Profits And The Poor

If you missed the discussion going on at Mike’s post on vouchers and making a profitable school, then I encourage you to check it out.  Part of that discussion made this article at the WSJ stand out even more to me.  Danone, or Dannon as it’s known in the states, is very active in selling yogurt and water to the poor in Africa.  But this is not philanthropy…it is business:

Mr. Riboud began to see he was missing out on the huge untapped market of products for the poor. In 2004 in Indonesia, Danone’s local managers presented Mr. Riboud with a pyramid diagram showing that out of the country’s population of 240 million, just the 20 million at the tip of the pyramid could afford Danone’s food.

So he decided to develop a cheap, on-the-go drinkable yogurt for poor consumers and children. “Why shouldn’t I be doing business with them, too?” Mr. Riboud recalls thinking.

The first such yogurt debuted in Indonesia at the end of 2004, selling at 10 cents for a 70-gram plastic bottle. The yogurt was an instant hit with lower-income consumers and children in particular, selling 10 million bottles in its first three months on the market. It is still one of Danone’s most popular products in Indonesia, where the average per-capita income is about $11 a day.

Two-and-a-half years later, Danone teamed up with Muhammad Yunus, the Bangladeshi who later won the Nobel Peace Prize for his microcredit program that lends money to poor entrepreneurs. Mr. Riboud and Mr. Yunus, having met over lunch, set up a joint venture called Grameen Danone Foods Ltd.

The idea was to sell an affordable seven-cent yogurt product called Shokti Doi—which means “strong yogurt.” Fortified with vitamins and minerals, it was to be sold through local women who would peddle it door to door on commission.

For the 54-year old Danone boss, who eschews ties and gets around by scooter, the Shokti Doi initiative was something of a personal mission. His father Antoine, who preceded him as chief executive, had instilled in him an interest in ventures that had a chance to both make money and give a lift to the poor—the “double project”, as he called it.

Within a year, though, Grameen Danone hit a wall: Milk prices soared, factory openings were delayed, and the saleswomen couldn’t earn a living selling yogurt alone. Today, a significant portion of sales of Shokti Doi come from urban stores, not rural villages as planned.

Danone stresses that none of its low-income consumer efforts are charity. “Danone is not an NGO,” Mr. Riboud says. “Learning to make a nutritious product that can be sold for eight cents without a loss helps us when we put in place a volume strategy, even in mature markets.” [emphasis added]

I think this last line is key.  Not only are they seeking a profit, but foresee that the efficiencies they learn in trying to reach such a poor market will ultimately help them in the more affluent markets.  Certainly Danone may not be indicative of all business… but it does represent the ability for private enterprise to make a profit, and reach the needy.

Danone says its emerging-market bottled-water business is already more lucrative than its water operations in developed markets, which includes the pricey Evian brand. The company strives for “satisfactory and durable profits, but not to maximize profits,” says Danone deputy general manager Emmanuel Faber.

Maybe some forward thinking companies like Danone would be the ones to spring up if education reform allowed competition through vouchers?  The article, as quoted above, mentions Muhammad Yunus – who I wrote about in this post a year ago.  It’s people like these that can re-frame the vision society has of the free market and capitalism.

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A Profitable School

CAI had a robust discussion on the idea of vouchers a while back, and I kind of missed it, which was unfortunate because I’ve put a great deal of thought into the subject. Actually, what I’ve thought most about how one could make some money in the situation of vouchers.

If the goal of a voucher system is to use profit incentive as a way to improve schools, then I think it’s worth considering the best ways to make a school profitable.

It should be first noted that running a school for profit would be different than many other businesses. For one, you would be selling a service that every client is required by law to purchase. Also, your fee for that service is fixed. Therefore, the way to profit is to attract as many customers as possible and serve their needs with as little money as possible. What this means is first that you don’t need to convince anybody to buy your service, only to buy it from you. Also, you don’t get to adjust your prices to affect your profits or to attract different types of customers.

Now it is possible that the fee wouldn’t be fixed. It depends on how a voucher policy is set up. If a school is allowed to accept a voucher and charge tuition on top of that, then the best way to profit is to take an existing private school and keep the tuition the same as it already is. In this case, you simply increase your revenues by the amount of the voucher. It might seem that such a move would anger the customers, but I would strongly challenge that assumption. Deborah Meier writes about private schools in The Power of Their Ideas and points out that these schools establish their reputations through their exclusivity. In other words, the more students to whom a school can deny admittance, the better the school’s reputation. Parents in these schools want the exclusivity, and that’s one of the main reasons they pay so much money to send their children there.

Of course, that’s not likely to be the case. If a voucher system were ever to pass, I don’t think schools would be allowed to charge tuition over the voucher. In fact, what a voucher system could mean to some exclusive private schools, is that they would receive less money per child since the voucher could be less than some schools’ existing tuition.

So in this case, we’d be starting from scratch. We’d need to build our client base and develop a business plan that’s profitable using only the voucher as revenue. This means that our best hope for profit is to attract the most possible vouchers and spend the least amount possible on each child.

