmandu, hold 228 crates, representing a consolidation of up to 10 individual wholesalers. It was estimated that the two-family operation shown had incomes consistent with a mid-level civil servant. From the income perspective this is not really an exploitative situation.

For more details on the above case study for marketing tomatoes in Nepal click here. Also, for additional information on cost of remote transport click here.

Similar situations happen throughout the developing world and represents the typical steps in the value chain that separates producers from consumer or processors. The Talid Thai wholesale market north of Bangkok looks like a massive facility covering a couple square kilometers with four main warehouses. However, upon close analysis, it is all broken down into individual areas measuring 5 x 10 meters suitable for a small family enterprise. Each area is fully furnished with individual electric meters, phone service if not a cell phone, living room suite, and the enviable TV, as well as any equipment needed for sorting, grading or other processing of the produce being traded. The daily volume per enterprise is two or three pickup loads of produce, or about two tons. Normally both the husband and wife are in attendance with the wife holding the money and exerting overall managerial control. The husband, doing most of the work, is assisted by a number of casual porters to bring the produce in and delivering it to the buyers. The entire multitude of metropolitan Bangkok is served by a wholesale market of individual family enterprises.

In a basically impoverished society in which daily wages barely provide enough dietary energy to sustain a person and complete the work expected of them, there just maybe too much temptation for pilferage or passing off trash for produce that everything needs to be closely supervised by someone with vested interest in profit margin. That would be a family member.

The reason for this high level of fragmentation is not certain, but it could be a simple lack of trust in non-family members and experience with excessive pilfering when more than one family is involved. It is also possible that the high fragmentation and accompanying low market volume per enterprise could result in the private traders such as the Tomato Vender in Lusaka, Zambia or the Banana Trader in Uganda being as impoverished as the smallholder producers.

While the mark-ups may be high in order to provide the necessary income from limited market volume, the overall business overhead is kept low and thus could be the most cost effective service provider for smallholder communities.

The question remains, are these profit margins of private traders less than or greater than the overhead costs associated with operating cooperatives or public sector institutes? It must also be noted that with most of development efforts funneled through the civil service such as the Ministry of Agriculture, there may be some vested interest on the part of the host to condemn the private traders, in order to emphasize public sector support services. Have there been any studies that prove how exploitive or non-exploitive the private traders are? Perhaps the most exploitive service providers are the public sector organizations such as ADMARC in Malawi that allowed the private traders to increase their profit margins to be consistent with ADMARC’s overhead costs, to the disadvantage of both the smallholder producers and consumers. In Malawi private traders could easily move commodities from the furthest corner of the country to Blantyre, the commercial capital, for ADMARC’s buying – selling price differential. Is the cooperative business model through which the development community funnels assistance to the smallholder producers closer to the efficient private traders or the cumbersome public sector organizations?

Last Revised: 26 March 2010

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