S3E5: Problem Solving for Fragmented Retail

November 3, 2021

As we began our exploration into retail and the so-called B2B commerce platforms, we kept asking about the nature of last-mile retail. Why is it so fragmented? And can we expect retail consolidation?

In this episode, we explore why retail looks the way that it does in African markets, and how B2B commerce platforms are working to empower retailers in the context of the way in which last-mile retail works to meet the demands of their customers, the mass-market consumers across the continent.

These platforms aggregate demand at the fragmented last mile, to ensure that products not only get to consumers but get to consumers more efficiently, with the aim to ultimately reduce the costs of goods, which, as we talked about last episode, are disproportionately expensive in African markets.

[05:12] - Why is retail in Africa so fragmented? As Twiga Foods' Peter Njonjo explains, it's largely due to the rate of population growth in urban cities across the continent.

[07:42] - How are B2B commerce platforms attempting to provide solutions for retailers in the context of massive fragmentation? We go on a journey of discovery with ZUMI's William McCarren.

[14:29] - So what exactly do B2B commerce platforms do, and how does retailer aggregation work? Sokowatch's Daniel Yu explains.

[16:52] - And as a result, these platforms can offer embedded finance offerings to SMEs and retailers who may not have previously had access to credit.

[22:07] - On the back of demand aggregation, platforms like Twiga Foods and Sokowatch are both needing to invest further upstream at the supply level of the value chain, as well.

[31:30] - A retrospective conversation with The Flip's host, Justin Norman, and b-mic, Sayo Folawiyo.

This season is sponsored by MFS Africa.

All this season, we're exploring value chains. And in the payments value chain, no fintech has a wider reach on the continent than MFS Africa. Through their network of over 180 partners - MNOs, banks, NGOs, fintechs, and global enterprises - MFS Africa's API hub makes connects over 320 million mobile wallets across 30+ countries in Africa.

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Justin Norman: Those who have listened to earlier seasons of The Flip may recall the show's origin story. I was this American guy living in South Africa and interested in the startup scene, and my mental models were not appropriate for the context with which entrepreneurs build in emerging markets. This podcast started as, and still is, a mechanism for me to learn.

And as I began my exploration into B2B commerce and mass-market retail for this episode, one thing I kept asking is if we can expect consolidation at the last mile. Bigger retail stores have greater purchasing power, I reasoned, which will help reduce the cost of goods further. So is that what the future of retail is going to look like for African markets?

I learned that I was once again using the wrong mental models. And quote-unquote more formal retail in African markets isn't going to look like retail in the west.

There are those building the so-called B2B commerce platforms, aggregating demand at the fragmented last-mile, to ensure that products not only get to consumers but get to consumers more efficiently, which will ultimately reduce the costs of goods in African markets. Goods which, as we talked about last episode, are disproportionately expensive.

Peter Njonjo: On average consumers are spending about 60% of their disposable income on food.

Justin Norman: All this season, we're taking a peek behind the curtain to explore value chains. This episode is the second in our current mini-series on how entrepreneurs are using bits to better move atoms, and working, ultimately, to decrease the price of food and goods in African markets.

We're exploring B2B commerce - those who are solving retailer problems first. And in this episode, we'll move across the fragmented retail supply chain, to better understand how it works, why goods are so expensive, and how various entrepreneurs are working to solve these big problems for retailers as well as suppliers and consumers alike.

Justin Norman: Before we start, we'd like to thank MFS Africa for their sponsorship of the entirety of season three of The Flip. MFS Africa believes strongly in the need to build products and services that support the development of SMEs across African markets, as do one of their investors, Goodwell Investments. And I had an opportunity to talk with Goodwell's Founder and Managing Partner, Wim van der Beek, about their investment thesis, and their point of view on backing companies building for and supporting the growth of SMEs.

Wim van der Beek: It's good to start first with our overarching investment theme, which is inclusive growth. So we focus on those businesses that help improve the daily life of the average African. And if you look at the daily life of the average African, they spend a large chunk of their daily budgets on food and on other products and services that actually cost a lot, much more, and are harder to get. And in the case of, for instance, financial services, are extremely costly and not always very effective if they can access them at all. And so, the way we've translated the theme of inclusive growth, which essentially is about sort of wanting to improve the daily lives of the average African, is investing in those businesses that have the single largest impact on their daily lives and with an immediate effect.

