1 August 2017

Africa: Getting Stuff Into Shops - Four Start-Ups in Africa Looking for Ways to Change the Retail Value Chain

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One of the most interesting areas for start-ups in Africa are those tackling improving the retail value chain. It's the unsexy backroom stuff that will help transform the lives of both shopkeepers and the bottom 80% of the income pyramid. Over the last few months Russell Southwood has spoken to Grant Brooke, Twiga Foods; Greg Murray, Koko Networks; Daniel Yu, Sokowatch; and Arnaud Blanchet, Last Mile for BOP.

The arrival of malls and supermarkets in Sub-Saharan Africa has been the occasion for much media coverage and comment. But the majority of Africans still buy most of their daily shopping from small, tin shack shops by the roadside or in neighborhoods. There's lots of them with almost no differentiation in stock or prices.

These shops often sell out of things and customers often pay a premium for an inefficient retail value chain where - particularly with certain types of fresh produce - there are high levels of stock loss. Also if shopkeepers need more stock, they tend to go off and buy it themselves. There's almost no credit in the system for either shopkeepers or customers because most of the transactions are "off the books".

The four start-ups interviewed below all want to give a better deal to both shop customers and shopkeepers, whilst making the lives of the latter easier by delivering. The logistics piece is already generating an ecosystem for individual delivery people. Because the transactions are recorded, they can lay the basis for both consumers and shopkeepers getting credit.

And last but not least, it helps manufacturers understand this huge informal sector more fully and serve it better. As Arnaud Blanchet, founder of Last Mile for BOP told me:"You can see where products are sold on a map. It's a goldmine for companies with data you can analyse".

If these kinds of start-ups take hold, they could begin to change the kind of retail outlets Africans can expect and places that offer them a higher quality and a wider range.

Twiga Foods (Grant Brooke)

In Kenya, 96% of food and FMCG products are sold through small and medium size retail stalls, supplied by large-scale, over-capacity, open air markets. This inefficiency results in 43% of the average household income being spent on food-affecting what individuals and families can spend in other critical areas such as education and healthcare.

"In the past, shopkeepers would wake up a 4 or 5 in the morning to go to the public sector markets with a push cart and shuttle their goods directly back to their shop. We deliver directly to them. We give better quality product and lower prices. We use our aggregated purchasing power to push back to the farm gate to offer farmers guaranteed markets with higher prices and run the logistics in between... The advantage for the farmer is about 10% higher prices in a steady market."

Twiga is the largest distributor of several basic food staples in Kenya, having sold more than 55 million bananas alone and delivering more than 4,000 orders a week. It has introduced cold storage to cut waste:"In a lot of value chains like bananas and tomatoes over 30% of stock is lost between farm and market. The end consumer ends up paying for that because the farmer got paid for that stock. If we can control these losses, that's more margin for us and more value we can share on both sides of the value chain."

"We run collection points in 7 counties across Kenya. Each collection point has between 50-100 farmers attached. Three to four weeks before the harvest they receive an SMS saying that Twiga's going to harvest on Thursday, ten tons of bananas".

"They SMS in what their commitment is (to this figure) and drop off their produce at the collection centre. They receive an mPesa, mobile money based payment with a receipt. If you sell to a broker, there's no history of that transaction. If you have a relationship with Twiga over a 3-6 month period..the banks are ready to help you grow your business."

The numbers are substantial. Twiga is already doing several million dollars of business a year and is growing by 30% a month. It deals with 2,000 shops but wants to get this up to 2,400 a day by March 2018. There are 2-3,000 farmers on its platform at any one time but because goods are seasonal 7-10,000 in aggregate.

At the end of July Twiga Foods announced that it had successfully raised a Series A funding round including $6.3m in equity and $4m in debt instruments. The round was led by Wamda Capital and includes Omidyar Network, DOB Equity, Uqalo, 1776, Blue Haven Initiative, Alpha Mundi, and AHL Venture Partners. The investment will enable Twiga to increase the number of vendors it is able to serve each day in Nairobi, diversify its product portfolio, and introduce advanced supplier services.

