Posts Tagged ‘retail’

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.

Retail ranking metrics vs Readiness for formal retail #AfricanConsumerMarket

The-ARDI-top-15-18133Continuing the thoughts expressed by Yacine in the previous post, I’d like to explore these rankings and their value. We’ll use the example of Tanzania, ranked 5th by AT Kearney in their 2015 African Retail Attractiveness Index (ARDI).

The ARDI states:

Tanzania is starting from a low base: With only 30 percent urbanization, high poverty levels, and less than $2,000 GDP per capita, Tanzania is in the early stages of development. Therein lies the opportunity—the unsaturated market has one of Africa’s fastest growing retail sectors, boosted by new shopping malls. Compare this with Kenya, which has one of Africa’s most developed markets—but also one of its most saturated.

By the less than clear metrics used in this Index (Kenya, for example, has surprisingly never managed to be ranked at all), Tanzania is a high potential market for a long term retail investment strategy. Yet nowhere is there any mention of local consumer behaviour or purchasing patterns.

The ARDI assumes that a “shopping culture” attractive to modern retailers will emerge organically as these nations develop economically and infrastructure wise.

Last year, South African retail giant Shoprite pulled out of Arusha in Tanzania. Arusha is a major international diplomatic hub, thus no less attractive to supermarket chains than Tanzania’s commercial capital Dar es Salaam.

Here’s some insight from the local paper, that offers some food for thought, and a clear signal that one cannot rely on metrics and rankings alone when considering an opportunity in these attractive yet challenging markets.

With many of Arusha residents still living in single rooms, thus few can afford to buy groceries in advance due to lack of storage space and therefore choose to shop when the situation arises then consume whatever was bought on spot.

A child will be sent to buy things like sugar, rice, cooking oil and charcoal for fuel three times a day; for breakfast, lunch and dinner, the shopping trend will again be repeated on daily basis.

As the result, the city is now dotted with hundreds of small grocery stores capable of breaking their stock down to the last grain in order to accommodate the economy and space conscious customers.

Boasting a population of 500,000 residents and additional 100,000 daily visitors, it comes as surprise that ever since it was made a township in 1948, Arusha has had only one supermarket to date.

Even worse, the one and- only supermarket, which opened here in 2002 courtesy of South Africa’s Shoprite- Checkers, has just fled from the city citing the lack of supermarket culture among Tanzanians but especially those living in Arusha.

[…]

But come 2014 and Shoprite, the supermarket which started it all, announced that it was closing shop, complaining that the large store business had totally failed to pick up even after 12 years of operating in the city.

The South African Supermarket chain somehow did not conduct any research prior to venturing into the Tanzanian market especially Arusha where people buy their groceries only during the time when they need them.

Supermarket shopping usually means walking into the large department store, pushing a cart and then loading one item after another onto the basket before checking out through the computerised counters handled by bored ladies.

It also means that a person or family has to make their weekly or monthly purchases once, and then store everything in the house until the next shopping date. That may require special storage cellars at home, refrigerators, deep-freezers and cabinets, not forgetting the cars required to carry everything home in the first place.

However, in Arusha where accommodation space is hard to find, most residents are forced to live in single rooms or cubicles that serve as living rooms, bedrooms and kitchen at the same time.

With hardly any space to store rice, flour, oil and other groceries, for future use, few ever think of practicing supermarket shopping.

It is the unquestioned assumption that lack of modern retail or formal economy institutions imply lack of an existing shopping culture – local & relevant & appropriate to its context and conditions. The real question is whether a region or country is ready for formal retail culture.

This newspaper article isn’t hard to find, supermarkets in Tanzania would uncover it easily, were the analysts working on these indices and reports considering the entire ecosystem of the operating environment in which retail would operate rather than easily measurable indicators.

These insights are not enough on which to base one’s market entry strategy but more than sufficient to make one pause and evaluate whether a more qualitative and exploratory market survey offering consumer insights and buyer behaviour might actually be worth investing in far more in the first instance than years of losses later. This is exactly the kind of moment you’d want to call us in to help you craft your strategy.