The SMEs are a linking pin between, if you talk about inclusive growth, between the inclusion that you want to achieve and the average consumer on the continent. So the average consumer, they walk past the corner shop a couple of times a day, so that is their logical distribution point for not just their daily, you know, food and daily basic products, but also for a lot of other products and services.

From that point of view, when we talk about inclusive growth, we don't just see consumers on the one side and the merchants on the other side, the merchants are also the ones that are not included right now, in access to a wide range of products and services that they should have. So if you look at the way that companies like MFS Africa are going to empower a whole range of SMEs, it's a broader range of inclusion that you're talking about, and that's why the smaller businesses, whether they are smaller businesses in the agri sector or in retail, mobility, transport, logistics, the average truck driver, it's those kinds of different small businesses that actually make the difference in Africa that are also underserved, and if you can find a good product and service for them, that actually empowers them, but it also makes life easier for their end-users.

Justin Norman: We'll hear more from Wim on SMEs and investing in companies to support their development, later in the show.

VO: You’re listening to The Flip. The podcast exploring contextually relevant stories from entrepreneurs around Africa.

Justin Norman: Welcome back to The Flip. I'm your host Justin Norman.

Throughout this episode, we're going to explore B2B commerce across multiple supply chains and categories - in particular, fresh produce, FMCG - or fast-moving consumer goods, and apparel and beauty.

The nature of last-mile retail, the fragmentation of small-scale shops and traders, causes several problems in a given value chain.

But first, to understand why African retail is so fragmented, and to understand why it creates the problems that make food and goods so expensive, we need to first talk about the macro problem - in particular demographics and urbanization.

Peter Njonjo: Urbanization right now is happening at 2x the rate of population growth across the continent.

Justin Norman: That's Peter Njonjo, the Co-founder And CEO of Twiga Foods.

Peter Njonjo: There's a lot more poor people moving into urban areas. There's a lot more informal retail. There's a lot more informal settlements. Why? Because the rate of population growth is faster than the rate of government infrastructure, the rate of supporting infrastructure into those urban cities. So everywhere that you look at the continent, there's just this whole explosion around informal settlements.

Justin Norman: So for these reasons - spatial considerations, low rates of car ownership, small disposable incomes, and even things like a lack of cold storage, these things all play a role in how Africans shop and what last-mile retail looks like across the continent. It looks and will continue to look differently than western markets.

Peter Njonjo: And what I see is, you know, Africa might not go the route of big box stores just due to the poor infrastructure. And you may actually have the digitalization or the mom and pop stores becoming availability points and once you have that, then the value proposition around the big box stores will then be limited because then now you're able to access everything using technology and you'll have millions of availability points across urban cities.

Justin Norman: That's something we already see happening - the merchants in question not only selling physical goods, but acting as agents to sell digital goods like airtime, or for consumers to pay their bills, cash-in and out of mobile money, and even operating as ordering and distribution and pick up points for online retailers - increasing the accessibility of ecommerce while also providing additional earning opportunities for the stores.

All of these trends have positive implications for B2B commerce companies like Twiga Foods and their merchants.

Peter Njonjo: I think that the B2B commerce aggregators are going to grow dramatically in size over the next five years. But the key thing that the B2B e-commerce players will do is that they will bring in modern supply chain, modern demand planning, and essentially apply this to thousands and thousands of retailers who would not be able to afford this. So the way to think of it is the back office in a Walmart or in an Amazon being availed to thousands of retailers across the continent.

Justin Norman: That everything is sub-scale, is a problem. It makes distribution hard for distributors. It makes access to finance hard for retailers. It prevents those involved to take advantage of economies of scale. Now, there are multiple ways to try and solve this fragmentation issue, so let's go on a journey with someone that's tried them all.

William McCarren: It has been a journey, journey is the right word.

Justin Norman: That's William McCarren, he's the Co-founder and CEO of the B2B commerce platform ZUMI, which operates in the apparel and beauty sector. William got his start working in African markets with Jumia.

