Understanding urban distribution systems of coffee: The case of Addis

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Understanding urban distribution systems of coffee: The case of Addis

Understanding urban distribution systems of coffee: The case of Addis

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  • 1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE Understanding urban distribution systems of coffee: The case of Addis Authors: Thomas W. Assefa and Bart Minten IFPRI ESSP Ethiopian Economics Association (EEA) and the Econometric Society 19th Annual Conference of the African Region Chapter of the Econometric Society 12th International Conference on the Ethiopian Economy July 16-19, 2014 Addis Ababa 1
  • 2. 1. Introduction • Policy makers in developing and developed countries often do no trust markets. They therefore often try to regulate and control them. • However, no good empirical evidence on these issues and to what extent markets reward quality • We look at this issue for the case of coffee in Addis • Interesting case because of controls in this area as well as significant quality and price differentiation
  • 3. 1. Introduction • Focus on three main research questions: Question 1: Can we trust traders? Do traders cheat with quality? Do traders cheat with weights? Question 2: Is quality control effective? By law, all marketed coffee has to be divided in export and local quality. Only coffee that is of lower quality is supposed to stay in the country. Question 3: Do markets reward quality in these settings?
  • 4. 2. Coffee value chain Producers Rural collectors Urban collectors Urban distributers Semi Wholesalers About 20. Buy from ECX but also buy from urban collectors. Have warehouses. Semi-wholesalers About 20-25. Buy from ECX if it is to be used for grounding. Or they buy from rural collectors. They sell to urban distributors or to roasters. About 240 semi-wholesalers on “coffee street” in Merkato. They buy from urban distributors and sell to traditional shops or supermarkets, cafés or coffeehouses, roasters, or to a smaller extent to consumers Roasters They buy from urban collectors or from semi-wholesalers. These use mostly rejected coffee from ECX. They roast and/or ground. They sell to cafés (that use machines), coffee shops, or retailers.
  • 5. 3. Data and methodology • Sample semi-wholesalers: 100 randomly selected from the 240 in Merkato • Sample retailers: - 10 sub-cities in Addis: half of them randomly selected (after geographical stratification) • All coffee traders in all open markets in the 5 sub cities were visited [104] • All supermarkets and minimarkets in the 5 sub cities [97 minimarkets and 53 supermarkets] - 4 kebeles in each sub city from an average of 10 in a sub city are selected randomly • 10 regular shops from each kebele [200 regular shops] • 543 coffee traders were surveyed in October 2013
  • 6. 3. Data and methodology • Survey collected information on: - Background of the retailers and the retail shop - Coffee sales turnover - Stated coffee quality and price at the time of the survey • Weight assessment: - Purchase of 1 kg from all semi-wholesalers; half of the open market traders, supermarkets, minimarkets; 25% of regular shops - 262 obs.: weighted with 2 different electronic scales; average used in analysis • Quality assessment: - All samples sent to Coffee Liquoring Unit (CLU) for analysis (tasting/raw bean inspection)
  • 7. 4. Descriptive statistics Wholesalers Retailers Standard Standard Unit Mean Deviation Mean Deviation Number of coffee types sold per trader Number 4.26 1.16 2.29 1.77 Sale prices (Birr/kg) Birr/kg 69.13 9.72 92.84 29.78
  • 8. 4. Descriptive statistics Region of origin Wholesalers Retailers Don’t know 3% 46% Wollega/Nekempt 32% 6% Djimma 36% 13% Harar 1% 1% Others 28% 6% Not raw coffee 0% 28% Washing Wholesalers Retailers Don’t know 1% 10% Washed 23% 13% Unwashed 77% 46% Not raw coffee 0% 30% Form Wholesalers Retailers Raw 100% 62% Roasted 0% 2% Grounded 0% 35% Packaging Wholesalers Retailers Packed 0% 57% Loose 99% 42% Branded 0% 40%
  • 9. 5. Findings Q1: Can we trust traders? Q1a: Do traders cheat with quality? Origin 1. Wholesaler 2. Retailer Total Understated 21% 18% 20% Match 13% 5% 10% Overstated 66% 77% 70% Total 100% 100% 100% Origin 0. Traditional 1. Modern Total Understated 21% 15% 20% Match 11% 0% 10% Overstated 68% 85% 70% Total 100% 100% 100%
