S1E4: Reaching The Masses - A Conversation On Distribution

Aaron [00:11]: Looking at why you would invest in Africa versus other parts of the world - a large part of that story is the consumer story.

Justin [00:20]: That's Aaron Fu, a serial entrepreneur and investor, who is now - amongst other endeavors - the Head of Growth at Catalyst Fund.

Aaron [00:27]: The consumer story is a much more appealing story. It's a much more longer-term story, as well. I think a B2C play is tremendously more risky but at the same time, it's also why we want to invest in Africa.

Justin [00:43]: Aaron's talking about Africa's growth story, and Maya Horgan Famodu, the founder & CEO of the Nigerian-based market entry firm Ingressive and VC fund Ingressive Capital, she brought with her some stats.

Maya [00:54]: There's 1.2 billion people in Africa, and 70% of them are under 35, and 40% of them are under 15 and we have the fastest-growing middle class in the world, 4 of the 10 - sometimes 6 of the 10 fastest growing countries by GDP, highest increasing rates of mobile penetration globally.

Justin [01:14]: The African consumer story is an alluring one, and it raises the question - in a nuanced and fragmented environment, how do entrepreneurs and businesses capture the opportunity? In this episode, we'll try to answer that question. And I think it comes down to one word: Distribution.

VO [01:42]: You're listening to The Flip, the podcast exploring more contextually relevant stories from entrepreneurs around Africa.

Justin [01:51]: Welcome back to The Flip - I'm your host Justin Norman. The African consumer story is an exciting one - we can all agree on that. Meanwhile, capturing that opportunity - especially across fragmented markets and in an environment with scarce infrastructure - remains an immense challenge to startups and corporates alike.

Going back to last episode, on leapfrogging, that narrative is driven primarily by mobile technology. The impact globally, and especially for Africa, is how mobile technology democratizes access to products and services, and importantly, solves a distribution problem. Here's Maxime Bayen, senior company builder at GreenTec Capital Partners and formerly of the GSMA.

Maxime [02:28]: The reality on the ground - people willing to access mobile technology and their first step in the mobile world is usually through feature phones and through SMS and USSD. And it's amazing the amount of innovation and service that today are accessible through those technologies.

Justin [02:47]: From 4G and 5G, mobile apps and mobile internet, all the way down to what Maxime calls low-tech solutions - 2G, SMS and USSD.

Maxime [02:55]: Today, to some extent the only communication means that everybody can access to one way or another is mobile technology and here - mobile as basic mobile technology - so 2G. My work in the mobile for development space with GSMA has been to support entrepreneurs in leveraging those technologies. Not forgetting those legacy technology that today are the real mass technology.

Justin [03:20]: Now there's a whole host of additional considerations related to mobile technology - smartphone costs, feature phone costs, data costs, telco infrastructure investments, and tech adoption. All of these questions have an impact on the aforementioned addressable market question. But acknowledging that there are mobile technologies - both high-tech and low-tech mobile technologies - that can help from a distribution perspective, it raises an interesting question for me - If we can reach customers digitally, why are fintechs building agent networks?

Keith [04:00]: As much as we like to talk about digital this and digital that and people are excited about the products -

Justin [04:05]: That's Keith Davies, ex-CFO and partner at Zoona, a South African fintech company that built agent networks in Zambia, Malawi and Mozambique.

Keith [04:13]: at its fundamental level being able to convert electronic money into cash and vice versa is still the biggest challenge.

Justin [04:20]: What Keith is talking about here is physical distribution - the need to build out a physical presence because ultimately Zoona's customers are those who are receiving local remittances in areas where there is a lack of infrastructure, and who wish to convert the mobile money they received into cash. In spite of the tech, physical cash is still necessary to transact in these environments in today's economy.

Keith [04:39]: We're all excited, as we should be about the innovations that are coming along and things that have changed the landscape, but it's still very much a distribution game.

Justin [04:46]: And for Zoona it wasn't merely about creating a physical presence; rather, it was about building out an agent network in a way that also took care of one crucial element in the transaction: trust.

Keith [04:56]: Financial services is so much about trust. We then reverted to a model of engaging the community much more tightly, engaging local leaders within the community for them to identify who those agents should be and they would invariably suggest people who would then become agents and they became an important part of those communities. So having that high touch model really played into the trust.

Justin [05:18]: So it's not merely about reaching customers, or giving them cash, but about baking trust into the distribution model.

Katlego [05:24]: We build credibility offline.

Justin [05:25]: That's Katlego Maphai, co-founder and CEO of Yoco, a fintech company based in South Africa.

Katlego [05:31]: We have a new region development team that literally goes door to door and partners up with innovative small businesses that are respected within their communities. Until we've reached and tapped a locale, and felt like we've gotten in with the right folks and built up relationships and generated the advocacy, that's typically when we start buying the traffic online. You start seeing this interrelationship between offline and online - credibility offline, scalable customer acquisition online, but the two things work hand in hand.

