Purchasing Patterns in Cash Based Markets and Informal Economy

When cash flow is irregular and not always unpredictable, both in amount and frequency, such as it is for the majority earning a living in the informal economy, buyer behavior is not quite the same as for mainstream consumers with access to credit cards and regular paychecks.

I’ve quite often made reference to how operating primarily in cash money influences purchasing patterns. Here, I cluster the patterns observed into 4 categories, based on a combination of need and money available.

Source: http://www.hobotraveler.com/electricity/prepaid-electricity-units-in-ho-ghana.php

1. Paid for in advance – Usually a service that can be utilized or consumed over time can be purchased in advance when funds are available and then made to last as long as possible. The best known example of course is prepaid airtime – voice, text and data for mobile phones. Consumers on limited budgets then seek coping mechanisms to extend the “life” of the service purchased.

Source: Niti Bhan, South Africa January 2008

An example is this refrigerator powered by LPG available in rural South Africa. It helps conserve the electricity consumption (South Africa was the first to install prepaid electricity meters) and is a parallel investment in ‘prepaid’ energy – the LPG cylinder.

Source: Niti Bhan, South Africa, January 2008

2. Bought in bulk – Usually food staples or something you cannot live without would be purchased in this manner, either when there is a sudden influx of cash or a payment at the end of manual labour, or, if managing on a fixed amount each month such as remittances from abroad. This ensures that there is something to eat even if money runs out before the next payment might be due. If it’s a sudden influx of cash for someone not on a pension or remittance, then this lumpsum is also the source of funds that may go towards a consumer durable purchase or big ticket item of some kind. In rural economies, the harvest season is major shopping time and boost to local commerce.

Freshly shredded cabbage (Photo Credit: Niti Bhan)

Source: Niti Bhan, rural Kenya, February 2012

3. On demand or daily purchase – mostly perishables like bread, eggs, fresh vegetables purchased for the day’s needs. Partly cultural but also influenced by availability of cash in hand. Cigarettes sold loose or two slices of bread and an egg are some examples we’ve seen. Indian vegetable vendors are also willing to sell you a small portion of a larger vegetable either by weight or by price. You can buy 50p worth of cabbage for a single meal. Mama Mboga in Kenya will even shred it for you. Minimizes wastage whether you’re cooking for one or have no fridge.

This is also the most common pattern if you earn small amounts daily, like the vegetable vendor, shelling out what you have for what you need and then if there’s some change, debating what do with it.

Source: Niti Bhan, The Philippines, January 2009

4. Single use portions – A form of on demand purchase. Interestingly, I came across this working paper by Anand Kumar Jaiswal at IIM, saying that sales results in rural India seemed to imply that only shampoos and razor blades were more successful in sachet form, whereas things like milkpowder, jam etc sold more in the larger size.

Source: Niti Bhan South Africa January 2008

The author cautions against assuming all sachets will sell. I believe it could be based on the usage pattern of the product in question or its nature – what if you packaged a perishable item in single servings that didn’t need refrigeration until opened? Formal packaging in sachets – the kadogo economy – emerged from existing behaviour in informal retail. Breaking bulk down into smaller portions is popular across the developing world’s informal markets.

Single meal portions of vegetables, Cabatuan market, Iloilo February 2009 Photo: Niti Bhan

This shopkeeper in The Philippines has gone a step further to offer you the convenience of purchasing all the vegetables you need for stew – carrots, beans, cabbage – without the financial burden of having to purchase the entire cabbage or carrot. Its a combination of the single use packaging (not quite a sachet) and the on demand purchase of what’s immediately required or affordable. The Philippines has some of the most creative variations of the kadogo or sachet economy that I’ve seen in informal retail.

Business Models for the Informal Economy

You can see the roots of the many variations on business models in these purchasing patterns. As people told me over and over during a project on household solar in East Africa, it wasn’t the price of the product that was the problem but the payment plan which didn’t fit with their existing behaviour. Both must be designed to meet the needs of your intended target audience.

Contact me if you need insights on consumer behaviour, household energy consumption behaviour and financial management behaviour in the rural and informal markets of the developing world. Note, this is not a free offer.

