Archive for the ‘Risk’ Category

The dangerous assumption that there’s no competition from the informal sector

In addition, the informal economy of open street markets still dominates 90% of retail in large countries like Nigeria and Kenya, meaning it’s a near safe bet there’s plenty of room to grow. ~ Quartz Africa, Jan 2017

Failure is a risk, and an inescapable function of the amount of resources invested, not just money. Time, effort, and managerial ambitions are also losses that destroy value for companies. Danger, then, lies in leaping to assumptions that turn out to be wrong. This is one of them.

First, a bit of history. Just over a decade ago, the Indian market was opening up to world’s investment flows in the retail sector, and estimates of the potential were as rosy and glowing as Africa’s today. From The Economist in April 2006:

Most Indian shops belong to what is known, quite accurately, as the “unorganised” sector—small, family-owned shops surviving on unpaid labour and, often, free land for a small stall. “Organised” retailing accounts for only 2-3% of the total, and of that, 96% is in the ten biggest cities, and 86% in the biggest six. However, organised retailing is growing at 18-20% a year and inspiring a rush of property development. Shopping malls are springing up in every big town: some 450 are at various stages of development.

By 2015, it was clear that these ambitious potentials were never going to materialize, though many malls did spring up in cities across the country. Last year, I covered this topic looking back at the growth projections and the subsequent real numbers achieved from the perspective of the resilience shown by the informal retail sector. I noted, in August 2016:

Yet if you look at the data from 2015, you’ll see that the forecasts were far too ambitious – formal retail has only reached 8% penetration in the past 10 years. Nowhere close to the 25% expected by 2010. Mind you, these were all the management consultancy reports bandying the numbers around.

I bring this up because I’m seeing the same kinds of projections happening right now for the African consumer market by the very same firms.

Second, this time it’s not just a management consultancy report with all the research and analysis efforts they pour into making their case. It’s not been distilled into one single yet dangerous sentence:

meaning it’s a near safe bet there’s plenty of room

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“Plenty of room” (Photo Credit: Yepeka Yeebo in Accra, Ghana)

There’s an inherent assumption within the assumption that the myriads of little stands, market ladies and their longstanding relationships with customers and suppliers, and the entire ecosystem which exists, such as in the photograph above, can simply be bulldozed over with a granite and marble mall development covered in shiny unreflective glass.
It didn’t happen in India, and it’s not happening in Africa. From Ghana, this news article on mall development says:

Ghana’s economic woes have translated into a variety of challenges for formal retailers who are competing for sales alongside the dominant and deep-rooted informal shopping sector. According to a recent report by African commercial property services group Broll overall sales in most modern shopping malls are well below historic averages, despite garnering sufficient foot traffic.

cth8lgkwcaauetyFurther, and more dangerously, this blithe assumption of a cakewalk where an informal sector so tangibly exists, overlooks the innate ingenuity of those who seek a dignified life even while hustling for a living. And that there’s no competition or customer service.

Insights on the psychology of cash money – Demonetization vs Financial Inclusion

moneyThe flurry of commentary on the Great Indian Demonetization of November 2016 has thrown up some nuggets of insight worth considering more deeply.

Santosh Desai explores the psychology of cash money in the Times of India blog, linking the need for tangible evidence of income to physical labour, as opposed to those of us with the contextual knowledge to understand the virtual concept i.e. digital currency.

“…there is another aspect of this situation that needs more reflection- the nature of the relationship we enjoy with cash. Cash is not merely a symbolic representation of value. Cash is the idea of value captured and owned. It is the product of labour that is an entity by itself and becomes much more than what it can buy. Sitting on a pile of cash gives pleasure both metaphorical and real.”

“…there is some value that is placed on the device of currency notes over and above the value that it signifies.”

This aspect has not been looked at deeply enough, imho, when financial inclusion is talked about, particularly in the context of digital solutions. I suspect that therein will lie behavioural insights that could conceivably drive design changes that lower the barriers to adoption in the strategies to introduce digital currencies and mobile monies to hitherto unbanked populations.

Earning money needs to be signified concretely. Those whose life’s earnings are in the form of a few high value currency notes, do not decode demonetization in quite the same way as those used to money in its conceptual form. The idea that it is possible to de-legitimise their life’s labour is to shake the foundations on which one’s life is constructed. What if some money is not exchanged? What if some paperwork, that bane of those living on the margins, is incomplete?