  • 10. Q1a: Do traders cheat with quality? Washing Wholesaler Retailer Total Understated 3% 3% 3% Match 90% 89% 90% Overstated 7% 8% 7% Total 100% 100% 100%
  • 11. Q1b: Do traders cheat with weights? Traditional Modern Total Underweight 58% 67% 60% Overweight 42% 33% 40% Total 100% 100% 100% Wholesaler Retailer Total Underweight 75% 51% 60% Overweight 25% 49% 40% Total 100% 100% 100%
  • 12. Q1b: Do traders cheat with weights? 0 .01.02.03.04 Density 800 850 900 950 1000 1050 Weight_Average 1. Wholesaler 2. Retailer kernel = epanechnikov, bandwidth = 3.7184 Kernel density estimate
  • 13. Q2: Is quality control effective? Overall result of quality assessment Wholesaler Retailer Total Fit for Grade 2 16% 13% 14% Fit for Grade 3 1% 1% 1% Fit for Grade 4 0% 4% 2% Fit for Grade 5 4% 5% 5% Fit at Peaberry Coffee type Level 2% 0% 1% Rejected for grades (but >UG) 41% 36% 38% Fit at Under Grade Level 33% 31% 32% Unfit 3% 10% 8% Total 100% 100% 100%
  • 14. Q3: Does the market reward quality? • In well-functioning markets, quality is reflected in prices. • Tested through hedonic pricing regression. Figure: Kernel distribution of wholesale and retail prices0 .01.02.03.04.05 Density 0 50 100 150 200 a. Sales price 1. Wholesaler 2. Retailer kernel = epanechnikov, bandwidth = 2.5840 Kernel density estimate
  • 15. Q3: Does the market reward quality? Hedonic pricing regression results The Whole Sample Sample Bought Unit b _star t b _star t Type of shop (default=regular shop) 1. Supermarket yes=1 33.857*** 18.89 37.542*** 12.187 2. Minimarket yes=1 6.154*** 5.151 6.17*** 2.873 4.Open market trader yes=1 -3.943*** -3.932 -4.386** -2.299 5. Wholesaler yes=1 -2.958*** -3.05 -5.734*** -3.207
  • 16. Q3: Does the market reward quality? The Whole Sample Sample Bought Unit b _star t b _star t Region of origin (default=Sidama, [Actual Origin for Samples bought]) 1. Wollega/Nekempt yes=1 0.23 0.187 1.922 0.69 2. Djimma yes=1 -0.954 -0.834 -3.398 -1.039 4. Harar yes=1 4.419 1.409 -3.471 -0.614 5. Yirgacheffe yes=1 0.594 0.194 0.506 0.114 7. Teppi yes=1 -1.807 -0.608 -5.867 -1.456 8. Bebeka yes=1 -10.909 -1.548 1.501 0.513 9. Arba Minch yes=1 -4.508 -0.778 10. Reject ECX yes=1 -8.563*** -3.349 11. Other yes=1 -0.328 -0.121 0.112 0.049 12. Blended yes=1 -10.255*** -2.986 -2.148 -0.914 13. Unknown yes=1 0.563 0.46
  • 17. Q3: Does the market reward quality? The Whole Sample Sample Bought Unit b _star t b _star t Washing (default=Washed) 2. Unwashed -11.316*** -11.692 -9.669*** -4.682 3. Missing -8.099*** -4.102 Packaging branding (default=loose) 2. Branded, packed [transparent] yes=1 44.164*** 6.858 24.107** 2.332 3. branded, packed [non transparent] yes=1 173.492*** 13.831 24.497* 1.726 4. Non_branded_pack_transparent yes=1 38.425*** 6.444 30.695*** 3.089 5. Non_branded_pack_non_transparent yes=1 46.682*** 6.8 31.287*** 2.849 Purity(default=pure) 2. 1 to 5 yes=1 -3.764*** -3.841 -4.936*** -2.869 3. More than 5 yes=1 -9.567*** -8.309 -9.728*** -4.672 4. Not row yes=1 -37.352*** -6.267 -31.564*** -3.241
  • 18. 6. Conclusions Major findings from the research: Q1: Can we trust traders? Answer: Depends. Can be relatively trusted with weights; however, cheating with not easily observable quality indicators Q2: Is quality control effective? Answer: No. There is a flourishing informal market Q3: Do markets reward quality? Answer: Depends. 1/ Quality indicators that are not easily observable not rewarded (origins of coffee); 2/ Indicators that easily observable rewarded (ECX reject cheaper than others; washed and pure coffee higher prices; packed and branded coffee higher prices)
  • 19. 7. Implications Do we need control? - Given that markets circumvent controls, one might re-consider the usefulness of using scarce resources spent on controlling them - if control deemed important, better mechanisms needed • How do we protect local consumers? - Modern retail in its current form does not assure quality yet (in contrast with international evidence); possibly because of early stage of rollout or because of informality of markets - Do we need consumer protection organizations? 1/ would be hard to do in this case, given informal system; 2/ not needed for weights and observable quality characteristics
  • 20. Thank You