What’s that got to do with the price of tomatoes?

My father ran a grocery store in England in the 1950s. At some point he converted it to self-service, which is what we would now call a minimarket. He did not do this because he had read about consumer psychology or operational efficiency. He did it because his shop assistants were stealing from the till and self-service made that harder, because there were less staff handling money. Common sense, he would have said. He sold the business in 1960, which turned out to be exactly the right moment before national supermarket chains started to take over and Retail Price Maintenance laws were abolished to allow discounting, and the property–last time I checked online– is now a convenience store called Big Bazaar (see picture) run by an Indian family who live in the same apartment over the same store just like we used to seventy years ago when my father used to get up at 6:00 am in the freezing cold and go downstairs to the store to slice bacon for our breakfast. I think about his store sometimes when I walk through the Feria Libre, because expats who move to Cuenca tend to go through a brief period of amazement at food prices, followed by a nagging suspicion that something must be wrong. Food this cheap, purchased in a market this informal, from vendors who have no electronic point-of-sale system and make change from a pocket — surely this is a sign of poverty, of underdevelopment, of a system that will eventually be replaced by something more organized. A proper supermarket, perhaps, like back home. However this thinking is exactly backwards. The American  or Canadian supermarket is one of the most capital-intensive retail environments ever built. A full-sized store costs between fifty and a hundred million dollars to construct before a single can of beans is sold. It requires a continental cold-chain logistics network, vast refrigeration infrastructure, electronic inventory management, liability insurance, regulatory compliance across multiple agencies, and a real estate footprint with a vast parking lot that in most American cities commands extraordinary rent. All of that cost has to be recovered from what you pay for your groceries. You are not just buying food. You are also paying down the mortgage on a very expensive building and everything inside it. And yet the American supermarket is the cheap option in the US. The convenience store on the corner or at the gas station — smaller building, lower overhead, fewer staff — charges more for the same goods, not less. This is not a paradox, but simple arithmetic. Fixed costs divided by transaction volume determine your unit cost for each stock unit or SKU. The supermarket processes so many transactions that it can spread its enormous overhead thinner than the corner store can spread its modest one. Scale wins, even when the absolute cost of scale is staggering. Ecuador’s Coral or Gran Akí supermarket cannot replicate that arithmetic. Their customer base is smaller, the transaction volume lower, and — here is the clincher — the competition has almost no overhead at all. The vendor at the Feria Libre pays stall rent, buys product, and takes a margin. There is no refrigeration budget because turnover is fast enough to make it unnecessary. There is no shrinkage calculation built into the price, no HR department, no loyalty card infrastructure, and if you want to use the bathroom at the Feria Libre, you have to shell out a quarter to the master or mistress of the toilet rolls. The price you pay for the food is closely related to the actual cost of the food. So the Ecuadorian supermarket ends up as the expensive option, serving customers who are willng to pay a bit more for air conditioning, lighting, and packaging and the psychological comfort of a familiar retail format and the possibility of spotting a fellow gringo on the hoof. Neither system is irrational, because both are rational responses to entirely different conditions. What looks like Ecuadorian informality is in fact a precisely calibrated supply chain. Much of what you buy at a Cuenca market traveled fifty kilometers to get there, not two thousand. The tomato was not refrigerated for a week in a distribution center in Peru or Argentina. The cheese was not produced in a factory Kraftily optimized for a national brand. Short supply chains compress prices in ways that no amount of American logistics sophistication can match, because the American system’s sophistication exists specifically to manage distances and volumes that Ecuador’s system never faces. So the American food distribution model is objectively NOT cost efficient, but it IS  efficient at scale, under specific conditions such as cheap fuel, interstate highway infrastructure, high population throughput, and the complete absence of viable informal competition. The US abandoned informal retail decades ago. The corner store survived only where family labor — typically immigrant families of at least three adults, living on site and typically willing to work hours that no formal wage structure would support — could substitute for the economics that a corporation cannot make work. My father’s staff stole from him. The Gujarati family that eventually took over his building bred their own work force, kept the hours, made the margins work, sold lottery tickets, sent remittances to India, and accepted food stamps. Same building, same logic, different people. Ecuador did not fail to develop a proper food system. Ecuador retained a food system that works quite well, alongside a supermarket sector that serves a different customer with different priorities. The mercado is not waiting to be replaced. It is doing exactly what it is supposed to do, at a price point that a fifty-million-dollar building in New Jersey cannot touch. The next time someone tells you that Cuenca’s markets are charming but surely a bit primitive, ask them what they paid for tomatoes last week. Then tell them how much the red sauce in your freezer cost you. Let the arithmetic make the argument. My father would probably have called it common sense. The post What’s that got to do with the price of tomatoes? appeared first on CuencaHighLife.