Source: These insights are drawn from patterns of behaviour observed among consumers in cash based and informal markets in South Africa, The Philippines, India, Kenya, Rwanda and Malawi. Primary research led and conducted by Niti Bhan. Citation.

The values gap in banking the unbanked

Back in 2008, after my first deep dive into the African consumer market, on behalf of Samsung, I’d identified something I called the “values gap” as an intangible barrier between the first world’s consumer brands, and the mindset and worldview of the majority market, then referred to (erroneously) as the “Bottom of the Pyramid.”

The value propositions of the producers immersed in mainstream consumer culture – “buy now; pay later”, “new and improved” or “throwaway and replace”- fell far short of the mark when it came to reaching the emerging consumer markets of frontier economies.

Overlooked by marketing communications and the messaging of the advertising industry for generations, these new consumers were not conditioned to respond to these familiar messages. In fact, their buyer behaviour – their “consumption values” if you will – resonated more with almost the exact opposite responses – “minimize risk; maximise returns”, “tried and trusted”, or “repair and reuse”.

These choices were the outcome of their environment of uncertainty, and often, adversity; of inadequate infrastructure and, incomes which tended to be irregular and unpredictable. Without access to consumer credit, their purchasing patterns were driven by their cash flow, and an environment of resource scarcity influenced their consumer behaviour.

This gap in mindset and in values meant that the value proposition of a product or service or even a business model was ignored for the most part, as noise. “Not for the likes of us” as some had said, in India, in South Africa, or in The Philippines. The irony, in some cases, was that even when the product or service was meant specifically for the lower income segment or for those in the cash based informal sector, the way it was advertised overshot the target it was intended to reach.

An example of this is Wizzit, a South African mobile bank designed for the erstwhile Base of the Pyramid (BoP) customer. Unlike traditional banks with their reams of required paperwork, most of which were unavailable to the BoP customer, all you needed to open a Wizzit account was your mobile phone number and your ID. You didn’t even need any money, nor were you penalized if the account was empty or left unused for 6 months.

You would think that everyone would open an account as soon as they’d heard about it? Well, it didn’t happen that way.

Wizzit’s marketing messaging focused on the value proposition of “mobile” as interpreted for the first world or privileged customer – “Now you can bank on the go”

Imagine someone who had never thought that they could qualify for a bank account hearing or reading that value proposition? “Its not for the like of us” and tune it out.

If the messaging had touched upon the value proposition embedded in the product’s design – ALL you need is a phone number and your ID and YOU TOO can have a bank account – their audience would have immediately recognized its relevance to their own context. “Hey, I can qualify for this bank account, let me go find out more”

As simple as that.

When the value proposition of the producers immersed in mainstream consumer culture don’t resonate with the world view and mindset of the customer, there’s a gap that cannot be crossed no matter how hard you try. This values gap manifests itself in the product’s design, its marketing communication, distribution strategy, and sales promotions.

And its not just consumer products or services that fail to bridge the chasm. Wherever you seek to lower barriers to adoption and minimize the dropout rate – promoting a new irrigation technique, for instance, or adoption of formal financial services – bridging this gap is key to success.

Upward Mobility is Changing Base of the Pyramid Consumer Aspirations

I’d observed earlier that upward mobility wasn’t simply about increasing incomes, but also a change in mindset, world view and values. Aspirational consumer behaviour trickles downward faster, as strivers seek to emulate the status signals sent by those they perceive as “arrived”.

The emerging middle class numbers may indeed be uncertain, as statisticians debate over the inclusion of the ‘floating class’ but regardless of their actual income (which in any case may be volatile, particularly if they’re part of the informal sector of the economy) people’s habits are certainly shifting towards more ‘middle class’ choices.

Kenyan news reveals some interesting trends. More people are using clean energy such as LPG for cooking, in the ‘slums’, than before.

In Mathare slum a few kilometers away, that residents are warming up to cooking gas is evident in the number of shops selling the commodity on the periphery of the informal settlement.