Additional to the Series A round closing, Twiga closed some $2m in grant funding from USAID, GSMA, and others to support bolt-on farmer services, financial inclusion, and first of their kind domestic food safety initiatives. "The addition of new partners into Twiga, and continued support of our current stakeholders, is a huge affirmation that there's a better way to build marketplaces for Kenya and the rest of urban Africa," said Peter Njonjo, co-Founder, Twiga Foods "We can get consumers and suppliers a better deal, and this support will go a long way in achieving those goals."

Koko Networks (Greg Murray)

The founders of Koko Networks have been incubating their idea for several years:"The three founders set up an investment vehicle (CleanStar Ventures) to commercialise their R & D." It ran a commercial proof of concept of their idea in Maputo selling ethanol to replace charcoal as a cooking fuel. NDZilo ended up selling to 10% of the population of the city before they sold it to local owners.

But they had bigger ambitions:"We wanted to make it more saleable by being able to use (the sales channel) for other goods and services." So it has now launched a pilot in Nairobi in March 2017. So what is it now?: "It's a smart commerce platform for Sub-Saharan Africa: physical e-commerce stores. Koko Networks puts its physical unit - a Koko point - in "Mom 'n Pop" stores" Eventually we want to have 2,000 Koko points in Nairobi and through licences and co-ventures we will set up in other cities. In Nairobi, we want the ultimate coverage to be so that the bottom 80% of households are never further than 200 meters away from a Koko point".

Currently it is testing 10 Koko points in different neighborhoods and once the testing phase is over they will roll out a total of 200 with a hard launch next year:"There's only a few hundred customers but we're trying to understand the numbers"

The shops are basically small, semi-formal or informal spaces where the bulk of transactions are done:"This is where the bulk of the money is and where the customers go, It's hyper-local and Kenyans use these kinds of shops twice a day." There is little differentiation between the shops as they all sell the same products and it's highly competitive. Space for products is very limited. However, it's not targeting the Dukas but the more formal of these hyper-local shops.

But the first product out of the gate is an ethanol-fuelled cooking stove and you can buy both the stove and the refills. It's aiming at urban households who have US$100-500 per month and who will typically have TVs and electricity. In the past, the aspirant customer might have looked longingly at LPG stoves but both the stove and the gas bottles are often out of the reach of these customers.

Koko Networks' product is US$45 for a two burner stove and it costs US30 cents to fill a canister which is a one-off cost of US$2:"Some will fill up once a day, others once a week." Customers can recharge using mPesa. The Koko point is like a fuel ATM: it's a unit with a screen that sits in the shop:"Most customers are coming on by paying deposits in advance. They trust us".

The Koko point has a 200 litre fuel capacity that is connected back to a central supply location which can see when it needs resupplying.

Longer term it's looking at selling other products using the unit. For example, with the screen users could browse a catalogue of products, order and pay using mPesa, and then pick up the delivered goods from the shop:"We'll be doing advertising on the Koko point screen later this year." Murray gives the example of Jua Kali buying a better power tool to improve what they can do.

It also wants to sell wireless Internet connectivity:"We're providing agent management and maintenance, lowering OPEX and CAPEX... .there's a huge appetite for (connectivity)."

Sokowatch (Daniel Yu)

Daniel Yu's Sokowatch is an ordering and delivery platform for retail outlets. The idea for it came from living in Egypt where he saw the lack of availability of products in small shops:"I'm a software developer so I thought what kind of implementations might be of use? There was nothing to do restocking. Everyone had a basic mobile phone so you could notify via SMS".

Initially the system launched in Nairobi allowed small kiosk shops t place orders by SMS: for example, three packs of Unilever soap:"The order comes via an SMS into our portal. There is no charge for the person ordering and you use a short code which means it's toll free in Kenya and Tanzania. We then send an order confirmation".

