Designers of Development Options

Issue No. 2020-03

Will the MSMEs Online Food Suppliers Survive COVID-19

Danilo A. Songco

Like many of you, I was drawn to ordering food online because my senior wife and I couldn’t go out. The experience (mainly buying cooked food) made me think of the emerging opportunities for small business in light of my nearly 15 years of work in micro and small enterprise development.

Mind you, these reflections are purely anecdotal and have no empirical basis. However, in light of my micro, small and medium enterprises (MSME) experience, they seem to be providing insights that could point us to possibilities in the future. So what have we observed?

consumers are having the confidence to buy from unknown food producers/suppliers because they couldn’t go to the market;
small producers saw this as an opportunity to fill that demand either because of the need to replace lost income or because of a personal knack for cooking/baking/trading;
intermediaries saw this opportunity to fill in the logistical gap of making goods/services reach the consumer in a convenient way;
the e-commerce business (which had existed before COVID) is being boosted not just by increased demand but because of improved technology; and,
financial technology (fintech) is making these transactions even more efficient and convenient for both buyer and seller thereby fuelling the robustness of e-commerce.

This is a wonderful phenomenon that is unprecedented and which promises the realization of the holy grail of MSME development – the efficient and sustained direct transaction between buyer and seller of goods and services. But is it here to stay? Is this part of the new normal or is this a flash in the pan?

Let’s try to analyze the different dimensions of the phenomenon to see if we can find the answers to these questions (or maybe uncover more questions). What are these different elements:

PRICE. There’s a wide range of understanding of the concept of profit margin among small entrepreneurs. There are those who want to make money quickly without realizing that they are pricing their product out of the market. There are those who are more keen about competitiveness and are content with a small margin in order to create volume demand. This is where the veterans have an edge. Many traditional food suppliers who have been in the business for sometime are invading the ecommerce space to recapture market share. They are more efficient because they have already achieved scale in production and are able to live with smaller margins in exchange for bigger customer base. Obviously price will be a major determinant of who will succeed and who will fall out of the food ecommerce space.

QUALITY. This is directly proportional to price from the point of view of consumers. Again, the newbies who will sacrifice quality (using cheaper ingredients for instance) in order to price lower end up with lesser quality and less competitive product. Successful entrepreneurs know how to tame profit margin (i.e.price) in relation to product/service quality. People will be willing to pay more for good quality.

DELIVERY/LOGISTICS. This is the ultimate factor in ecommerce. The convenience of buying food/service online has a cost. If you build in that cost into the price of the product/service, the ultimate price of what you’re buying could end up being more expensive than buying it from a store. Lately, I have observed that delivery cost could go as high as 30 – 40% of your bill, depending on the quantity of your order. Clearly, it is the logistics intermediary like Grab, Lalamove, Food Panda and the like (and the Lazadas and Shopees in the dry goods space) that are raking it in. This includes the Gcashes and Paymayas that are receiving far greater business than they ever had before COVID. In my interview of one of the delivery guys, he said his take home these days could go up to P 1,000/day. However, he also said that it is getting more and more competitive because many riders are getting into this space as a result of rising unemployment.

EASE OF DOING BUSINESS. This is a case against BIR’s move to tax online business. Many of these micro and small enterprises are simply making up for lost income. The e-commerce is only becoming more and more dynamic, thanks to COVID. Why regulate something as nascent as this? How much does the BIR expect to collect in taxes from these dominantly small players, especially given that many of them will be tax exempt due to their net revenue level? The intention to get a sense of the players in this sphere by enlisting them is well-intentioned. But does it have to be done at this time? This is akin to legislating the terror law at a time when citizens are getting more and more anxious about the prevailing situation.

Methinks this phenomenon of online food selling will sustain even in the new normal, even though they are more expensive, because of the convenience they offer. But many will fall by the wayside because of being uncompetitive and poor entrepreneurship. The malls and stand alone food establishments (most especially the fast food chains) will offer stiff competition simply because many of them have achieved economies of scale. Apart from the experience of dining out, the price-quality value for money of established businesses will trump the emergent food suppliers who want to make a quick buck. Those that require a minimum order is a classic example. This to me is a deal breaker because there is no risk on their part when I have to pay first before my order is filled out and I have to pay for delivery cost. When the lockdown is fully lifted, only the more resilient – those who will have learned the tricks of the trade and will wisened in the process – among the nascent food businesses will survive.