1 October 2017

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

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 story of KOKO Networks pre-dates its launch in Nairobi this year. Its founders previously set up an investment vehicle (CleanStar Ventures) to carry out R&D in sub-Saharan Africa, and ran a commercial proof-of-concept in the urban cooking fuel market in Maputo, selling liquid ethanol cooking fuel as a replacement for deforestation-based charcoal. The venture gained strong traction, gaining 10% of the population of the city. There was clearly an opportunity to scale, if the costs associated with downstream distribution could be reduced (and therefore charcoal could be undercut on price).

"We wanted to use technology to make this proven fuel more scalable, and to expand our offering to other goods and services," says Murray. Thus began KOKO Networks, which commercially launched in Nairobi in March 2017.

So, what is KOKO today? "KOKO is a smart commerce platform for urban mass-market consumers in Sub-Saharan Africa." The company is building an extensive network of Agent shopkeepers who host its e-commerce kiosks - called KOKOpoints - in their stores. "KOKOpoints are as consumer access points for a range of goods and services, and are built around our first business line, serving as smart 'ATMs' for ethanol fuel. Eventually, we plan to have 2,000 KOKOpoints in Nairobi alone, and through licences and co-ventures we will set up in numerous cities across the continent. In Nairobi, we want the ultimate coverage to be so that the bottom 80% of household incomes are never further than 200 meters away from a KOKOpoint."

KOKO is currently in a 'soft launch' phase, testing 10 KOKOpoints in different neighbourhoods of Nairobi. Once the testing phase is over, they will roll out a total of 200 with a 'hard launch' next year: "We're growing demand for our SmartCook sub-brand gradually over the course of this year. We've been really pleased by the very strong demand from shopkeepers and customers across the city - the key issue for us is now supply-side planning as we prepare to roll out the full network in Nairobi next year."

KOKO's agents basically run unbranded local convenience stores ("7/11-style"), where the bulk of mass-market transactions are done: "This is where the bulk of the money is and where customers go; it's hyper-local, and many Kenyans use these kinds of shops twice a day. There is often little differentiation between these shops selling many of the same products, and it's highly competitive market. Space for products is very limited. We're not targeting the small 'Dukas', but the more formal and profitable of these hyper-local shops. KOKOpoints enable them to add a profitable new line of business, expand their product ranges, and boost customer footfall.

The first product on KOKO's smart commerce platform, SmartCook, holds strong customer appeal. Customers buy an ethanol-fuelled cooking stove and reusable fuel canister. Murray adds: "Our target customers are urban households who have some disposable income, and who typically have TVs and electricity, but are underserved when it comes to cooking energy. In the past, aspirant customers might have looked longingly at LPG stoves, but the upfront costs of both the stove and the gas cylinders are often prohibitively high.

The SmartCook kit sells for US$45, and customers can buy fuel from as little as US30 cents: "Some will fill up once a day, others once a week." All transactions are cashless, using M-PESA. Customers can either pay the full amount upfront, or make deposits in advance.

The KOKOpoint has a more than 200-litre fuel capacity, and communicates constantly with KOKO's command centre and fuel wholesale partner, enabling seamless refilling when required.

Longer-term, there is a clear opportunity to sell other products using through the platform. For example, users could browse a range of household durables on the screens, order and pay using M-PESA, and then pick up the delivered goods from the shop, 'click and collect' style. Murray gives the example of giving handymen or carpenters access to buy a better power tool, to improve the quality of what they can do. He adds: "We're also introducing in-purchase advertising on the KOKOpoint screens.

Wireless internet connectivity, via KOKOpoints, is also being considered: "The fact that we build and operate an agent network means there is a possibility to lower CAPEX for ISPs... .and there's a huge consumer 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".

Background Briefing: Start-Ups in the retail chain

Arnaud Blanchet, Last Mile for BoP on an app to help informal shops get cheaper goods: https://www.youtube.com/watch?v=tAs42ibLh0k

Grant Brooke, Twiga Foods on a Kenyan start-up revolutionizing food delivery: https://www.youtube.com/watch?v=TgQnNoiGFQE

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