Of course, one could simply hire fewer teachers. The most vouchers per employee equals most profit. Once again, though, it’s a balancing act because the students need to feel they’re receiving a good experience. Also, parents are not likely to send their children to a school with too high a student-to-teacher ratio. We could, however, hire a large amount of teachers in the beginning to get customers in the door, and then once seats are filled, we could slowly reduce workforce in order to increase profits.

This is a model I see very commonly in private enterprise. I helped open a Ruby Tuesday’s in Boulder, and that’s exactly how it went. Corporate brought in their best and brightest from around the country and staffed one waiter for every two tables. This lasted about a month, at which point the best and brightest left to open up new stores and staffing went down to a 4 to 1 ratio. They were also aggressive about releasing wait staff at the first sign of a slow evening, which some times increased the ratio to 8 to 1.

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A proposal for international soccer

Like most fellow citizens of planet earth, I’m psyched out of my mind for the world cup.  I love soccer but rarely watch it, primarily because I just can’t get worked up for the MLS, which is undeniably weak compared to every other major professional league in the world.  I haven’t gotten around to arbitrarily picking an English team to root for like Mark and many other friends of mine.  I can’t really get excited for a game in which I have no rooting interest.  Put all of that together, and there is really just one opportunity every four years in which I get to watch the world’s best players with a strong rooting interest, and I’m talking about the world cup here.  I love the fact that I get to root for the U.S. and the underdog at the same time.  I love the fact that the team I root for actually represents a place (as opposed to the will and financial muscle of some team owner), and perhaps, an idea, or a set of values (OK, I’m stretching, but still).

I also love the format of the first round, with each team playing three others and the two best teams advancing.  This format allows for teams to at least play three games and demonstrate their skills against different types of opponents.  It allows a good team to have a bad game, and mitigates the possibility of a fluke goal determining a team’s fate.  And, most interestingly to me, it forces a team to keep playing its hardest even when it knows it can’t win a game, since goal totals play a role in determining which two teams advance.  In other words, if you’re down 3 – 0 with 10 minutes left, it’s still in your best interest to have your best players on the field, trying to make it 3 – 1 or at least prevent it becoming 4 – 0.  I also love that this format allows for ties in the first round.  I don’t know why, I just like the idea of a tie, especially since it’s been seemingly eradicated from every American sport imaginable (apparently you still can technically tie in the NFL, but even some veteran quarterbacks in the league don’t know that).

Another near-save for the goal keeper

However, one thing I hate about the world cup, and soccer in general, is what happens when a tie in not acceptable.  Once the first round is over, all other games must have a winner and loser.  That is unavoidable.  The means of determining the winner and loser, however, namely penalty kicks, is problematic.  Of course there is first a traditional overtime (which I believe is sudden death- am I right?) and, if the first overtime does not resolve the deadlock, a second.  But if all of this ends without a team scoring, the game goes to penalty kicks- 5 players from each team kicking penalty kicks, with the team who scores more winning the game.  If there’s still a tie, they do it again.

My biggest problem with this format is that it is so different from the rest of the game.  Taking a wide-open shot with no defender around is almost completely removed from the ethos of the sport that emphasizes team work, passing and speed.  The idea that this kind of shot influences the game at times (such as the case of an actual penalty in the penalty box) is acceptable, and of course there is the occasional break-away play in which a player does take this kind of shot (although it is always with a lot more drama leading up to the shot), but this should not play such a massive role in determining a 2+ hour hard-fought game with the world’s best players.

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Dark Pools

Anyone living in California is well aware of our budgetary crisis. But what if I told you there was more than just the budget? What if I told you that even though the CA budget was in the red, there were dark pools of money not being touched that far exceeded our budgetary shortfalls? While that may sound like a conspiracy theory, it turns out to be both true and quite commonplace.

If you look at the budget, then California, as of April, has a shortfall of about $26.3 billion. That’s the amount allocated for spending that we did not take in as revenue in the general fund and must now make up the difference either by increased taxes or spending cuts. There’s nothing unfamiliar about that so I won’t bother going into detail. But that’s the budget. When it comes to government finances there are two sets of books. There is the budget and then there’s the Comprehensive Annual Financial Review (CAFR). The CAFR is basically a comprehensive list of all liquid asset funds, bonds, stocks, etc, that the government owns. Every state, county, city, and local government must produce a CAFR every fiscal year. And much of the assets reported in the CAFR never go towards the budget, strange as it may seem.

So what’s the difference between the budget and the CAFR? The budget only lists the money the government receives from taxes, fines, and fees. Within each budget, a certain amount of money is set aside for “rainy day funds”. This money gets invested and does not get spent as part of the next year’s budget. There are also large profit centers in each state where revenues do not go towards the budget. For instance, the revenues from many toll roads are excluded from state budgets. Thirdly, when voters approve the sale of bonds to raise money for a specific project, once the project is paid for, the excess funds are not handed over to the state toward next year’s budget. They just sit idly in an earmarked fund, drawing a modest interest. This is why, in California, we have the dichotomy of experiencing both a budget deficit of $26.3 billion while at the same time having a $71 billion surplus.

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