Où se trouvent les plus grands consommateurs en Afrique?

Proud to introduce our newest contributor, Ms Yacine Bio-Tchane of Cotonou, Benin. She will be writing on the business perspective from Francophone Africa, mostly in French. If you’d like to see a post translated, leave us a comment!

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Une récente étude de la firme de conseil A.T. Kearney a classé 48 pays africains selon leur attractivité. Un indice sur le développement du commerce en détail africain (African Retail Development Index-ARDI) a été compilé. Cet indice reflète l’appétit pour la consommation de la classe moyenne.

Le classement des 15 premières économies est comme suit :

Source : http://www.consultancy.uk/news/2594/the-15-most-attractive-retail-fmcg-markets-in-africa

Ma première remarque lorsque j’ai aperçu ce classement était qu’il est assez correct puisqu’il regroupe la plupart des économies avec une croissance élevée en Afrique. J’ai aussi été agréablement surprise de compter trois pays francophones (Gabon, Sénégal et Côte d’Ivoire). En y réfléchissant, la concentration de pays en Afrique australe s’explique par l’implantation des marques sud-africaines dans l’espace SADEC.

Toutefois, je suis surprise par certains aspects :
• L’ordre d’attractivité est un peu off : le Gabon en première position, la Gambie arrive avant la Côte d’Ivoire ou le Mozambique dernier du top 15.
• Les pays que j’estime devaient faire partie de ce classement : le Kenya (grand manquant, très très surprenant!), les deux Congo et soit le Cameroun soit la Guinée Equatoriale
• L’inclusion de pays comme la Gambie, la Namibie ou la Zambie parmi le top 15 laisse à réfléchir.

Mais ce qui est sûr, de tels indices sont utiles pour les grandes marques africaines ou internationales qui ont un meilleur aperçu d’où se trouve la demande. Bien entendu, il faut pousser plus loin pour comprendre les industries ou les secteurs à développer dans les différents pays.

Breaking bulk and profiting at the margins

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Photo Credit: Michael Kimani

Michael sent me this information from Nairobi last week. He’d spotted informal retail within the context of a mini-supermarket – known as traditional trade in the jargon of consumer product distribution and retail. He adds,

“So 500 ml of Rina cooking oil retails for 120KES, 1 litre for 195 KES. What the owner of this store found out is buying a 20 litre (which she retails for 2700 KES) and repackaging it into 1 litre  plastic bags in red basket), is more profitable according to attendant doing this – Each bag retails for 135 KES”

Quick math informs us that she’s not giving her customers an out – the retail price for the 20 litre jerry can works out to 135 KES per litre. On the other hand, purchasing an informally packaged plastic bag over the formal product packaging offers you savings of 60 KES and helps stretch the grocery budget a little more.

A search online shows me an e-tail website whose prices for Rina are even higher – 500 ml at 121 KES, 1 litre at 214 KES and the 20 litre at 3,300 KES.

This behaviour isn’t just seen in Kenya or the African continent – I’ve documented it in The Philippines, and in rural India.  Its the natural outcome of the purchasing patterns influenced by cash transactions and irregular incomes – of the retailer as well as their customers.

Without contextual knowledge of the operating environment of the vast majority of trade and services in the informal sector, implicit assumptions left unquestioned pose their own barriers to sustainable growth.

For Mama Biashara, it’s these margins that provide a little wriggle room for profit, while offering some added value to her customers.

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.

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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.

Why Indian FMCGs eagerly enter African Consumer Markets

neilson4retailACM2015 This chart from that Neilson retail study on sales of Fast Moving Consumer Goods (FMCG)  shows how Kenya’s retail sector is  significantly more formalized than India’s.

Given their decades of experience with their vast, informal markets, is it any wonder that India’s consumer brands find the East African market an attractive proposition?  Their visibility in the marketplace was already being noted more than 7 years ago and this gives rise to some interesting questions even as the Western world is only now waking up to the opportunities.