Justin [06:02]: So even a fintech company like Yoco, whose innovation is -

Katlego [06:05]: Our innovation has really been tapping into digital - using digital channels to target merchants, allowing them to sign up online, and then using an ecommerce model to distribute.

Justin [06:16]: Yoco's distribution model relies on a physical presence, not just in terms of getting their card readers to customers, but in terms of building trust and credibility amongst the customers -many of whom may have previously been overlooked as merchant services customers by incumbent banks.

But this again raises a question - going back to episode two on business models - if technology companies on the continent are tasked with building a physical presence or leveraging a variety of offline activities, how are they doing that in a sustainable and scalable way?

Salami [06:50]: We don't have to touch every single member. Whether they are digitally connected or not, we just need a node, and a node can connect to as many as 1000 to in some cases several hundred thousand points.

Justin [07:01]: That's Abolore Salami, founder and CEO of Riby, which creates digital products for cooperatives and informal lending groups. Riby's creating digital products for the masses by leveraging a business to business to consumer model - B2B2C.

Salami [07:15]: Really we don't want to be in the last mile B2C business because it's extremely expensive, but the B2B2C is where our retail business focuses on. Even though we're providing the credit or financial services at the individual level, the goal for us is to support the people that are managing these individual groups as opposed to the individuals themselves.

Justin [07:36]: From a unit economics perspective, the leaders or decisionmakers of a cooperative are all that Riby needs to transact with, and in consolidating demand, it enables Riby's products to be utilized by more people at a sustainable customer acquisition cost. Coming back to market size, this model has positive implications.

Salami [07:52]: Addressable market the way most people are trying to go about it, which is go directly to the customer, is extremely small. But addressable market where you are targeting a specific approach that doesn't require you to go down to the last mile customer becomes a lot bigger.

Justin [08:11]: And yet, while some companies are levering existing networks so they don't have to go all the way down to the last mile, someone does have to build those last-mile networks. Let's look at it from a logistics perspective - When building sustainable businesses, companies still need to be able to get their products into customers' hands at an affordable distribution cost. So what about FMCG companies like Coca Cola? Do they have distribution solved? After all, they're even distributing medicine around the continent using their network through initiatives like Project Last Mile.

But if you recall back to episode 2, we spoke with ecommerce company Kasha's co-founder and CEO Joanna Bichsel on building a sustainable business model, and she had this to say.

Joanna [08:50]: So, from the beginning, we realized that we actually are building a platform of the most influential consumers on the continent - women drive 80% of consumer purchases, they own the household, they are the primary decisionmakers when it comes to family health. Women are a target consumer for many pharma, FMCG, beauty companies that are looking to enter the market. And so for us, we are a platform where we have both B2B revenue in addition to our ecommerce, the B2C revenue. And while low-income consumers and rural may be low margin, you find that a lot of manufacturers are more interested in reaching them because they're kind of unreachable for them otherwise - so we can still monetize that capability.

Justin [09:39]: Kasha has a B2B relationship with a major multinational FMCG company. And while certainly FMCGs can leverage a platform like Kasha from a brand and marketing perspective, as well as from a distribution perspective, the notion that FMCGs need help to reach customers at the last mile requires further exploration. So I sat down with Antonio Bruni, CEO of the South African company Picup, a startup solving last-mile distribution through technology.

Antonio [10:04]: We do last-mile logistics using crowdsourced drivers, build pretty cool technology to solve last-mile problems for B2C or B2B.

Justin [10:13]: Picup employs an asset lite model - think like uber - where they tap into a network of drivers who use the platform to fulfill last-mile delivery on behalf of Picup's clients.

Antonio [10:22]: For us, it was about how do we pay the driver. We spent 3 years building an algorithm that calculates what a driver should earn based on distance, number of parcels, parcel size and we built various AI modules into the tech that allowed us to quote a customer in real-time based on the volumes of parcels he's sending through our tech. And it's all variable, so the more deliveries a customer or merchant of ours has, the better the optimization and the better the price per delivery.

Justin [10:50]: And the technology, given its ability to optimize delivery, is also used by manufacturers and transport companies with existing infrastructure and fleets of their own.

Antonio [10:58]: In last-mile, the biggest challenge, the biggest cost factor is the last mile portion. And that's because a company like FedEx will have a hub by the airport, they'll bring deliveries in there, and from the airport to the CBD is fine. It's short distance, they can consolidate a lot of volume into that to a single trip. But orders going to Hermanus and outlying -

Justin [11:21]: Hermanus is a town on the coast about 120 k's outside of Cape Town.

Antonio [11:25]: they then subcontract to another courier and subcontract. They don't own that whole chain.