William McCarren: At the time Jumia was very, very focused on kind of general merchandise, you know, electronics, phones, chargers, and what we saw is that typically there is usually two e-commerce players running concurrently. One is kind of a general merchandise player, like a Jumia or a Zalando in Southeast Asia. And then you typically had an apparel and cosmetics or beauty player, and there was some level of inevitability around that model.

Justin Norman: But ZUMI didn't start out as the B2B commerce platform it is today - William and his co-founder started by taking a lesson learned at Jumia in terms of customer acquisition.

William McCarren: The other sort of embedded learning or takeaway we had from the Jumia experience was user acquisition is really expensive in these markets. So one of the things that we decided very early on to tackle was that we would go with a content-first approach, and then we leveraged that audience that converted into this kind of B2C marketplace platform focused on apparel and beauty.

Justin Norman: So they built an audience around apparel and beauty, and then...

William McCarren: We realized that a lot of the assumptions that we had around selling apparel, selling beauty products through, you know, a website were wrong, in short. People just weren't converting. Most of these guys are not really buying from websites.

Justin Norman: Lesson number one on retail in African markets. Trust and human interaction in commerce is important.

William McCarren: One of my earliest memories from Jumia was people coming to the website, seeing the product on the listing, seeing the price, seeing all of the fulfillment information, you know, we uploaded how to use the product, everything was there. And then someone making a phone call to customer service so that a person would place the order for them. Our customer service lines were just jammed. We had so many people in customer service just handling orders.

Justin Norman: That lesson led to ZUMI trying to build more trust into the equation.

William McCarren: Then the idea kind of evolved into, well, we have all these followers and kind of young women who have rich social networks that are very engaged online. Could we help them sell online? So we started with a model whereby we actually went around and aggregated a selection of different products, put them onto a platform, and then enabled our audience to sell to their friends and only place an order when they get a customer who's ready to pay. So there was no sort of working capital requirement for them to be an online seller. And we had a ton of interest there. That definitely worked more than the website play, but we didn't really achieve, you know, I think the scale that we needed that was satisfactory for us to continue pursuing the model.

Justin Norman: William chalked the lack of traction of this social commerce model up to high data costs - which doesn't necessarily allow for the kind of lengthy social media browsing behavior, and also low disposable income for some of the impulse-buy products that are typical of the apparel and beauty category. Which then led ZUMI to iteration number three - the B2B commerce model.

William McCarren: That led us to the final iteration of ZUMI, which, you know, we looked at what we were doing and what we had learned from the social commerce experiments was number one, really cheap, fast-moving apparel was the most in-demand, you know, that was the fastest moving product that we were pushing through the distribution network.

The second thing was like, hey, this is like an incredibly fragmented supply chain. Just speaking for apparel specifically, you have an importer who imports a container of clothing from abroad. Then you'll have a wholesaler, then you have a broker and then you often have another broker and then you have the retailer. So usually four layers of markup in the price. No one is sort of breaking bulk. No one is layering in logistics or any value-added services. It's literally just additional markup for the retailer.

Justin Norman: So William and ZUMI turned their attention to the mass-market retailers at the end of this broken supply chain.

William McCarren: So what we started doing is actually looking at like, what does a more mass-market version of this retailer profile look like? It's not a fashion business we're talking about, really, really mass market, essential apparel. 60% of what we do is kind of kid's clothes, right? So we actually went offline. We went into the markets. We went into some of the informal settlements, like Kibera and Kawangware in Nairobi, where you just have huge numbers of people. And we looked at those retailers. These are informal, open-air market traders who sell either very cheap new clothing or secondhand clothing in these open-air markets to the everyday consumer and the average piece is a couple of bucks.

Justin Norman: This is how the majority of Africans shop. This is where retail happens - informally, in open-air markets. And the opportunity for B2B commerce platforms is not to try to make retail look like other markets, but to create products and services to help these merchants grow their businesses, and subsequently meet the needs and demands of their customers.

