Understanding urban distribution and coffee retailing

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
Understanding urban distribution
and coffee retailing
Thomas W. Assefa and Bart Minten
IFPRI ESSP
Ethiopia’s coffee value chain: Evidence towards improved investments and policies
Addis Ababa Hilton
September 15, 2015
Addis Ababa

2. Introduction
• Purpose:
• Understanding domestic urban coffee market in the country
• Relevance:
• Provides insights on how the domestic urban coffee market
works in the country
• Check if urban coffee traders can be trusted
• in terms of quality and quantity of the coffee they sell
• if they respect existing government control
• It fuels the long-standing debate on the appropriate role of the
state in the governance of markets
Understanding urban distribution and coffee retailing

3. Introduction
•Answer the following three research questions:
Question 1: Can we trust sales by traditional traders,
in terms of quality and weights?
Question 2: Are modern market practices different
and more trust-worthy?
Question 3: Is regulation effective?
Understanding urban distribution and coffee retailing

4. Coffee wholesale and retail in Addis
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 (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. Buy from urban
distributors and sell to traditional shops or supermarkets, cafés or
coffeehouses, roasters, or to a smaller extent to consumers
Roasters 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.
By law, all coffee has to come to ECX and be graded. They sort
the coffee in export and local quality and only coffee that is of
lower quality is supposed to stay in the country.
Understanding urban distribution and coffee retailing

5. 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
Understanding urban distribution and coffee retailing

6. • 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)
- CLU is responsible for inspecting all the coffee going out of the country for
export.
Data and methodology
Understanding urban distribution and coffee retailing

7. Traditional markets
What is valued in coffee markets?
• Definition traditional: 1/ loose formats; 2/ no cash registers or no self-
service
• Two types of regressions were run; using stated and measured quality
• Stated origins of coffee little influence on prices
• Washed coffee valued at a premium of 9% compared to natural-
sundried coffee
• When we use measured grades of CLU, no impact on prices [except
the lower grades significantly reduce prices]
Understanding urban distribution and coffee retailing

8. Traditional markets
What is valued in coffee markets?
• Overall, rewards to easily observable quality measures; few to not
easily observables
• Comparison with formal export markets:
- Large differences in premiums for origins and measured grades of CLU
• Seemingly a dissipation of the not easily observable quality premiums
in local markets
• Why? Lack of trust? Lack of knowledge?
Understanding urban distribution and coffee retailing

9. Traditional markets
Assessing trust
• Can we trust in weights? Yes.
Semi-
wholesalers Traditional retail markets Loose
Unit Regular shop Open market Total products
Number of observations 100 44 51 95 202
Mean grams 992.6 1004.2 1002.8 1,003.4 998.2
Median grams 991.5 1004.8 1001.5 1,002.5 996.5
Underweight % 75 36 43 40 57
Overweight % 25 64 57 60 43
T-test if weight is t-value* -5.42 2.09 1.48 2.51 -1.69
diff. than 1 kg Pr(|T| > |t|) 0.00 0.04 0.15 0.01 0.09
Understanding urban distribution and coffee retailing

10. Traditional markets
Assessing trust
• Can we trust in quality? Yes with not easily observables; No with
easily observables
Semi- Traditional retail markets Loose
wholesalers Regular shop
Open
market Total products
Statements origin
Understated % 21 24 15 20 14
Match % 13 5 10 7 8
Overstated % 66 71 75 73 78
Total % 100 100 100 100 100
Washing
Understated % 3 2 6 4 3
Match % 91 89 90 90 89
Overstated % 6 9 4 6 8
Total % 100 100 100 100 100
Number of observations 100 44 51 95 202

11. Traditional markets
• Selling export quality coffee? Yes
Semi- Traditional retail markets Loose
wholesalers Regular shop
Open
market Total products
Overall quality assessment
Fit for grade 2 % 16 0 4 2 9
Fit for grade 3 % 1 2 0 1 1
Fit for grade 4 % 0 2 2 2 1
Fit for grade 5 % 4 2 8 5 4
Fit for Peaberry coffee % 2 0 0 0 1
Rejected for grades (but >
under-grade) % 41 52 39 45 42
Fit at under-grade level % 33 32 31 32 33
Unfit for export % 3 9 16 13 8
Total % 100 100 100 100 100
Understanding urban distribution and coffee retailing