What if the mobile phone’s battery dies? Do my hard earned monies disappear like other unsaved data?

Trust in technology is a function of our contextual knowledge – our immersion in an environment saturated with electronic communication and screens of all types and purposes provides us with conceptual frameworks that are entirely different from someone whose daily labour is on the farm, or at a mechanic’s garage.

While those who are financially excluded might not face demonetization i.e. the de-legitimization of their labour, as Desai mentions above, the current attempts to convert their cash intensive habits into digital form via various “cashless” initiatives overlook the psychology of cash. Regardless of locale, those at the margins (the excluded) have high levels of mistrust in the system, through their experiences with institutions and the system, over time and history.

The talk of ‘cashless’ is easy, but it ignores that there is a cultural dimension to the physicality of cash. Digital wallets operate on a transfer of intention, where a promise to pay gets converted into an intention to buy. For this to work at scale, one needs to have become comfortable with the idea of surplus and develop the confidence that money will come without having to struggle or having to think about it all the time. One needs to develop trust in institutions, in a context where the evidence around is overwhelmingly to the contrary.

I suspect that if this subject was explored further, we would discover that where mobile money has succeeded, such as in East Africa, the institution that was trusted was the telco – the mobile service operator, and that the early stages of adoption have a different narrative from that being used currently in entirely new markets where mobile money still struggles to penetrate. India and South Africa are two such places where the unbanked and the financially excluded have reasons of history to develop high mistrust of the systems of the privileged.

To convert one’s worth into worthlessness, even if for a small period is to make everyone nervous. Psychologically, money works on a convention of mutual deception. We agree to call something money, and that is good enough. But to have the thinness of this convention exposed in such a way is to cause great anxiety.

The transition to a cashless future can be made gentler and more accommodating to their fears and concerns, generating a sense of security and commitment, with some empathy for an entirely different world-view and life experience.

An economy of trust

_92445052_02Cash on credit is the caption given to this cartoon by the BBC. Neighbourhood groceries are offering their regular customers cash advances in addition to bread and milk.

While the media is filled with a plethora of stories of heartbreak, my own suspicion is that we’ll discover the resilience of the cash intensive informal sector lies in the relationships between people, once the hubbub has died down.

Research Question: Why is the informal retail sector so persistent and resilient?

retail2Retailing in India is currently estimated to be a USD 200 billion industry, of which organised retailing makes up 3% or USD 6.4 billion. By 2010, organized retail is projected to reach USD 23 billion and in terms of market share it is expected to rise by 20 to 25%. (Sinha et all, 2007)

These claims of projected growth were made based on a 2005 KPMG report on the Indian Consumer market, while the chart itself with it’s aspirational forecast is from the IBEF website. I have been watching and waiting for more than ten years for India’s retail revolution to take place.

The consistent message from the beginning of the retail boom has been that since the organized retail sector (what we would call the formal) has only been ~2% of the total retail trade in India (the balance is informal retail) there was ample opportunity for growth in modern retail.

Yet if you look at the data from 2015, you’ll see that the forecasts were far too ambitious (or, perhaps, aspirational, in the push for modernization driving India’s recently opened markets) – formal retail has only reached 8% penetration in the past 10 years. Nowhere close to the 25% expected by 2010. Mind you, these were all the management consultancy reports bandying the numbers around.

I bring this up because I’m seeing the same kinds of projections happening right now for the African consumer market by the very same firms. And with very few exceptions, the majority of the SSA markets tend towards the same kind of proportions of organized vs unorganized retail  (formal vs informal, modern vs traditional et al are all variations on this theme with minor differences in definition).

And, even as the retail real estate development investments are booming, we are already seeing the very first signs of the same challenge that India faced – over capacity, low footfalls, and empty malls. Just yesterday, the news from Ghana – a firm favourite of the investment forecasters –  has this to say:

Ghana’s economic woes have translated into a variety of challenges for formal retailers who are competing for sales alongsidethe dominant and deep-rooted informal shopping sector. According to a recent report by African commercial property services group Broll – titled Ghana, Retail Barometer Q2, 2016 – overall sales in most modern shopping malls are well below historic averages, despite garnering sufficient foot traffic.
[…]
“International players are also looking at the market and re-adjusting their product/pricing mix to cater for the real middle class, whereby we are talking more in terms of value products rather than high-end products.”