William McCarren: We realized that these guys have massive problems. They're waking up at four in the morning, they're traveling a couple of hours to the wholesale market every day. When they get there, they're getting ripped off by one of these brokers. And because these retailers are sort of micro-retailers, they don't have any sort of purchasing power. So that's difficult for them to go further up the supply chain and achieve any sort of economies of scale. Then they’re lugging the, you know, big wholesale shipment back to their retail markets, selling out and this is all in kind of an offline and cash-based business, so it's very difficult for them to achieve some sort of digital ledger of transactions to get access to affordable credit options.

So they're effectively stuck in this sort of sustenance retail. And we realized, okay, these guys have major problems. Like how big are they? And they're massive. The amount of revenue and trade that these guys are doing compared to, you know, one of the social commerce sellers that we were doing was just 10x plus.

Justin Norman: So the big question becomes - how do you make informal retail - that which William just described, how do you make it work better for the retailers in this environment? It starts by aggregating demand at the last-mile, which is the core function of B2B commerce platforms. In short, these platforms aggregate fragmented demand on one side - the retailers - and connect to supply - either farmers or manufacturers or importers.

Here's how it works - let's say I'm a merchant selling goods roadside at an open-air market. I can place an order for my supply through my B2B commerce platform's app, or in some cases via USSD or the company's agent. They will then handle delivery to my store or my retail location, dropping off my goods as well as many other merchants nearby.

Daniel Yu: Our average order value right now is something about $70. And so if you actually break that down, the number of SKUs that are a part of, the number of unique products that actually make up that order, it can be more than a dozen different items.

Justin Norman: That's Daniel Yu the founder and Global CEO of Sokowatch, who we heard from last episode. Sokowatch’s sector of choice for their B2B commerce model is FMCG.

Daniel Yu: And so you're talking about basically like $5 per product that's being bought in many cases. And what that really means is one box of soap, it's one box of soap that maybe has, you know, 20 individual bars within it. And a consumer is coming in and buying that bar of soap for 20 cents apiece. And the reality is that the supplier on their own, that soap manufacturer, that soap distributor would never be able to profitably deliver one box of soap to say 10,000 different shops in Nairobi. Through aggregation, you're basically saying, we're going to allow the shop to get their soap from us, but also get their rice, get their cooking oil, get the detergent, the whatever other kind of fast-moving goods that they're selling. What you're doing is you're aggregating to a large enough order volume that you can actually deliver that order profitably, where it would not be possible for the manufacturer, for the distributor to provide an on-demand service otherwise.

Justin Norman: Whereas a distributor cannot operationally or profitably deliver small quantities and small orders to me and my fellow merchants, B2B commerce platforms make it work by aggregating our orders together and working out the delivery routing in a way that's most efficient. I may also get pricing efficiencies, as opposed to buying small quantities from my wholesale broker.

As I continue to place orders, I may then be given an opportunity to order goods on credit. This solves two problems for me. Number one, I can order more goods without having to worry about how much cash I have on hand - which will allow me to meet customer demand and prevent stockouts. Number two, the credit may help me grow my business - and maybe I can open up a store at a fixed retail footprint.

While the aggregation and delivery is obviously the critical function of these B2B commerce companies, it then creates the opportunity for these companies to layer services like credit on top.

Daniel Yu: The idea behind providing the financing, and it's worth noting, this is all done in-kind. It's basically a, it's a buy now pay later experience. So from the merchant's perspective, what they're seeing is, okay, I can buy a box of soap today, and pay for it on delivery. And that's the kind of standard experience. Or once eligible for it, I can buy this box of soap, but pay for it a week later. And that is actually, I think, a very, very powerful method of implementing financing because it's highly de-risked in the sense of you're not doing a separate mobile money transfer that could then be potentially diverted to a different kind of non-productive use case. And it's also embedded within us as their existing trusted supplier.

Justin Norman: Here's an example of why financing and working capital is important for retailers.

Daniel Yu: What we found was that the reliability of successful orders was actually at risk because what would happen is you have a merchant placing an order today for $50 with the products, you show up the next day with the $50 worth of goods, and they say, oh, sorry, I've already spent, you know, $20 of that buying something else on my own. And so actually now I can't take the full order cause I don't have the full cash on hand.