Prices for cooking gas are the lowest they’ve been since 2012, putting the smallest available size – 6kg- within reach of far more than before. LPG is an aspiration for both urban and rural cooks. A farmer’s wife in rural Makueni in eastern Kenya told me about her ambitions to cook with gas even though she was making do with firewood from the farm.

Even more interesting is this report on what the author calls the “reject economy” – the sale of seconds and damaged products. Its not so much that there’s an after market for these seconds, but the reasons for their brisk sale. Here are some selected insights from that fascinating article.

Well, the economy in Kenya’s informal sector has its own rules and the about 22 million people straddling the poverty line are masters at navigating it.

For instance, Ogola buys eggs with cracks or other tiny imperfections — known colloquially as vunjika — at Sh5 each; whole eggs retail at between Sh12 and Sh15 in middle-income neighbourhoods.

Korogocho, like many other slums in Nairobi, is also awash with charred or misshapen loaves of bread, which retail at Sh30 instead of the market price of Sh50.
[…]

“The people in the village buy these products because they are cheaper and they cannot afford mainstream prices. They buy them because, just like other people, they would like to watch the news and have the family gather around the TV,” says Ngala.

The article goes on to quote some salaried professionals offering expert advice to the poor to be cautious about these rejected or secondhand products but I suspect that those with less income have no false impressions about their challenges in life.

“We also deserve the good life just like other people, or what do you think” Ogola asks with a smile.

As the article ends, just because someone may not have 50 shillings for a loaf of fancy bread doesn’t mean he doesn’t wish to have bread with his tea in the morning.

Without something to aspire towards, we would stagnate in our current circumstances, fatalistically accepting our status in life.

“No Ordinary Disruption” – Africa’s Transformation

McKinsey consultants have released a new book – No Ordinary Disruption – looking at global mega trends and market forces that are forcing a rethink of the foundations of their intuitive knowledge. Assumptions are to be challenged and questioned, they say, as these changes impact a deeper transition in the way the world works. Even as all eyes are on Asia, the fastest growing region on the planet, it behooves us not to overlook the second fastest growing and often overlooked opportunities of the African continent.

“Well, there was a reason why: growth has moved elsewhere—to Asia, Latin America, the Middle East.”

Let’s look at their key points and reflect upon Africa’s transformation.

The first trend is the shifting of the locus of economic activity and dynamism to emerging markets like China and to cities within those markets. These emerging markets are going through simultaneous industrial and urban revolutions, shifting the center of the world economy east and south at a speed never before witnessed. […] Perhaps equally important, the locus of economic activity is shifting within these markets.

Numerous reports are pointing out the immense potential inherent in African urbanization and population growth, for retail, for real estate and for opportunity. Not all 54 countries on the continent are seeing economic growth as its unevenly distributed, just like in Europe. Some points of note:

Nigeria became the largest economy last year, surpassing South Africa the traditional leader, after their economy was re-based. Kenya has just been ranked as the 3rd fastest growing economy. Rwanda is also expected to show similar growth – both are in the 6 to 7% range. Ethiopia is making strides in infrastructure and industrialization – attracting manufacturing as well as high street brands like H&M and Primark. China has been looking closer at the lower costs of labour on the African continent.

What is notable is that instead of the usual sources of wealth like oil or other natural resources, most of this emerging economic growth is coming from modern sectors like telecom and services. Entirely new industries such as mobile gaming are gaining traction and e-commerce is another fast proliferating area. Cote D’Ivoire has gained visibility with its embrace of online marketplaces while the Nigerians’ penchant for shopping has captured attention at home and abroad.

All this urbanization means a boom in construction – transportation infrastructure, power plants, dams, houses and malls – cement magnate Dangote has already invested over a billion dollars across the entire continent while competition hasn’t dented LaFarge’s healthy profits.