And, retail developers are turning their attention to secondary cities such as Kumasi and Takoradi, as Accra reaches saturation point. The exact same pattern as we have been seeing in India. You would think people might pause a moment to take a look at similar markets and operating environments to assess patterns of market creation development.

This pattern is what gave rise to the research question I would like to frame – why has the informal retail sector been so persistent and resilient? What does this mean for modern trade? And, what are the implications for urban development and planning?

The trajectories of the Indian and the Ghanaian economies have taken different turns, thus, while one might point to these factors as the reasons for the challenges facing the mall owners and the retail brands, the big picture over the past twenty years points to something more fundamental in these operating environments common to the developing world.

That is what I would like to find out.

Japan’s Indian Strategy for the African Consumer Market

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One of the most high-profile events Kenya has hosted since independence begins this week when heads of state from across Africa and the Prime Minister of Japan Mr Shinzo Abe jet in for the Tokyo International Conference on Africa Development (TICAD). It will be the first time that Ticad has been held outside Japan and it is an honour to Kenya to have been picked to host this event. ~ Daily Nation editorial

The Nikkei Asian Review has been preparing for days with longform articles on the African consumer market, and other opportunities for Asian businesses. While Indian B2C investments have been closely analysed (and embraced), it is clear that the East Asians are eyeing each other as their closest competitors.

Africa was once dominated by Western investors, due to ties forged in colonial times. But Chinese companies have muscled their way in, and Indian, Japanese and South Korean players are arriving and thriving. This intense competition is no longer just about extracting minerals and materials. It is about tapping the next big consumer market.

Their articles are well researched and provide ample insights for businesses contemplating these new markets. Here are some highlights that caught my eye:

Vivek Karve has a clear picture of the ideal African market. The chief financial officer of India’s Marico, a maker of hair and body care products and other fast-moving consumer goods, said his company targets countries with “per capita GDP under $5,000, many mom-and-pop shops, low penetration of multinationals and political stability.”

There’s little handwringing over lack of data or missing middle class metrics. Inadequate infrastructure and informal retail in Africa is no different for your average Indian FMCG brand than their domestic market, thus the concept of the ideal market being one full of little mom and pop shops.

Marico’s strategy for achieving that includes promoting local brands familiar to African consumers, rather than pushing products that are popular in India. It uses multiple distributors to cushion itself against credit risks.

The Japanese, having already faced off with the Koreans in India’s large, diverse, and fragmented markets, are ready to take a leaf from the Indian playbook for their foray into the African market.

The gap between Asian and Western rivals is expected to narrow over time, with China making up much of the ground. About 3,000 companies from China — Africa’s largest trade partner since 2009 — are doing business in sectors such as infrastructure, resource development and telecommunications.

And even this focus on infrastructure development and large scale investments is changing. The Chinese idea is to boost purchasing power across Africa and turn the continent into a massive consumer market.

csm_Dr.Morimoto_and_Mr.Okabayashi_01_c364aafd49

Nissin Foods launched locally sourced sorghum noodles in Nyama Choma flavour in Kenya

The Japanese are preparing the ground to apply their own strengths in Africa. Japanese companies see Africa as a lucrative but daunting challenge — one they would rather tackle with a partner or subsidiary that is familiar with emerging markets.

This, again, is where India comes in. Toyota Motor, Honda Motor, Nissin Foods Holdings and Hitachi all export from their factories in India to Africa. The Japanese government is actively working to help companies make inroads in India as a springboard to Africa.

A couple of years ago, the Ministry of Economy, Trade and Industry compiled a list of potential Indian partner companies with strong African operations in 16 fields, including beverages, consumer goods, retail, electronic parts and auto components. Godrej Group and Marico were among them.

The lessons of the last quarter century are driving a new collaborative strategy. My rupees and yen are on Asia.

