Saturday, January 16, 2010

Mark-ups, Part 2


I've had more than my customary level of feedback on my recent musings about the cost of certain products in both Antigua and the nearer parts of Mexico, so I think a bit of a follow-up is required.

Some of the alternative explanations for higher price-tags — which could be categorised as a) regional risk/cost of money b) exotic product/deliberate social exclusion and c) size of market — I had considered and, I suppose, dismissed before my original post....but this of course means nothing as I had also dismissed out of hand the idea that Rosenberg plotted his own death. (Ockham's Razor might have suggested to me that a massive right-wing conspiracy was in fact less probable than a one man right-wing conspiracy!)

There's no doubt that doing business in Guatemala involves certain level of additional risk. Government bonds from all over this region pay out interest with a 'risk premium' reflecting the dangers of default. Before it became part of Citi, Banco Uno used to pay us around 7% on our Dollar savings account which was quite extraordinary given the rates that then prevailed in the US, a reflection of both the riskiness of holding money in Guatemala and the fact that the bank was probably holding if offshore in Panama anyway.

One commenter suggested that new businesses here will tend to find it harder to get seed capital at a rate they can repay and I would think this is probably true, but in the case of Domino's we're not really talking about a start-up. (And I doubt whether the pizzas have indulged in a round-trip to the US and back before arriving in their boxes.)

I suspect that multinational firms will be looking to operate at higher margins in Guatemala as a consequence of this risk....and simply because they are able to. Coffee may be very expensive in London or New York, but such are the competitive conditions that there's a constant squeeze on profits. (I'd be surprised if the margins aren't better at El Portal.)

This is why Starbucks (and any restaurant with a decently scaled wine list) charges us comparatively more for things that involve very little incremental increase in base cost to them — for in the battle for extra margin, victory goes to he who provides a mechanism for those people who don't really care how much they spend to self-select.

So Lorrie Moore was missing something when she suggests in A Gate at the Stairs that "Tall" meaning in fact "Small" at Starbucks is as Orwellian a piece of marketing as you are likely to come across. And the thing she's missing is that you can walk into any Starbucks and order a "Short" latte: they have simply decided not to advertise this option on the menus behind the barristas, so budget-conscious coffee drinkers have to a) know this and b) be un-self-conscious about their penny-pinching.

Anyway, back to Tapachula.

Mexico has the same per capita GDP as Argentina, which surely allows for a certain degree of sophistication. (Indeed, a couple of years ago Mexican tourists were listed as one of the biggest spending sub-groups of foreign visitors to London.) Unfortunately, the world tends to see Mexico through the condescending lens of its northern neighbour, and so finds it hard to imagine that its inhabitants are not all subsisting on a diet of beans and tortillas. As that famous track from Molotov goes: "No me llamas frijolero pinche gringo puñetero!"

Coffee is surely not such an exotic product in Chiapas. The park with the band-stand offers free wi-fi and the coffee shop in question was full of local teens with laptops. In my three visits to Tapachula over the past twelve months I have yet to run into another non-Hispanic wanderer, so I doubt very much whether this rennovated urban space is an elaborate ploy to trap passing yuppies from abroad. The local market still might be quite small, but the pricing structure is essentially the same in Tuxtla Gutiérrez, which has a substantial smartly dressed white collar community (and outlets of The Italian Coffee Co. all over the place.)

What of exclusivity? Well yes, it was an ICED coffee, but normal boiling ones were no cheaper. It is true though that fast food brands in certain parts of Latin America are perceived as aspirational. Certainly McDonald's in Sao Paolo is a cooler place to be than its equivalent in Idaho. But an aspirational positioning doesn't necessarily imply a deliberate effort to keep the mucos away.

I'm not sure that this would work anyway in Antigua. Such is the class system there that people tend to naturally gravitate to places where 'their sort' hang out, even if the place where the more affluent demographic tends to go is actually cheaper. (I could cite several examples.)

And conversely perhaps, last Easter I saw (and blogged about) the spectacle of out-of-town campesinos quaffing capuccinos in the park, clearly oblivious to the fact that they were supposed to feel excluded by such an exotic product.

One thing I did neglect to consider in the original post was the scarcity of good locations. In London this is directly reflected in the rents (and in the opportunity cost of having to wait for a bank at a prime location to close in order that it may be turned into a coffee shop or wine bar.). Rents may be lower in Antigua, but good locations are still comparatively scarce, especially when it comes to regular footfall.