In the bustling markets of Mexico, a subtle yet significant revolution is underway. It isn’t a political or social upheaval. It’s a transformation in the retail sector. Traditional neighborhood shops, once the heart of local communities, are now competing at a considerable disadvantage with giant convenience chains like 7-Eleven and Oxxo.
This revolution, fueled by the entry of the larger, more efficient convenience chains, has far-reaching implications for consumer welfare.
Chains offer a broad range of goods, similar to neighborhood shops, and stand out for their amenities: extended operating hours, parking spaces, air conditioning, and acceptance of electronic payments, to name a few. These features benefit certain sectors of the population. They do not, however, benefit everyone.
Local Welfare: A Tale of Winners and Losers
Much of the difference comes down to income and consumer preference. A recent publication by authors from the IDB in the Review of Economic Studies reveals that median and average households fare better with the entry of chains, their diverse product range, and the numerous other amenities they offer.
Lower-income households, however, rely heavily on neighborhood shops. The entry of chains, which reduces the number of neighborhood stores, means households have to travel further to shop. They also have less access to fresh goods, informal credit, products especially tailored to local customers, and other features.
The Mechanisms of Welfare Change
Welfare can be considered a measure of the satisfaction that consumers get from buying goods and services within their income limits. It takes into account the shopping experience and the amenities offered by the establishments and consumers’ income, which influences what they can afford and their preferences for goods, services and amenities.
The welfare change of the new retail revolution is thus driven by two underlying mechanisms. On one hand there is household income. This encompasses all potential income sources, such as profits and wages, and takes into account employment availability. On the other hand is the cost of living, which includes all the benefits of acquiring goods at given prices, factoring in the shopping experience and accompanying amenities.
Our research show that the effect on household income is largely neutral. The expansion of chains leads to 10.7% fewer shops and a 5.8% decline in profits for surviving shops, directly impacting income and self-employment. However, chains also create employment opportunities, and on average, the decrease in jobs (including for shop owners) in traditional shops is offset by the increase in jobs in convenience chains.
The net income effect, as a result, is nearly neutral. The lost income and gained income channels largely cancel each other out. The labor income from new jobs at convenience chains compensates for the lost income from shop owners’ profits.
Cost of living, by contrast, emerges as the primary driver of welfare effects and varies according to economic status. For wealthier households, the chains, which are not necessarily cheaper, offer welfare gains in the form of variety and amenities. Wealthier households value these amenities more, and the gains from the increased availability of convenience chains for the wealthiest quintile are more than 20% larger than for the poorest quintile.
Welfare losses associated with fewer neighborhood shops, meanwhile, are most significant for the poorest quintile. Lower-income households experience greater welfare losses as they are more cash and credit-constrained and, among other characteristics, less likely to own cars, thus valuing the shops more for the informal credit option, relationships with the owner, and proximity to home.
The replacement of neighborhood shops with convenience chains, in short, has a regressive effect, benefiting wealthier households the most, with the wealthiest decile of households experiencing a welfare gain of 1.6% for the poorest decile suffering a welfare loss of 0.5%.
Looking Ahead With Convenience Chains
The emergence of convenience chains isn’t necessarily a negative development. It offers numerous advantages to a wide range of consumers and stimulates market competition. However, it’s vital to acknowledge that the effects of these changes are not uniformly distributed. As we navigate this evolving landscape, it is essential to mitigate the losses suffered by the most disadvantaged and ensure that progress is inclusive, extending its benefits to everyone.
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