The Kenyan informal sector’s well-trodden paths of upward mobility

IMG_4417Studying the dynamics of the informal economy of a particular region in Western Kenya has been an eye opening exercise in questioning one’s own assumptions and frameworks. Other times, I noticed answers to questions I’d never even thought of asking (an outcome of holding implicit assumptions).

One of these was career paths and ambitions.

The most obvious paths are the ones with tangible indicators of upward mobility. You begin with the bicycle, adding a cushioned seat at the back, and dream of purchasing a motorcycle, which can also double as a micro distributor at the last mile of delivery. Then, you dream of a car and taxi.

I was wrong. The decision to select one’s choice of vehicle is a professional one, and each of these transportation mechanisms is a distinctly separate cluster of owner/entrepreneurs. There isn’t much cross vehicle mobility as you’d imagine. There are older gentlemen who preferred the simplicity and the low running costs of a bicycle, saying that anything one earned after a big solid breakfast in the morning was pure profit.

However, this is not to say that the fundamental paths to expansion and growth of opportunities were as closed. They are just different from what we imagine, looking on from the outside, and the drivers for decision making are fundamentally characterized by the patterns of flow of time and money in the informal/rural economy.

For instance, in Malaba and Busia on the western Kenya/eastern Uganda border, one does not begin in Malaba. For the penniless youth emerging from his father’s shamba deep interior where no tarmac goes, its Busia that provides the facility to earn seed capital. They call this kibarua, and there’s a yard near the truck loading docks where they can join the available pool of labour. Its the first step to earning an income in the economy the world calls informal. Women prefer to grow something to sell – be it chickens, eggs or a wide variety of fruits and veg. One lady sells partially treated roots and branches that’s the seed for locally brewed beer.

Once one has amassed some cash, one can buy stock to sell, or invest in a growth vehicle for cash flow. A dairy cow is a growth vehicle, with almost daily cash flow. The challenge for growth on the farm is lack of cash money. Women dominate the informal wholesale and retail trade, just as they’ve been documented to do in West Africa. They are newcomers to trade, having been noticed in this region only in the past 10 or 15 years. They’re smarter, shrewder, and know how to leverage their extensive social networks. They are a growing demographic, particularly in Kenya, Uganda, eastern DRC, South Sudan, and Rwanda. Burundians, it seems, are happy to live on their farms and let their Rwandan friends do the hard work of buying and selling them stuff.

Then, one can move from tabletop sales into retail and wholesale. Its an interesting example of leapfrogging the middle income trap – by the time the market woman with a cloth covered with merchandise can grow her stock to rent a permanent store, she has also become a micro-wholesaler who will break bulk down to the smallest denominations for her micro retail customers to sell on their tables and mats.

Their next ambition is to become that micro-region (a radii of 50km) re-distributor. That is, by the business practices of the global FMCG majors, they want to be registered and counted. The local Coca Cola distributor has probably a hundred such wholesalers scattered around a 100km radius. The scale of operations is limited by the cost of fuel and transport.

Now, many who don’t wish for the extensive groundwork that the former ambition requires, move on to trade from Malaba. Its where the larger regional trade flows take place, not just the multiple micro-crossings of Busia (which by the way annually cross 33 million US dollars). In just one border market, there’s annual biashara worth $5 to 10 million. There will be one or two outliers to this due to natural and geographic advantages.

The energy of biashara is obvious in the market. And every market day along the better roads, the scale of trade was far more than anywhere upcountry, even the roads to Nyeri and Nanyuki. These trading ties go back centuries to before the white man came and the kings of the Buganda loved teh stuff the Indian Ocean traders brought to the Swahili Coast.

The best paid profession is that of a long distance trucker. Yet, intriguingly, young men aspire to reach this position only to acquire the networks of a broker and to retire from the dangerous business of driving heavy inflammable loads for a living.

There many such paths to live a good enough life, educate the kids in town, take care of mums back home on the homestead. The informal economy does indeed offer the lowest barriers to entry into business.

 

The hidden cost of doing business #informaleconomy

household shop

Kenya, 2nd Feb 2016. Photo Credit: Emerging Futures Lab

This looks like its a low cost business operation with low barriers to entry. All you need to do is find a decent tree under which to display your wares.