The second disruptive force is the acceleration in the scope, scale, and economic impact of technology. Technology—from the printing press to the steam engine and the Internet—has always been a great force in overturning the status quo. The difference today is the sheer ubiquity of technology in our lives and the speed of change.
[…]
Processing power and connectivity are only part of the story. Their impact is multiplied by the concomitant data revolution, which places unprecedented amounts of information in the hands of consumers and businesses alike, and the proliferation of technology-enabled business models, from online retail platforms like Alibaba to car-hailing apps like Uber.[…]Entrepreneurs and start-ups now frequently enjoy advantages over large, established businesses.

Source VC4Africa

The impact of the democratization of technology has already made itself visible. Incubators and tech hubs are popping up across the African continent. New startups are emerging almost every other day. One of my favourites is Cladlight – a safety jacket with indicator lights to be used by motorcycle taxis.

Whether its Uber or grocery delivery in Lagos and Kampala – apps that leapfrog the lack of adequate infrastructure and distribution systems are disrupting their local markets. Technology, both at the front end and the back is expected to change the face of retail and service delivery.

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This is the Ethiopian capital’s new light rail system.

And its not just computers and smartphones – a variety of solar powered products, distinguishing themselves with payment methods and business model innovation, are lighting up the formerly dark continent, while China’s ambitions in high speed rail will soon connect the unconnected.

The human population is getting older. Fertility is falling, and the world’s population is graying dramatically. While aging has been evident in developed economies for some time—Japan and Russia have seen their populations decline over the past few years—the demographic deficit is now spreading to China and soon will reach Latin America. For the first time in human history, aging could mean that the planet’s population will plateau in most of the world. […] But by 2013, about 60 percent of the world’s population lived in countries with fertility rates below the replacement rate. This is a sea change.
Call it the demographic dividend or the African youth bulge, but the cradle of mankind remains the youngest continent on earth. This is one of the reasons why Africa matters for the emerging future.
The final disruptive force is the degree to which the world is much more connected through trade and through movements in capital, people, and information (data and communication)—what we call “flows.” […] “South–south” flows between emerging markets have doubled their share of global trade over the past decade. The volume of trade between China and Africa rose from $9 billion in 2000 to $211 billion in 2012. […]the links forged by technology have marched on uninterrupted and with increasing speed, ushering in a dynamic new phase of globalization, creating unmatched opportunities, and fomenting unexpected volatility.

Increasing regional integration for trade and commerce are changing the economic landscape of the continent. At the forefront is the East African Community, who have already issued a single tourist visa for Kenya, Rwanda and Uganda whilst pushing forward with infrastructural development and various trade related initiatives to tighten their financial and commercial links.

Flows of information mean increasingly connected consumers, as smartphone penetration and mobile subscription growth puts the internet in the hands of even the nomadic pastoralists. Social media use is moving beyond friends and family to become platforms for informal trade and banking. And mobile money’s ability to provide financial inclusion profitably is driving the continent’s telcos to overcome their competitive nature and join hands in interoperability.

Afropolitan, Africapitalist, Afro futurism – all of these are ways to name the basic trend that Africans are finally reaching out to grab their turn on the global stage. Most recently Credit Suisse named Tidjane Thiam, originally from Ivory Coast as their new CEO. Africa’s future is being transformed by the global forces shaping the world and cannot afford to be overlooked.

As the authors conclude:

The fact that all four are happening at the same time means that our world is changing radically from the one in which many of us grew up, prospered, and formed the intuitions that are so vital to our decision making.[…] Yet we work in a world in which even, perhaps especially, professional forecasters are routinely caught unawares. That’s partly because intuition still underpins much of our decision making.[…] If we look at the world through a rearview mirror and make decisions on the basis of the intuition built on our experience, we could well be wrong. In the new world, executives, policy makers, and individuals all need to scrutinize their intuitions from first principles and boldly reset them if necessary. This is especially true for organizations that have enjoyed great success.

Market forces transforming the African retail landscape

Cosmetics giant L’Oreal’s partnership with pan African e-commerce platform Jumia signals a big shift in the way consumer packaged goods companies address the challenge of reaching the emerging African consumer classes in a cost effective manner. A combination of market forces and on the ground realities points to this solution as a sweetspot for optimal outcomes.

Business challenge for cosmetics

On their website, they acknowledge the complexity of informal distribution networks as a major barrier to cost efficient and optimal reach.

