Pure Watah Economics

Pure water – 500ml plastic bags (sachets) of clean, treated H2O. They can be found in abundance throughout West Africa (and I’m guessing elsewhere), sold by market women, by street vendors, and in stores everywhere. These things are everywhere, leading to an unfortunate amount of trash, but ensuring that pretty much any time of day when you’re feeling thirsty, shouting “Pure Watah!” into the air will get someone running to help you out.

These things are sold for the lowest usable piece of currency (see last weeks post, “No pennies in Ghana”) – 5 pesua coins (about 3.5 cents). You can buy a bag of 30 for 1 Ghana cedi – the difference between 30 sold at 5 pesua and the cost of a bag is the profit for the people engaged in selling these things individually (and, as alluded to before, there are a good number of people doing so). That’s a 50% margin – not bad – but represents only half a Ghana cedi for a pretty good amount of work for someone selling them. I’m not sure how long Pure Watah has been at 5 pesuas. Before Ghana knocked 5 zeros off their currency in 2008 (check out last week’s post: No Pennies in Ghana), Pure Watah sold for 200 Cedi (2 pesuas), but with the new currency came a new “smallest denomination coin” – 5 pesuas.

Ghana, like many developing nations, suffers from inflation. The government has been doing it’s damndest to bring this down in past years, and lately it’s been in single digits – 9%. This is a big improvement from previous years, but is still quite high – for comparison, Canada has an inflation of 3.3%. People often hear of the exhorbent interest rates in the developing world, and while in general it’s true that they’re very high (25-35%), at least part of that is because of inflation.

With our inflation so low, generally, we don’t really think about it too much. We might complain that a bag of chips is a $1.25 now, but really, consumer product price inflation goes pretty much under our radar. This isn’t the case in Ghana – it can’t be. If you just keep charging a steady price, you’ll see your profit margin disappearing, your real income slipping between your fingers. As such, it’s common to see prices rising, and while people don’t like it, they’re also pretty used to it. For example, even in the last few months, I’ve seen the price of Fanice (a package of vanilla icecream, basically) increase 10 pesuas (25%). Taxi prices have gone up noticeably as well (although this must be attributed at least in part to increased fuel prices, I suspect that’s also an excuse to make the necessary price hike).

To put the inflation in perspective, that means that at that fixed 5 pesua price, someone who sells pure water has seen their real income drop by 4.5% since I’ve arrived – less than 6 months ago. Think about how much people fight for a 3% raise to put that in perspective.

It shouldn’t come as any surprise, then, that there’s been talk of raising the price of pure water sachets to 10 pesuas. They’ve tried it, once in January, once in February, and again in April. Packages got sold at 1.50 Ghana cedi – therefore, if you sell all thirty sachets, you’re grossing 3 Ghana – 100% margin, 1.50 Ghana Cedi profit. Bonus! Each time, however, they’ve ended up reducing the price back to 5 pesuas and 1 Ghana.

What’s really fascinating, though, is what happens when that price gets hiked – some of Porters Five Forces at work. Firstly, you start to see substitute products – specifically, in the form of tap water in plastic bags, untreated, unbranded, and probably unsafe. All other things being equal (mainly the price) people will opt for the Pure Watah – but as soon as that price gets hiked, that substitute product starts looking a lot more attractive. People might like to sell that “bag water” cheaper, even when Pure Watah is at 5 pesuas, but the lack of a smaller denomination make that impossible. A soon as they can, suppliers start to create a low-cost alternative, and buyers start to look for it. Pure Watah falls prey to substitute products.

Next, Pure Watah suppliers (and buyers too, probably) start getting creative. When pure watah is at 5 pesuas and 50% margin, there is a well established, stable market, and there is really no room for product differentiation, except for brand selection, but I haven’t found this to be significant. People seem to just take what’s available (this may change a little as Pure Watah manufacturing becomes regulated, but we’ll have to wait and see). However, at 100% margin and 1.50 Ghana Cedi in profit, suppliers start to look at this and see an opportunity. Some suppliers start to make deals – get 3 sachets for 20 pesuas! Get 6 for 50! With enough time, I would guess that this would stabilize and get standardized across all vendors, but so far, I haven’t seen that happen. The increased margin has given suppliers bargaining power. They can offer deals. Speaking for myself, within a week of the price increase, I had a Pure Watah lady at work and one on my way home I would preferentially visit, because I knew they would give me a deal.

Within a few weeks of each price increase, it would inevitably drop back to 5 pesuas. Eventually something will have to give, as everyone in the supply chain sees their real income continue to drop, but I wonder what that will take. Maybe they can replace the 5 pesua coin with a 7 pesua denomination.

One thing I’m not sure on is who decides to change the price. Is it fixed by the government – I’ve heard otherwise. If vendors are indeed setting the price, how is that they all change their price on the same day? No question, competition is FIERCE in this market, so it’s no surprise that there’s so little price difference, but they must be at least communicating to make this shift all at once. 

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4 Responses to Pure Watah Economics

  1. Tom Curran says:

    Is the bag water advertised as clean?

    • Not advertised per se, but definitely recognized as such.

      There’s currently no legislation or overseeing body so anyone can buy the machine, start filling bags with whatever water, and call it ‘clean’. There’s a lot of talk about changing this, and there’s no an ‘opt-in’ regulating body that publishes ‘certified’ pure watah places. My guess (hope!) is that this will eventually be mandatory.

  2. Pingback: Development Digest – 13/05/11 « What am I doing here?

  3. Boris says:

    Hey Dan! Nice post. You may need to “go to the source” to find out how the prices get changed all across the board. I remember in BF market kids selling water would buy 30-50 water sachets containers at a “bulk” price, themselves bought by a few retailers positioned in the central market. This is where the market value would be adjusted, by word of mouth at the moment you replenish your stock.

    In a related process, in 2007 the pork-Oven-roasters of Bobo Dioulasso increased their prices all at once.
    Pork oven roasting is a favorite sunday activity in Bobo, right after church, you go to a market stall, drink Dolo (local sorghum beer) and eat pork pieces with a delicious tomato and hot pepper relish. The price of wood had increased, and their profit margin had decreased significantly. They had formed an association and paid for a radio announcement that across the city, the price of roasted pork was going to increase to make sure they could keep serving their clients. It all increased at once. That seemed counter intuitive to my market economics mind.

    B

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