The reality is that these entrepreneurs have numerous fees and costs that they must pay in order to do business, regardless of how informal it all looks. They pay rent for that space on market day, they pay the council in order to transport their wares, they need to pay for transportation, and any assistance they might need for loading and unloading, they even need to pay the various formal and informal “tax” collectors on the road to this market town.

There is a cost to doing business, and there’s uncertainty of income and cash flow. Some of these fees might be fixed or known, but some, like the amounts asked for, along the way, might be dependent on the mood of the officer, or even, the weather.

On the other hand, these fees and taxes and payments ensure that the retailer has a decent location in the market, that they won’t be harassed or chased away during working hours, and that the “system” – chaotic though it might seem to our eyes – will serve their needs.

If you were ask them what they think of this, they would shrug their shoulders and tell you its just the cost of doing business.

Why I’m cautious about most mobile platform consumer research in Africa

Standard-Chartered-and-Premise-Data-are-using-smart-phones-to-better-und...StanChart’s price tracker rolled out in Nigeria is a great example of where and how mobile phones can really add value in understanding the African consumer market and add substantially to its scarce database. What concerns me however is the increasing promotion of the ubiquitous cellphone as the means to gather consumer insights for all sorts of polls, surveys and sentiments.

Why?

Surveys conducted online and through the phone may not, at this point in time, offer a representative sampling of the relevant population, no matter how random. Ironically, in this context, its this very randomness that creates skewed results. Unless the results and the methodology clearly specify the gender, age, income and education breakdown of those responding to their survey, there’s little basis to assume that they are representative of the population. Reliance on such results should very much be contextual – which country, what are they aiming to show, who exactly did they survey, rather than accepting results from any old location on face value.

Here are some recent stats that help explain why:

The Mobile Africa 2015 study, conducted from GeoPoll and World Wide Worx, surveyed five of Africa’s major markets; South Africa, Nigeria, Kenya, Ghana and Uganda finding that mobile Internet browsing now stands at 40% across these markets – Ghana: 51% Nigeria: 47% South Africa: 40% Kenya: 34% Uganda: 29%

And these are the top 5 markets.

Let’s say you get results via mobile surveys – you’ve already narrowed down your sampling base to less than one third of the population. If you’re not calling them up, then you’re narrowing it further than those who can read and write, and if your survey was in English or French, its narrowed further to those educated in the language. By the time you actually get to the people responding to the survey, you’ve effectively sampled a tiny unrepresentative slice of the national population.

If I wanted to know what young tech-savvy men think, I’d never hesitate to use  the results of a mobile survey. If I wished to have a better idea of lower income or female heads of households, or even those in regional towns and cities, I would be sceptical of any research conducted without human intervention. There’s also a high risk of surveys being filled in for the nominal cash or equivalent rewards. There isn’t enough quality consumer research available on the African consumer market that we can risk further muddying the waters like this.

On the other hand, as this StanChart price tracking system shows, there’s a lot of untapped potential for the use of phones in consumer market research across the entire continent. It just may not necessarily be something that works in exactly the same way in the OECD world.

Understanding-Nigeria-economy-through-smartphones

Breaking the caste barrier: Aspirations, upward mobility and the brass ring

We don’t talk about this much. India’s caste system is an intangible barrier to upward mobility. We assume the ‘untouchables’ are a one lumpen mass of poor. Is the post liberalization economic growth finally offering opportunities for change?

“Post-liberalization, the country witnessed a transition from the caste-based occupations and services to modern businesses. Looking at so many self-made people from different communities across the country, aspirations among more and more people started rising, they started taking risks and are now competing with the market (irrespective of the caste),” says Milind Kamble, founder of the Dalit Indian Chamber of Commerce and Industry (DICCI), an organization that brings together all the Dalit entrepreneurs in India under one umbrella.

According to DICCI, there are more than 30 Dalit crorepatis (billionaires) in the country.

Although, there is no reliable data on the profile of scheduled caste entrepreneurs, as per rough estimates of DICCI, there are 1,000 Dalit entrepreneurs with combined turnover of Rs.60,000 crore.

Reading Siddhant Kumar’s story reminds me of CK Prahalad’s immortal words on the tyranny of dominant logic.

ckptyranny1Taking this concept a step further, we can say the same about Indian beliefs. Innovation was a top down process, designers came from elite English educated families. Instead, what we have here, is a designer from IIT Bombay who breaks the rules.