12. Modern marketing practices
Typology
• Two modern marketing practices emerging:
1/ Modern retail:
- Becoming very important in developing countries
- Despite prohibition of FDI in retail in Ethiopia, domestic modern
sector emerging
2/ Packaging and branding:
- Unpacked and unbranded products indistinguishable from
competitors
- Brandings adds “brand value”
Understanding urban distribution and coffee retailing

13. Modern marketing practices; Typology
• Significant quality premiums for modern retail
0
.01.02.03
Density
0 50 100 150 200
Birr/kg
modern retail traditional retail
wholesale
0
.01.02.03
Density
0 50 100 150 200
Birr/kg
branded bags retail unbranded bags retail
loose
• Significant quality premiums for packing and branding
Understanding urban distribution and coffee retailing

14. Modern marketing practices
Assessing trust
• Can we trust in weights? Yes.
Modern retail Packed
Unit Supermarkets Mini-markets Total Branded Non-branded Total
Number of observations 26 41 67 13 47 60
Mean grams 989.1 994.2 992.2 990.9 990.4 990.5
Median grams 994.5 997.5 995.5 993.5 996.5 995.5
Underweight % 73 63 67 85 66 70
Overweight % 27 37 33 15 34 30
T-test if weight is t-value** -1.48 -2.02 -2.33 -2.35 -2.24 -2.75
diff. than 1 kg Pr(|T| > |t|) 0.15 0.05 0.02 0.04 0.03 0.01
Understanding urban distribution and coffee retailing

15. • Can we trust in quality? Yes with not easily observables; No with
easily observables
Modern retail Packed
Super-
markets Mini-markets Total Branded
Non-
branded Total
Statements origin
Understated % 20 13 15 50 11 14
Match % 0 0 0 0 0 0
Overstated % 80 87 85 50 89 86
Total % 100 100 100 100 100 100
Washing
Understated % 6 0 2 0 3 2
Match % 89 91 91 100 95 96
Overstated % 6 9 7 0 2 2
Total % 100 100 100 100 100 100
Number of observations 26 41 67 13 47 60
Modern marketing practices
Assessing trust

16. • Selling export quality coffee? Yes. But also high quality.
Modern retail Packed
Super-
markets
Mini-
markets Total Branded
Non-
branded Total
Overall quality
assessment
Fit for grade 2 % 50 15 28 46 28 32
Fit for grade 3 % 0 2 1 0 0 0
Fit for grade 4 % 0 10 6 0 6 5
Fit for grade 5 % 8 2 4 0 6 5
Fit for Peaberry coffee % 0 0 0 0 0 0
Rejected for grades (but
>UG) % 23 22 22 38 21 25
Fit at under-grade level % 15 39 30 15 32 28
Unfit for export % 4 10 7 0 6 5
Total % 100 100 100 100 100 100
Modern marketing practices
Assessing trust

17. Conclusions
Major findings from the research:
Q1: Can we trust traditional traders? Answer: Depends. Can be relatively trusted
with weights; On quality: 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)
Q2: What is different with modern markets?
Answer: Deliver high quality and more processed products at a high price but no
more trust-worthy than traditional markets
Q3: Is regulation effective?
Answer: No. There is a flourishing informal market
Understanding urban distribution and coffee retailing

18. Implications
1. Markets not to be trusted in non-observables. More adapted
market institutions [like credible certification mechanisms] needed.
2. Flourishing illegal market. Liberalize? Yes, but maybe not completely
(especially on regional indicators)
3. Modern markets. Strong heterogeneity. Special situation? Informal
markets and early roll-out of modern retail. Possible that FDI and
reduction of informality would solve some of the issues.
Understanding urban distribution and coffee retailing

19. Thank You
Understanding urban distribution and coffee retailing