Justin Norman: To solve that problem, Sokowatch offers same-day delivery - which we talked about last episode. But the other way, and perhaps the easier way, to solve this working capital problem is financing.

Daniel Yu: From a financing perspective, once you can come in and start offering that, you can start to add some of that flexibility back in where you're saying, okay, we're going to finance your entire basket of goods, once you have an established order history with us, and that allows you to significantly increase your stock on hand, which allows in many cases for the shop to increase their actual overall turnover, their overall sales. But then also for us, allows us to build kind of our stickiness with the customer as well because the traditional wholesale suppliers in the market are not giving them credit. So aggregating all the sources of product, but then also kind of aggregating and being a one-stop-shop in terms of financing, at least from a working capital perspective, the store also unlocks a ton of value.

Justin Norman: When we talk about credit - there's a spectrum of approaches we are seeing on the continent, from the alternative credit scoring, consumer lending models, to this kind of embedded finance, where non-financial services companies offer credit as a value-add above and beyond the core service they are offering.

Daniel Yu: I don't think that we're doing anything, you know, groundbreaking from algorithmic scoring or anything like that. It's really about kind of embedding financing within an existing relationship where there's trust.

And where there's that kind of in-kind good that, by virtue of the fact that this is what the merchant is going to sell, and then use that capital to get more of is just ultimately way more de-risked than any type of direct, SME financing that is currently on the market.

Justin Norman: When we come back, we'll head upstream and talk about the investment in improving efficiency at the supplier side of the value chain. But first, another word from our sponsor, MFS Africa.

Justin Norman: Earlier in the show, we heard from Goodwell's Wim van der Beek on their firm's investment thesis, and the role SMEs play in their inclusive growth objectives. So from the investor perspective, what else needs to happen, and what else is Wim thinking about, in terms of supporting these companies, and the SMEs they are serving?

Wim van der Beek: I think what you see happening a lot of, and it's not something that just needs to start now, but it's already happening but we'd love to see more of that, is that actually there's a lot of disintermediation that can still happen in those markets. It is, for instance, the very simple idea of the scratch card itself that empowered the mobile revolution in Africa in the first place. That average scratchcard had had a value of $1, and still has where it's still used, and it's printed somewhere in Dubai, then shipped to Africa, and needs to go through five or six different hands before it's sold somewhere in a rural shop or on the street corner in the city. And every hand that passes, that holds that scratch card and sells it on, it needs to also make a margin on it. So that's where a lot of the inefficiencies in supply chains and value chains can resolve a lot of the inavailability of products and services, and the higher cost of that for the average consumer.

So the other thing that is needed and it's also happening, but that could happen faster if we would have more businesses doing it and if we would have more investors interested in funding it, is the actual building of the infrastructure behind a lot of this stuff. But building the backbone is something that requires a bit more patience and a bit more focus and endurance. And without the backbones, you can't do this fast stuff. So you need the B2B businesses to empower the B2B or the B2B2C businesses. And you also need the B2B patience and more patient capital for that. And that'd B2B investing also needs to happen, and that B2B mindset also needs to be there in the companies that are building the infrastructure.

Justin Norman: Now, back to the question of how to make informal, fragmented retail work better. In the case of fresh produce, it's not only demand at the retailer level, but also supply at the level of smallholder farmer that's sub-scale.

So B2B commerce platforms like Twiga Foods then need to think about aggregating supply, as well. Here's Peter again.

Peter Njonjo: The reason why smallholder farmers existed today in, domestic agriculture is because it's the lowest risk way of servicing highly fragmented, informal retail. That's basically what it is. One thing that we realized is that there was a lot of investment going to the farmer, but no one was trying to figure out what is it that we need to do to get this produce from the farm to retail. Because it's one thing to produce it, but if you produce it and you don't sell it, then effectively all the investments that are going in terms of helping farmers are sub-optimized.

Justin Norman: Most farmers in Kenya are smallholder farmers - that might mean backbreaking labor, subsistence farming, and irregular incomes only around harvest time - and they remain smallholder farmers large in part due to the difficulty and waste in getting their produce to market.