In large part, Godrej’s success can be attributed to its measured, localized approach. While it imports synthetic fibers and henna leaf powder from India and Asia, the company uses those materials to mix its colorants and weave its extensions in Africa and markets its products under African brand names that cater to specifically to African consumers.

Similarities between the Indian and African business climates have helped as well. Godrej’s experiences in fragmented markets and with middle-income consumers have no doubt proved critical to the company’s impressive performance on the African continent.

Back when India’s markets first liberalized, I was a wee fish in the large domestic pond of advertising and marketing. Numerous global brands rushed in to this untapped market with its erstwhile burgeoning middle class, not dissimilar to what is currently going on across Africa.

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Darling products, Nakumatt LifeStyle, Nairobi Kenya Aug 2010 Photo Credit: Niti Bhan

Many were surprised out of their complacent imported market entry strategies by the entrenched domestic incumbents refusal to give way to global leaders in soaps and cornflakes. Price wars and sachet games ensued. Two decades later, we find new product categories and evolving consumer tastes but ye good olde brands still standing.

What will happen across the traditional trade segment in East Africa?

Navigating the African Informal Retail Sector

Nigeria’s consumer market has captured global attention. A significant proportion of this emerging market opportunity is in the FMCG category. Due to historical reasons, 87% of this retail trade happens in the “unorganized” or “informal sector”.  The market is highly fragmented and inefficient.

Yet due to the nature of the informal economy, most of this economic activity has been overlooked or not captured by conventional market analysis and research.

CPG companies wishing to enter this market need a map of the landscape in order to navigate the opportunity successfully or to design the most appropriate and relevant business model for their needs.

Situation Analysis

Nigeria’s informal retail trade can be segmented into three major categories – Tier 1 (approx 5%), Tier 2 (approx 30~35%) and Tier 3 (approx 60~65%) of which Tier 1 is the most formalized with some amount of business processes in place.

The real challenge in addressing the market commercially is the unorganized nature of the bulk of the trade – Tier 3 – who tend to be market women buying and selling goods in open air markets and street corners without any business infrastructure. There is no feedback loop in place for manufacturers and distributors who have little idea on how to plan and estimate their product pipeline.

Yet, the methods and tools available in the formal economy with its information, communication and financial services infrastructure cannot be directly implemented either due to the informal, flexible, unstructured nature of the sector.

There is a gap in knowledge and in understanding of the business practices in the cash based informal economy. In order to bridge this gap, we need to begin by understanding the informal retail business from the ground up. Then we need to figure out how to use smartphone technology to map retail locations and keep a finger on the pulse of consumer demand and product sales flow.

Framework required for optimizing informal retail market research for CPG distribution

  1. Landscape of informal retail in FMCG
    1. Market survey of FMCG  retail distribution space – trends in etail, ecommerce, business models, distribution models, startups and apps.
    2. Insights on demand creation, market development, consumer behaviour – loyalty, relationships, purchasing patterns, choice of location.
  2. Identifying touchpoints for intervention – with and without technology – to improve efficiency of system with respect to: Data gathering, inventory management and forecasting
    1. Identifying attributes by which to segment and cluster retailers – Volume and/or Frequency, location, density, product categories, profitability

The basis of the optimal solution for maximizing distribution of consumer products across the vast, undocumented and fragmented informal retail sector, such as in Nigeria, would be using Pareto’s Law to cluster and identify the retail outlets to be reached for a particular product category’s target audience and thus, crafting the most cost efficient reach strategy.

Using technology to optimize data collection

ITC in India has already implemented the use of GPS in a tablet based inventory management solution which sales officers use in the remotest areas to send real time data on inventory, demand and sales back to the company headquarters using ubiquitous mobile connectivity in the remotest rural area.

NeilsonMobileRetailACM2015With the right list of outlets and channel clusters, manufacturers are better able to offer the right product format and size to meet the particular needs of the consumers who visit those particular outlets.

Crucial details such as store location, type of store, trading days, opening hours, access to power and water, the presence of a storeroom, categories stocked, and a long, long list of other characteristics should be captured during the survey. Simply knowing which stores have refrigeration can transform the business of a Guinness distributor in Nigeria, for example.

