Accounting, Edition 42

Tienditas or Supermarkets: In Pursuit of Consumers’ Best Interests

By: Jorge Omar Moreno
and Paula Beatriz Morales

On April 5, 2011, Mexico City mayor Marcelo Ebrard presented a Bill on a new regulation called “Rule 29: Improvement In Equity and Competitiveness Conditions for Public  Provisioning”,  which was added to the city’s Delegation Urban Development Program,  Chapter 4, Territorial Organization, Section 4.5, Organization Rules, Point 4 .5 .2, General Organizational Rules.  The new rule reads as follows:

“Commercial establishments that intend to sell primarily articles that make up the basic basket of staple goods, complemented by clothing and footwear, under the supermarket system, through the use of food retailing establishments, supermarkets, mini-supermarkets or convenience stores, may only be situated in areas whose secondary zoning is Mixed Residential (MR) as well as on land that abuts public thoroughfares subject to some “roadway organizational rule” under which it is assigned MR zoning, as indicated in the corresponding Delegation Urban Development Program.  Commercial establishments that are designated as small dry goods or general stores are exempt from this rule.”1

Rule 29 creates a monopolistic incentive for tienditas because it creates a legal barrier that impedes the entry of mid-sized and large supermarkets and allows tienditas to be created and to operate in communities that intend to favor small businesses.

In principle, this rule directly contradicts Article 28 of the Political Constitution of the United Mexican States, which prohibits monopolies, monopolistic practices, price controls, tax exemptions and other conditions created by laws by granting monopolistic power to small-retailers over other retail alternatives.  Additionally, the proposed change to Rule 29 mentions that “any concentration or hoarding of necessary articles of consumption in few hands […] as well as any agreement intended to inhibit free competition between businesses and to oblige consumers to pay exaggerated prices, shall be severely punished.”

The theory of perfect competition is a fundamental paradigm in the study of industrial organization, because it permits us to study the degree of competitiveness of a market and therefore the potential benefits of improving competitive practices in that market in particular.  This model of market behavior is based on four basic assumptions which are shown in table 1.

Table 1.  Basic assumptions of the theory of perfect competition and its relationship with Rule 29.

There are few examples of markets that can be defined as “perfectly competitive” in the strictest sense in economic theory terms; however, many markets display characteristics very close to perfect competition given that participating offerors face very elastic demand curves2 or it is impossible for producers or offerors to keep prices higher than the marginal production cost in the relevant market where they operate.

The retail consumer product market, specifically in communities like neighborhoods or small housing developments, does not meet the definition of perfect competition.  Tienditas and supermarkets both take advantage of consumers’ need for the basic products they offer, and since consumers take time savings and transportation costs into account when they weigh shopping options, they may be willing to pay higher prices at a locally situated tiendita than at a supermarket3.

In this case, tienditas in isolated communities are more similar to a monopolistic seller of the staple goods they provide, since if they decide to raise the price of a good that they offer, they needn’t worry about competitors that charge less in their relevant market.  This relevant market is not only defined by the type of goods it offers, but by the distribution of potential competitors in the neighborhood or in proximity to the neighborhood where they operate.

Thus, the proximity of small stores to consumers’ homes, and the need for the buyer to have the article at that moment, generates a degree of monopolistic power that increases with the creation of loyalty to the “brand” (nearby tiendita or established market), and as a result of all of this, the seller can charge a price higher than that of the competition.

The social cost of this monopoly by tienditas, because of the extent to which it inhibits the free competition of supermarkets and mini-supermarkets, results in higher prices in the tienditas and, as a result, the loss of benefits for buyers and the abnormal enrichment of these establishments.  In general terms, there is an irrecoverable loss of efficiency provoked by the power of the monopoly, a phenomenon known as “social inefficiency triangle” or “social loss by monopoly.”4

In contrast, in the particular case of supermarkets or mini-supermarkets, prices are set by the socioeconomic group of consumers as well as by their location.  This means that the same line of stores can offer different prices for the same product depending on whether a store serves consumers in the A/B socioeconomic bracket or in the D+ socioeconomic bracket5.