Source: L’Oreal website

At the same time, they recognize that their largest markets are served by the very same fragmented and informal retail networks that pose such a challenge to their distribution and sales.

Connectivity and Communication

Smartphone penetration is growing exponentially across the African continent, as is the phenomenon of online retail. When you consider the trends, its not difficult to make the informed assumption that the customer segment representing this early majority is urban, affluent and informed. They are also likely to be the most relevant segment for international cosmetic brands.

Getting in on the ground floor

Given these factors, it makes sense for L’Oreal to leapfrog the entire distribution chain, with its diversity and informality, and make straight for their customer’s doorstep.

As e-commerce businesses grow and develop, they are changing the landscape of the retail and distribution environment, offering brands a way to quickly and easily (as well as cheaply) test the waters with their product range before investing in more extensive sales and distribution channels.

These early partnerships are a signal of the way the ambitions of the globally connected African consumers aren’t going to be held back by the limitations of their environment.

Growth in Africa’s informal trade with China needs more formal diplomacy

China Southern Airlines announces 3 flights a week between Nairobi and Guangzhou. This can only be a signal of increasing informal cross border trade between the greater African continent and China’s manufacturing hub. Earlier, we’d noted the importance of this trade for Kenya Airways when they announced the opening of a ticket office in Nairobi’s Tea Room area – a hotbed of informal trade that supplies the entire country, and beyond.

The informal level is often ignored in discussions about Africa-China trade but it plays a massive part in the overall trade relations between the two. African traders based in China act either as direct buyers or middlemen and organise the logistics behind thousands of container loads of consumer goods headed for African ports. Transactions are in cash and all parties watch each other like hunting hawks, as lack of trust is the normal state of affairs.

But the addition of more flights, this time by a Chinese airline implies brisk business in this critical trade corridor. Here’s a key snippet from a recent article in mSafiri, Kenya Airways’ inflight magazine:

One trader said that virtually every flight from West Africa brings around two million dollars in cash, and there are around eight flights a day.

We don’t know the dollar value (in cash!) of the flights from East Africa, but if they are anywhere close, then we can do the math for 3 additional flights a week!

Its not just Kenyans who make the journey, lugging back suitcases bulging with products or placing orders for containers to arrive in Mombasa. Nairobi’s JKIA serves as a connecting hub for traders from both the Congos, Rwanda, Tanzania and more. As the mSafiri article informs us:

Nigerians form the largest group, followed by Malians, Ghanaians and Guineans. There are traders from DRC, Kenya, Tanzania, Zambia, Zimbabwe, Uganda, Sierra Leone, South Africa and a fairly large contingent from Angola.

Some researchers believe that 90% of goods in African markets today come from China, Thailand and Indonesia, and it is the traders in Chocolate City who organise the thousands of containers that make their way to African ports.

Even as we note the benefits of this pipeline of affordable consumer products reaching the smallest village market, there’s an increasingly visible downside. Travelling afar for new opportunities is not just a one way flow, and the Chinese in turn have been coming into Africa’s informal markets as well. How this increase in competition will impact livelihood activities at the local level remains to be seen.

Cultural differences and mutual suspicion seem to run deep.

African smallholders have complained bitterly that Chinese hawkers have been driving them out of the market by undercutting their prices and by operating cabals. There have been protests, riots and violent stand-offs between African and Chinese people at mines, factories, shopping malls and markets. Indigenous building contractors and architects also complain that Chinese firms use underhand means to secure contracts and that their operations are opaque. The build quality of some Chinese construction is so poor that official complaints have been made at the national level, for example, by Botswana.

The thousands of African traders who travel to China and other Asian countries to place orders for consumer goods complain that they receive poor treatment from the authorities, are racially discriminated against and abused and cheated by their trading partners.

As Anver Versi, the author of the excellent indepth article says, in conclusion:

One cannot help thinking just how much this form of business could develop if the African entrepreneurs were treated better by the Chinese authorities and given some protection against crooked dealers. It would also make the large presence of Chinese people in Africa more palatable.

