Profitability risks after the acquisition of informal players

McKinsey has a nice example from Brazil, but not only – Russia also has similar examples – where formal supermarkets have found that they can’t profitably acquire informal players, because of the unearned cost advantage. Although supermarkets could increase the productivity of the acquired businesses, their net margin goes to zero once tax obligations are paid:

They also show that in Turkey dairy processors enjoy informality-related cost savings of almost 20%, so these companies survive despite their low pro-ductivity. Informal software companies in India appropriate innovations and copyrights without paying for them. If software piracy rates fell to US levels, the industry’s productivity and profitability would soar by nearly 90%.


One thought on “Profitability risks after the acquisition of informal players”

  1. I just found an interesting article: The informal economy – a threat or driver for the Green Economy? – see

    Could the informal economy be the route to deliver the ideal of a Green Economy? – I think this is a good question. The informal economy currently accounts for over half of global employment and as much as 90 per cent of employment in some of the poorer developing countries. The International Labour Organization (ILO) estimates that it employs 1.8bn people, as opposed to the 1.2bn in the formal sector.

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