But the negative consequences of Rule 29 for consumer well-being stem not only from the way in which it promotes higher prices by inhibiting competition, but in its tendency to limit a shopper’s choices for purchasing other goods or performing other services.

For example, normally consumers value having a number of choices for a single product, since this enables them to buy not just at the price, but also the quality offered by different brands of the same product (for example, milk, bread, eggs, oil, etc.).  With these choices, the consumer can weigh price and quality and decide which is the best option.  This possibility is not available in a small establishment, where the range of merchandise is limited to a few brands, or even a single brand for each type of product.

Furthermore, because consumers value their time and take into account the cost of the distance they must travel, they tend to make bulk purchases when doing their supermarket shopping, meaning they acquire not just one good, but a list of the goods they need.  This is efficient from economic standpoint, because by making only one trip they can minimize the transportation cost and time they spend shopping.  The lack of a mid-sized or large supermarket in a community makes it impossible for shoppers to purchase their entire shopping list, which means higher costs for consumers because they have to make multiple trips to acquire the goods not sold in the tienditas protected by the Rule 29 barrier.

Finally, consumers can take advantage of mini-supermarkets and major stores not only to buy the consumer products they require, but also to take advantage of the complementary services offered, like the payment of utility bills (electricity, water, and gas), loans for durable goods (like refrigerators, irons and other appliances) and other businesses that are often found near the major retail establishment, like bank branches.

Characteristics of supermarkets and tienditas

According to Marín (2004), a food retailer or supermarket is one that sells groceries at retail.  Additionally, they must have annual sales of more than 2 million dollars and have more than 9,000 m² of sales floor area.  The National Association of Supermarkets and Department Stores (ANTAD) defines these stores as a direct-to-consumer system that displays products and articles on open shelving, classified by categories and types, primarily dry goods, perishables, clothing and general merchandise.  They offer the greatest service with the least intervention of personnel and an area for clients to pay, with point-of-sale systems at the exit.


1 Translator’s note: the terms tiendas de abarrotes and miscelaneas refer to small, single-proprietor establishments that sell basic staple goods and are generally located in residential areas. Because there is no precise equivalent in English, we have used the Spanish term tienditas throughout.

2 Elasticity is a measure of the percentage variation in a variable provoked by a 1% increase in the other variable. This is a useful tool for determining the degree of market power company has, by determining its capacity to select production and price based on the demand it faces.

3Becker (1971) calls “total price” the price of a good aunt acquisition cost plus the cost of the time taken to seek it out and consume it.

4This social loss would be eliminated if the monopoly-holder were to impose perfect price discrimination, charging each consumer the most that he or she would be willing to pay. However, the discrimination would be a total transfer of the benefits of the relevant market to the business that holds the monopoly.

5In Mexico, individuals are classified by income levels and consumer habits into six categories: the A/B bracket is the segment made up of people with the highest standards of living and income in the country; socioeconomic bracket C+ encompasses people with a slightly above average income level or standard of living; the C bracket includes people with middle income or medium standards of living; the D+ socioeconomic bracket covers people earning slightly below the average; the D bracket is made up of people earning a low income with an austere standard of living; and the E bracket encompasses inhabitants of the country at the lowest end of the income and standard of living scale.

Gomez and Setién (2001) say that Mexican consumers have various options for acquiring almost any type of product, since there are various stores formats where there is a wide range of products available.  According to these authors, the advantages of supermarkets over tienditas are the following: because they stock directly from producers, they eliminate extra links in the distribution chain, and therefore offer lower costs; they have greater negotiating power with suppliers, and as a result obtain better discounts and more favorable forms of payment; they achieve economies of scale, and thus reduce their operating costs; they use more advanced technologies, like computer systems, barcode readers and point-of-sale cash registers.  All this makes their operation and customer service more efficient.