Clustering retail outlets by volume of sales as one of the attributes.

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What’s missing?

While reasons for visiting different retail formats were documented what’s missing is the frequency of visits. Also required is a chart capturing purchasing patterns seen most commonly among the majority (the prepaid or kadogo economy) who manage on irregular incomes in informal markets where over 90% of all transactions are conducted in cash money.

Those need to be mapped against buyer behaviour for a true picture of the rhythms of the bazaar, without which the CPG firms will not have a finger on the pulse of the market, just reams of numbers without a contextual framework and foundation. One element, for instance, would be seasonality, the “high season” and “low” which are commonly seen in cash dependent markets.

Also, flexibility in this context does not simply mean variety in packaging and SKU sizes or branding the product container. Flexibility refers to the flow of cash – the time and money – that allows for the management of volatility between outgoing expenses and incoming cash flow. In the retailer’s context, this would be the interplay of credit and cash, inventory and demand and of course, “fast moving goods”.

Lets see how this research initiative proceeds to understand and grapple with that critical characteristic of the operating environment and retail ecosystem that distinguish the African consumer market.

Download the Neilsen Africa Retail Labyrinth report as a PDF. Contact me if you’re curious to know more about the original thinking behind the situation analysis and research plan.

Importance and value of Africa’s informal food markets

Kenyatta Market, Nairobi, Kenya (Photo Credit: Niti Bhan)

Kenyatta Market, Nairobi, Kenya (Photo Credit: Niti Bhan)

There’s a new book released by the International Livestock Research Institute (ILRI) and partners — Food Safety and Informal Markets: Animal Products in Sub-Saharan Africa—that probes the complicated world of traditional or ‘informal’ markets in livestock products. Here are some unexpectedly juicy findings:

Research by ILRI and partners shows that in most developing countries, more than 80 per cent of livestock product purchases occur through informal markets — and in places where there is no ‘formal’ alternative, like a western-style supermarket, close at hand. And the studies find that this situation is unlikely to change for decades to come. Also, even where supermarkets are an option, studies in East and Southern Africa have found that, due to a poorly patrolled chain of custody between producer and seller, milk and meat sold in supermarkets may pose a greater health threat than what is sold in traditional markets.

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Informal & Social Measures in the Kadogo Economy (Photo Credit: Niti Bhan)

Moreover, small producers have many attractions for poor consumers. They are typically within walking distance for people who lack cars and they offer the opportunity to purchase fresh food in small amounts — part of what is known in East Africa as the ‘kadogo’ economy. (Kadogo is street slang for ‘small.’) In addition, many sellers in traditional markets will extend credit and typically offer the traditional foods their customers prefer.

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Uchumi Supermarket, Ngong Road, Nairobi, Kenya (Photo Credit: Niti Bhan)

Many policymakers mistakenly believe that food-borne illness in developing regions will rapidly decline as the modernization or ‘supermarketization’ of food sales steadily supplants informal markets. But the ILRI studies show that Africa’s supermarket food is not necessarily safer than food in informal markets and also that informal markets are unlikely to disappear — and could even become stronger — in the coming decades.

Indeed, the research shows that consumers prefer informal to formal markets, and not just for their lower prices, but also because traditional markets tend to sell fresher food. They also sell local products and breeds, which many consumers continue to prefer — and those preferences seem to intensify as incomes rise. For example, in Africa and Southeast Asia, consumers often prefer local chicken breeds over cheaper imported breeds.

Freshly shredded cabbage (Photo Credit: Niti Bhan)

Freshly shredded cabbage (Photo Credit: Niti Bhan)

Informal markets are growing, not shrinking, across the developing world and in many ways mirror the “locavore” trend occurring in wealthy countries’, said Grace.If we are going to improve food safety in these markets, we need policies that are guided by an understanding of producer and consumer behaviour, local diets and customs, and interventions that can reduce illness without imperilling food security or increasing poverty.’