"Originally we were just focused on ordering in the tech layer. It turned out that organizing suppliers and setting them up to fulfill orders was easier said than done. There was a lack of economic drivers. There was no incentive to deliver US$2-3 worth of orders". The current average order is US$9.

The average spend in these tin shack outlets is US15 cents and the average retailer might turn over US$40-50 per day:"84% of consumer purchases are made at these small shops and this end of the retail market is very fragmented

"Initially suppliers ignored a lot of orders. So we talked to manufacturers who were not set up to handle small orders like on-demand delivery services in Europe and the USA. We can create a B2B delivery network here and make it more effective because we have lower labour costs so you can build efficiency into the delivery model".

The model was piloted last year and it now supplies 5,000, using 20 delivery agents who go to the warehouse and collect and deliver the orders:"We guarantee 24-hour delivery but we actually do it in 6 hours". The average order is once a week and the delivery agents are on foot or by two or three wheel motorcycle. The main deliveries are for shops in the slums and many are close to each other enabling a single delivery to say 8 shops. The range of products are FMCG goods from brands like Unilever, Nestle and Glaxo Smith Kline. It did a pilot with Wrigleys and was able to produce a 26% increase in their sales.

It competes with traditional wholesalers and retailers going to do "cash-and-carry":"There are definite similaritiers to Twiga with our last mile logistics but it's focused on fresh product."

In early 2017 it also launched in Dar es Salaam and it's hoping to open up in Mombasa by the end of the year. By early next year it wants to be operating in Kampala and Kigala.

It has primarily been backed by a set of angel investors and is very much at the seed stage. The money has mostly come from the USA but also from Europe and within Kenya.

Last Mile for BOP (Arnaud Blanchet)

Frenchman Arnaud Blanchet is based at the MTN Solutions Space in the University of Cape Town's Graduate School of Business. His company Last Mile for BOP aims to improve access to affordable products in townships and rural areas through the small, informal shops known in South Africa as Spaza shops.

These Spaza shops usually charge a premium on goods because there is no working capital and often run out of items because it can cost a lot of money to restock:"We talk about the poverty premium. We're also trying to give them the opportunity to have a wider range of products." It also has longer term plans to be able to offer solar lamps to replace candles.

The mobile app the shops can use allows them to check prices across 10 wholesalers and instead of having to fetch the goods, the stock is delivered. The price saving on different products may be as much as 10%. This allows them to reduce their costs and not have to take time out to go to the wholesaler:"It also creates a job using the Uber model for local drivers to deliver in a cashless transaction. We've solved the problem of price because we're more competitive and you can just order baby milk."

It's discussing setting up a direct link to the wholesalers databases as the system is currently run manually and want to encourage wholesalers to offer promo specials for this delivery channel:"We want the suppliers in future to pay for top placing in the different categories but the best price will always appear first."

The order record of each shop will over time allow them to build up the possibility of creating a credit record for borrowers:They can approach a bank or microcredit organization and show them their track record and we will handle the loan on the basis that they pass the savings on to their customers. We'll also use analytics so that if there is a high number of water bottles sold, we can send them water filter products".

Initially he ran a test with 100 Spaza shops to "make sure the shops love the system. The aim is to have 100 Spaza shops by the end of the year in Cape Town first, then Gauteng, then Durban and then the rest of the country." It's still experimenting but depending on the distance, time and value it charges 2% of the price of the goods.

Meanwhile Spaza Shops themselves are undergoing a different kind of revolution. The current South African owners are being replaced by Somalis and Bangladeshis:"They buy a palette together and split it. They are very aggressive on prices and they decrease prices". A number of Somali Spaza shop owners have been killed:"85% of Spaza shops are now run by foreign owners. We see our role as helping locals to keep their shop. But we deal with everybody as our aim is to get low prices for everybody."

So far Blanchet has self-funded the project as he only needs to buy goods once he receives the orders "so it's not cash intensive. But we're looking for funding to scale up nationally. The first stage funding will be 200,000 euros and the full project to go national will be 3 million euros".

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