“While all entrepreneurs in India face obstacles because of lack of credit from the formal banking system, potential Dalit entrepreneurs are doubly handicapped because they almost invariably lack the collateral and also because of their more limited access to informal credit through community networks,” according to the book Defying the Odds: The Rise of Dalit Entrepreneurs by Devesh Kapur, D.Shyam Babu and Chandra Bhan Prasad.

Note that the very same tools inspiring young Africans to break free of their expected roles (jobs in government) and start online businesses, are what offered Kumar his break – e-commerce, and dreams of the brass ring.

NB: It isn’t just the Dalit who face caste based discrimination, every caste faces prejudice and stereotypes, so much so that my father too dropped the caste marker from my name and gave me his middle name. We are Gupta, the greedy, grasping, miserly moneylenders of middle India.

Perspective: Critical Analysis of The African Hype Cycle by Gartner

_fs_Hype_cycleThe very fact that this hype cycle exists is a signal of the increased importance and visibility of the African continent’s place in the global landscape for technology. Released recently by Gartner, the 2015 Hype Cycle for ICT in Africa, is far more interesting for its depiction of the perspective and worldview of Gartner’s analysts than a pragmatic assessment of a diverse and fragmented market.

From Gartner’s website:

The biggest challenge remains the fact that one solution does not suit all countries in Africa. Companies trying to grow their business operations throughout the continent must understand the local market conditions within each country. Small deals stress the business models of many global vendors, to the advantage of local companies.

Yet, intriguingly, this disclaimer did not stop Gartner from assessing the technologies for the entire continent and integrating them all under the broad label “Africa” in one diagram. The other point to note is the use of the word ICT, in general.

If one takes a closer look at many of the technologies listed on the diagram, one will note they are those more closely associated with ICT4D initiatives, rather than corporate for profit or enterprise solutions. ICT4D is defined as

refers to the use of information and communication technologies (ICTs) in the fields of socioeconomic development, international development and human rights. The theory behind this is that more and better information and communication furthers the development of a society.

Further reading of Gartner‘s framing shows that while they position this hype cycle for the benefit of both the public and the private sector, their approach seems to conflate enterprise and business needs with those of social and economic development.

One would question whether this, then, is a helpful framework for either of the two intended audiences. Experience shows that the underlying motivations and philosophies for private enterprise are often very different from those of the public sector and the development aid industry. There is sufficient literature available on how differing agendas influence the evaluation of a particular tool or technology – what might be a viable technology for public sector may not always be appropriate for private enterprise.

A further concern is that there have been numerous instances of “silver bullets” that failed in the development context, often due to the burden of hype. Perhaps Gartner’s hard work and effort in creating this Hype Cycle would have been of greater benefit if they had distinguished between public sector/non profit frame of reference with respect to technology and its surrounding hype, and the consumer market responses and needs of the private sector.

This lack of clarity, imho, will be far more challenging for businesses seeking investment opportunities in this nascent yet rapidly burgeoning market, than for any of the charities deploying their myriads of pilot programs for the sake of development.

Two data points on the hype cycle come to mind as clear examples – Digital commerce, which is advancing far more rapidly outside of the South African context, in such regions as Nigeria, and even, Cote D’Ivoire, and Mobile Retail Payments in East Africa. Gartner’s distinction of Mobile Retail Payment as Apple Pay et al creates further confusion when one realizes that the ever popular game changer M-Pesa has been classified as Mobile Wireless Payment Systems (for NonMature Payment Markets).

End users will require a lot of education in order to comprehend the difference between NFC/contactless payments and Mobile Wireless Payments in markets where the entire context for mobiles and money is very distinctly different from “Mature Payment Markets”. There is no mention of this anywhere in their press release, and one hopes that their education seminar offers more insight.

The path of technological development being taken in Africa is such that one would find greater value in a Hype Cycle firmly grounded in the operating environment’s own context than attempting to use the same labels and subsectors of technology from the overly mature markets of the established world. One feels that a research and analysis office on the ground would have helped with this exercise in a far more practical manner. Insights emerging from the conflation of private sector needs with non profit motives simply perpetuate the existing barriers to the development of relevant and appropriate technologies.