Quality of service at the last mile will make or break African e-commerce startups

Photo Credit: Techpoint.ng

With new e-commerce startups sprouting up everyday, competitive advantage in the urban African context will boil down to their quality of delivery and logistics managment. Given the lack of infrastructure such as home addresses, post codes with embedded information, or as is the case in India – the last mile of delivery in the form of the village postman – the responsibility for ensuring customer satisfaction lies squarely on the shoulders of the online businesses themselves.

Online stores in more developed operating environments can focus on the aesthetics of their web presence, the design of an order form, or building a loyal community of users. Their business models emphasize the way they will distinguish themselves in a crowded marketplace and build brand awareness to gain a critical mass of customers.

But for the slew of startups in emerging markets such as Nigeria’s or in the Cote d’Ivoire, it will be their distribution strategy and logistics management in the last mile that will differentiate the winners from the losers. Does the business plan have a viable solution for addressing this challenge?

New players are emerging who see this distribution need as an opportunity space, one such is ACE in Nigeria, whose last mile solution has been documented in detail by Techpoint.ng today. Others eyeing this lucrative space include the global courier behemoth DHL, whose forecasts are rubbing their hands with glee. Big or small, their ability to serve their customers’ needs will have impact on the entire value chain, both online and in the real world.

A matter of strategy: In house delivery or third party support?

With so much dependent on the quality of the customer experience at the moment of fulfilment – timely delivery, ease of payment, courteous service, receiving the correct order, etc – the decision to invest in building in house operations, like the well-funded Kongas and Jumias, or to outsource to third parties becomes a critical component of corporate strategy.

Which approach will allow you the opportunity to offer the best customer experience for your brand’s needs?
What happens when the still nascent market matures enough for potential conflict of interest with competing brands being delivered by the same service?
How important is your branding in the real world as compared to the virtual experience?

These are all the questions and more besides that startups will need to ask themselves, before their potential investors ask it of them. Word of mouth travels as fast the smartphones that are fuelling the internet boom and no amount of PR will help with ensuring quality of service that will make customers return for more.

The Rise of the African KINGs

The Abraaj group announces yet another African investment fund, one which emphasizes the following:

The sectors include consumer goods and services, consumer finance, and resource and infrastructure services in the core countries of Nigeria, Ghana, Côte d’Ivoire, South Africa and Kenya.

While South Africa tends to be de facto in most continental investments, note the choice of the other four countries. Rewritten, we get Kenya, Ivory Coast, Nigeria and Ghana. Or, as was noted earlier, KINGs.

Watch this space.

“Cheap is expensive.”

Kitchenware stall at open air market outside Kibera, Nairobi Kenya 23 Jan 2012

Mama said something very profound when I asked her which of those kerosene stoves she would purchase for herself,

“Cheap is expensive,” she said, making a moue at the low cost imports jostling for space in her kitchengoods shop on the outskirts of Kibra.

While the limitations of cash in hand may drive her customer’s choices, they know full well the trade off they are making when they choose a less sturdy, possibly unreliable product that they can immediately afford over a better quality though higher priced one.

Marketing the Unbranded: Avocados on the side of the Road

Brand stickers on avocados sold by the side of the road, Kenya. April 2013

These stickers caught my attention. The only one of a long line of makeshift wooden stalls by the side of a highway in Central Kenya to display what looked like branded avocados. Were they part of some cooperative or horticulture exporter’s leftovers?

They turned out to belong to Maude, the ambitious and aspirational market woman whose avocados stood out among the crowd. No other type of produce was on sale in this roadside cul de sac lined with at least 8 or 10 stalls piled high with avocados.

She’d heard that branding her produce would help it sell. It was a marketing strategy. And so she’d invested in these stickers for her fruit. Did she sell to supermarkets or the formal retail sector, we asked, still thinking these were part of the formal value chain, given the familiarity of the stickers on fruit and veg.

Nope, just here, by the side of the road. But she aspired to sell them under her brandname, and her ambition was build a reputation for quality that would, perhaps, lead to greater things. She wanted people to come back and ask for her by name.