Peter Njonjo: The retail market is so fragmented. So for produce to move from farm to retail, you need a series of intermediaries to essentially aggregate then disaggregate the product to the small retailers that we have, which is essentially the structure of retail across most of urban Africa. About 70, 80% is this type of small retailers, and that's where a bulk of the food is purchased. So that was the issue around fragmentation. Now, as a result of handling perishable goods across so many different intermediaries, then you'd lose 30 to 40% just due to post-harvest handling.

Justin Norman: The downstream fragmentation problem, the company realized, is precisely why smallholder farmers remain sub-scale - and why, as a result, a lack of economies of scale and a large amount of intermediaries keep food prices disproportionately high.

Peter Njonjo: So we realized that the opportunity was actually focusing on the downstream side of that equation. Now because its downstream side was so fragmented, then what you found is that it also had an effect on the upstream side. On the upstream side, it meant that most of the production was informal, was low-tech, very little agronomic capability.

And when you put all those things together, it's like a self-fulfilling vicious cycle. You know, you have poor market access, poor market access doesn't provide sustainable investment opportunities on the production side. And hence, no investment is made to solve some of the challenges that you have on the downstream side. And this cycle continues to a point where food inflation now is outpacing incomes, income growth in most of the urban cities.

Justin Norman: But by aggregating retail and ensuring access to market for smallholder farmers, it's now creating an opportunity for more investment at the farmer level, on top of Twiga's market access.

Peter Njonjo: So for us in Twiga, we've actually done a commercial lease of farmland. And we're going to do a proof of concept. And right now, some of the indications that we have is that on some of the leading agricultural value chains, by sometime early next year, we'll be able to cut off 40% of the average price that we saw in the first six months of 2021. Wholesale prices. And that starts building a proof of concept to then say to investors out there, hey, by the way, you know what, if you invest in efficient domestic production of food then, if you have companies like Twiga helping you distribute that, net-net, you can essentially have a profitable business that makes sense, and at the end of the day, we can actually reduce the amount of money consumers are spending on food in urban cities.

Justin Norman: And then improving retail in urban cities can have a transformational impact on rural communities, as well.

Peter Njonjo: So the key thing is that if you want to solve a smallholder farmer problem, you're solving a problem around sustainable incomes in rural areas. That's essentially what you're doing. The other thing is to solve food security in urban areas, food security in urban areas means that there's a lot more poor people moving into urban areas. There's a lot more informal retail. There's a lot more informal settlements. Everywhere that you look at the continent, there's just this whole explosion around informal settlements. So when you start looking at it from that perspective, solving food security in urban areas then leads you to a very, very different solution. And that solution has to be efficient, that solution has to be low cost. That solution has to have high productivity. That solution has to have very little waste. And that you're not able to achieve with smallholder farmers right now.

So there's a need for us to rethink what's the alternative, and I think for us as Twiga, what we're doing is we're building that alternative to then showcase as a proof of concept to then say, hey, by the way, this is what this alternative reality looks like. And if we solve food security with this, then can we then have more players coming on board. And how can we then scale this across the continent?

Justin Norman: Simply put, Peter thinks markets like Kenya need more commercial farming. And here's why.

Peter Njonjo: Today when you look at smallholder farms or smallholder farmers, in some instances it doesn't look very sustainable. Why? Because you're having significant urbanization that's happening and in Kenya specifically, the average age of a smallholder farmer is 59 years. The average population age is 19. What that tells you is young people are not moving into farming.

So if you're not recruiting the next generation of farmers, what will happen is that at some point the country will become a net importer of food. We've already seen that today. And essentially that's because of that over-reliance on smallholder farmers where there's really no improvement in terms of productivity, no improvement in terms of agronomy support to help them scale.

Justin Norman: So whereas retail may stay small and hyper-local, to best serve the needs of mass-market urban customers, in the case of fresh produce and perishable goods, in particular, farming needs to move from smallholder farming to commercial farming, in order to best serve the needs of the aggregators like Twiga Foods, who have aggregated demand at the retail level.

Though this kind of upstream investment opportunity exists in other categories, as well, like FMCG. The end goal of which is still to get cheaper products into retail stores and in the hands of African consumers. Here's Daniel.