Justin [11:30]: And while South Africa isn't necessarily the most representative example of logistics on the continent, even within its urban areas and environments like townships, we can see how companies not owning that whole chain can severely cut into margins.

Antonio [11:42]: You look at Coca Cola, they've got to partner with other distributors in the townships. You've got these cash and carries, your bigger distribution outlets, these big FMCG companies supply into. And then they will supply into a distributor that's maybe 3 or 4 kilometers away and then that distributor will supply into a spaza shop that's 100 to 200 meters away from him. So all of this - you've got 3 chains within a 3 or 4 kilometer radius.

Justin [12:11]: While the middlemen may enable distribution, it comes at a cost.

Antonio [12:15]: These FMCG companies are not trying to go direct these spaza shops because of the cost, the margins that they're losing in between with the distributor, the cash and carry. It can be a lot more efficient.

Justin [12:27]: And for Picup, using their logistics platform and technology creates multiple opportunities for FMCGs.

Antonio [12:32]: The consumer is coming in and buying but he doesn't have enough product on the shelf all the time. The FMCG companies are coming in and they want to be the first one accessing that last mile, they want to put product on that spaza shop shelf. The more they can use technology and distribution to get product onto the spaza shop shelves quicker, they win the race.

Justin [12:50]: Picup believes that their technology - and the layer of transparency and efficiencies created by the data - can both lead to subsequent infrastructure investment in this space, as investments are securitized, and perhaps even reduce the need to invest in certain assets or infrastructure, as asset lite models continue to be proven out.

Antonio [13:08]: That process to get it to the cash and carry requires them to have a lot of their own infrastructure because it's the only reliable way of getting it there. A lot of these companies are looking to control most of that process whereas opposed to being before it would go let's say a trade port that buy from the multiple FMCG companies and they will stock it, buy it at a bulk discount, and because they hold it at the cash and carry, guys will go buy their goods at that place. So it all becomes a margin game - there's a lot of middlemen in those processes. The future's all about shrinking it down and getting it to the customer faster.

Justin [13:50]: So at the end of the day, FMCGs have found success getting their products into the hands of consumers all around the continent by setting up distribution networks and leveraging middlemen at several levels of a value chain, which gets Coke cans to where they need to go. And while Coke's margins may afford them the ability to profitably leverage middlemen at multiple levels of their value chain fintechs don't necessarily have the same luxury. So the conversation around distribution requires a larger conversation around something else - something we alluded to earlier - market size.

We've talked about how companies are solving distribution issues, and how companies are building sustainable business models. But when building a company in this way, you need to account for consumer demand. And while Coke's margins may be to their benefit, is it also that they can build out their distribution network at scale because everyone wants a Coke, but that a fintech will struggle because not everyone is going to be their customer? Or is it because the nature of a financial services transaction is much different than buying a Coke? That's what my b-mic Sayo and I sat down to talk about, when reflecting on this episode.

Sayo [14:48]: Here's another thing to think about - what about the fact that Coca Cola just has so much more scale in terms of who is buying their stuff that they can afford to do it. And maybe there's this question about all these new companies trying to build distribution for products that are not necessarily proven at the kind of scale they need to be proven at to justify that spend.

Justin [15:22]: Is it also the fact that their addressable market is more absolute than the addressable market of a fintech?

Sayo [15:30]: That too.

Justin [15:31]: So I guess in Coke's distribution model they're not also seeking product-market fit while building their distribution network.

Sayo [15:36]: Exactly. That's the interesting difference. There's also a question of consumers wanting these products and wanting to use these products.

Justin [15:46]: Yeah, it goes to question earlier of is the addressable market of a fintech company the same as the addressable market of Coca Cola on the continent.

Sayo [15:58]: To frame the conversation - the two questions we want to ask is: assuming there was an addressable market, how do you get to people? And then, coming back and saying, is there actually an addressable market?

Justin [16:13]: Perhaps the challenge for these startups is that they have to ask and answer both questions at the same time.

Sayo [16:20]: Yeah.

Justin [16:20]: So Coca Cola was not refining their formula while setting up their distribution. They were just pumping product. So they were purely a distribution company, so it's a question of are there any purely distribution tech companies that will win by virtue of not having to deal with product-market fit and only having to solve a distribution problem. Are logistics companies that? Are logistics companies the new Coca Colas because their product is the distribution and they don't have to create a product?

Sayo [16:47]: Mmm, that's interesting. Or, can they enable existing distribution?

Justin [16:53]: Right, and they the ones who will win because all they have to do is solve this problem and they don't have to deal with products?

Sayo [16:59]: Yeah and it just becomes a marketplace, right? Bring your product, I'll get it in front of people, they'll decide. If that platform did exist, what would people buy?

Justin [17:14]: That question - on market size and consumer demand - is what we explore in next week's episode of The Flip.

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