 A deeper understanding of the entire value web (chain doesn’t apply as the rural ecosystem is as unstructured and informal as the markets) of  these informal markets for meat, milk, vegetables and other foodstuffs will offer greater value than towards informing policy alone.

Informal retail is expected to grow, and “supermarketization” will neither come fast enough to change this any time soon, nor be able to replace the complex role the bazaar plays in both rural and urban contexts. This is worth remembering for consumer facing brands, especially in the FMCG sector, as well.

How e-commerce leadership is driving innovative business in Nigeria

While it’s still under construction, there’s an unusual mall coming up in Nigeria. Reports say its aim is to combine the virtual and real shopping experience – retail outlets and shopping alongside with a bonded warehouse and ecommerce facilities.

Nigeria’s retail opportunity has been garnering international attention; its economy surpassed South Africa’s last year to rank #1 on the African continent.

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The infographic above puts the development of the formal retail sector in Nigeria – from its infant stage in 2006 to its projected capacity this year, in greater perspective.

Less visible in the global media has been the rapid growth of Africa’s ecommerce sector. A recent report by market research firm Ipsos, on behalf of PayPal, puts the Nigerian ecommerce as the frontrunner on the continent.  65 % of the country’s 50 million internet users having at one time or the other shopped online, surpassing the usual contenders – South Africa and Kenya.

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Infrastructure and delivery channels will be make or break for up and coming ecommerce players hoping to succeed outside of the urban markets such as Lagos. Of note will be ambitious initiatives like this recently funded startup focused on e-commerce logistics – Africa Courier Express:

Eksin said the startup filled an important gap as logistics in Sub-Saharan Africa is difficult given the lack of infrastructure and poor addressing across the continent.

“These, coupled with the fact that most logistics businesses today need expertise in pay-on-delivery services, and this makes our job quite difficult,” he said.

“Another challenge is the poor road infrastructure we encounter across the markets we operate in. However, the opportunity in Africa is so much larger than the challenges and we are excited to tackle all challenges and help our customers grow and move their goods across the continent.”

All of this seems very exciting, stay tuned as I keep my eye out for more insights on how this will play out in an operating environment (Nigeria’s) where the vast majority of retail is still informal and cash transactions dominate.

More or Less: the flexibility of the informal

One of the things that stood out for me during the recent household consumer behaviour study was the lack of weights and measurements used to sell foodstuffs and commodities in the market. There were no weighing scales at all, unless they themselves were for sale. Instead, some form of “socially accepted” measure was used to display various quantities and their price.

Shelled green peas can be purchased by quantity displayed, and similar containers can be seen for dried fish and ground coffee as well. When asked, the shopkeeper may refer to each measure by “weight”, saying this is “half a kilo” or that is a quarter but in reality, these are simply approximations.

The dried fish has been more generously piled than the shelled peas, and this too is an interesting variance – primarily across product category rather than different shops. In a market, shopkeepers with similar products act like a cartel and offer similar quantities for similar prices (unless bargaining brings down the amount or a lagniappe is thrown in.)

Note how the ground coffee, which is slightly more expensive, is displayed in far small containers, catering to the purchasing power of the consumers frequenting the market.

This is called a ‘deben‘ and it is a standard measurement for charcoal across the entire country of Kenya. Prices naturally fluctuate between rural regions and city centers, but the container itself is ubiquitious though the actual amount piled on top might change according to the frugality of the seller.

This bagging was a surprise though, as I’d only seen it otherwise in rural Philippines (in informal markets, not supermarkets). This is not common.

These so called “social measurements” are intriguing to me. They are rough estimates and approximations and no two piles or containers will ever be alike, yet customers are quite willing for them to be priced the same. There is no pressure to measure exactly or purchase by weight of commodity, something so common in the wet markets of Asia. It seems to me there’s a link between this behaviour and the level of informality of the local market, as well as a greater willingness to accept that something might be “more or less” okay. How does this relate to local perceptions of time and money, the two key uncertainties in these challenging operating environments?

Your thoughts?