Furthermore, because the supermarket segment handles a larger volumes of merchandise, they can offer more attractive prices.  In general terms, supermarkets and food retailing establishments have gross margins of between 20% and 22%; in contrast, tienditas run at gross margins of up to 40%.

Another very important benefit of supermarkets and mini-supermarkets is the increased quantity and variety of goods and services (payment of taxes and fees, purchase of airtime for cell phones, cash withdrawals, etc.).  There is a wide range of brands and extensive product lines, and shoppers can pay with credit cards or vouchers.  Additionally, some supermarkets offer e-commerce and home delivery, as well as phone shopping.

According to information from ANTAD, figure 1 shows purchasing patterns in Mexico City.  Although most of the shopping takes place in supermarkets, the situation varies depending on social class, since more than 80% of the members of socioeconomic brackets A/B and C shop in supermarkets, while people of the lower socioeconomic brackets tend to purchase in established markets and tienditas.

Figure 1.  Consumer shopping patterns.

Figures from the National Survey of Household Income and Spending show that the average household spends 612.96 pesos per week on food, beverages and tobacco.  According to ANTAD, the typical shopper visits these establishments once a week and buys food 5.6 times in a week to complete their shopping.  It is also interesting to note that only 16% of supermarket shoppers change establishments.  Of this percentage:

  • 51% do so to obtain better prices
  • 30% do so because another establishment is better located
  • The rest do it for reasons of variety or selection

These results show that consumers effectively weigh price, quality, and alternatives for the consumer products they decide to purchase, in their decisions.  Thus, because  Rule 29 creates a legal barrier to the entry of mid-sized and large retailers into mixed housing zones, benefit tienditas, but at a high cost to consumers, who have fewer alternatives and choices for acquiring goods and services at a lower price.

References

Becker, G. S. (1971). Economic Theory. Alfred A. Knopf.

Gómez, V. y Setién, N. (2001). “Tiendas de autoservicios y tradicionales en México”. Tesina. Instituto Tecnológico Autónomo de México. México.

Lassala, R. (2008). “Modelo de análisis cuantitativo para oligopolios”. Tesis. Instituto Tecnológico Autónomo de México. México.

Marín, J. (2004). “Conducta de las empresas en los oligopolios: Tiendas de Autoservicio en México”. Tesis. Instituto Tecnológico Autónomo de México. México.

Nash, J. (1951). Non-Cooperative Games. The Annals of Mathematics, Second Series, vol. 54, núm. 2 (septiembre de 1951), pp. 286-295.

Pindyck, R. y Rubinfield, D. (1998). Microeconomía, 4a. ed. Prentice Hall.

Tirole, J. (1988). The Theory of Industrial Organization. The MIT Press. Cambridge, Massachusetts, y Londres,

Websites

Asociación Nacional de Tiendas de Autoservicio y Departamentales, A.C.

http://biblio.juridicas.unam.mx/libros/2/641/6.pdf f.

Constitución Política de los Estados Unidos Mexicanos, http://www.diputados.gob.mx/LeyesBiblio/index.htm.

Encuesta Nacional de Ingresos y Gastos de los Hogares.

http://www.inegi.org.mx/est/contenidos/Proyectos/Encuestas/Hogares/regulares/Enigh/Enigh2010/ncv/default.aspx.

Gaceta Oficial del Distrito Federal. 20 de Mayo de 2011.

http://www.paot.org.mx/centro/leyes/df/pdf/GODF/GODF_20_05_2011.pdf.

Instituto Nacional de Geografía, Estadística e Informática. Consultada el 4 de abril de 2012. http://www.inegi.org.mx/.

Procuraduría Federal del consumidor. Consultada el 26 de marzo de 2012 y el 4 de abril de 2012. http://www.economia.gob.mx/economia-para-todos-rss?start=14.

Secretaría de Desarrollo Urbano y Vivienda del Distrito Federal. Consultada el 26 de marzo de 2012. http://www.seduvi.df.gob.mx/portal/images/stories/pdf/articulo14/fraccioni/Manual_Administrativo_2012.pdf.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>