Daniel Yu: So at the kind of wholesale segment, which is really where we play right now, you know, that's always where the kind of thinnest margins are in general. But then also when I look at the kind of manufacturing side, actually, it's interesting. If we kind of talk about what's holding us back the most right now, in general as a business when it comes to our growth, it's actually on the manufacturer side.

Justin Norman: The problems on the manufacturing side, in some cases, might actually be somewhat similar to the problems caused by sub-scale farming in the case of smallholder farmers.

Daniel Yu: If you break down that manufacturer segment, it's because the way that these businesses have been run traditionally, most of them are kind of still family-owned and operated, as these kinds of full-stack manufacturers where they're doing everything soup to nuts. I mean, they're getting the inputs to make these products, they actually own and operate the factory, all the machinery. They package, they brand the product, they do the marketing, they do the distribution, which is crazy. And so I think that's a big opportunity in the African manufacturing space. We have to get away from, you know, one family trying to do everything kind of soup to nuts in the value chain.

Justin Norman: It raises a question around what degree a platform like Sokowatch should look upstream, as well.

Daniel Yu: One of the things could be like, yes, you know, to go and actually start opening our own factories and stuff like that ourselves. I think that that's kind of the extreme end of it. A less asset-intensive approach would be to take the approach that a lot of manufacturers and successful retailers in, you know, say the US or Europe have taken as well, which is a private label.

Justin Norman: Private label is where a retailer has their own generic brand of soap, for example, that, put next to a multinational brand is typically a bit cheaper. It's a brand built on distribution and availability at a retailer like, say Target, in the US, as opposed to a brand built on, well, branding. And it's a concept that might have merit in African markets, considering the distribution challenges that these B2B commerce platforms, first and foremost, are solving.

Daniel Yu: This is a hypothesis we have, and it is something that we're actively looking into. I think what's very interesting in the African context, you know, right now brand loyalty is not a really established concept in the informal market segment in a lot of categories because of the availability challenge. So the big issue right now being that, hey, I go into the shop this week I get this brand of soap. I go in next week, it's a totally different kind of soap. So, you know, currently I, as a consumer, really don't have a strong preference for any brand of soap.

However, if you have best-in-class distribution and you can actually combine that with a reliable brand that is always in stock because we control the production and off-take directly ourselves, then that's like a very interesting proposition.

Justin Norman: Now, all of this leads us to a very different outcome from where we started.

Whereas my initial assumption was that there ought to be a consolidation at the retail level, it turns out that that may not be the case to best serve the nature of African markets and its consumers. And instead aggregation not only at the last-mile but even further at the first-mile on the demand side - certainly in the case of fresh produce, and perhaps in the case of manufactured goods, as well - is a necessary step to ultimately reduce the price of goods on the continent.

And it’s that lesson learned that my b-mic Sayo Folawiyo and I reflected on in this week’s retrospective.

Justin Norman: I asked you yesterday - does every company that's servicing a vertical end up becoming this platform that helps with sourcing and finance? And it seems like there's actually then a convergence of, we just define these companies as platforms and they do all of this stuff, what we're talking about is B2B commerce companies, they do delivery, they do financing, they do sourcing...

Sayo Folawiyo: Production soon.

Justin Norman: Production.And then the last thing for them is honestly, just to become retailers themselves, you know? And then, what are they then? They're just vertically integrated.

Sayo Folawiyo: Walmart.

Justin Norman: Yeah, exactly. But maybe that's, so that's what Peter said though, was it was like the back office of Walmart. So they're doing everything that Walmart does except sell to consumers because of the nature of urbanization and last-mile retail and consumer habits, et cetera.

Sayo Folawiyo: But one thing you said that's interesting is does everybody become retailers? And I thought it was quite interesting how Twiga moving towards becoming commercial farmers.

Justin Norman: I think it's very interesting because my assumption previously would have been that consolidation was necessary at the retail level. But what I've learned is that the consolidation is actually necessary at the supply level. My main takeaway from that is that the fresh produce problem doesn't get solved unless there is more consolidated supply on the back of Twiga’s consolidated demand.

Sayo Folawiyo: Yeah. I can see how that might be true. It was quite interesting. I think that was actually, yeah, kind of a surprising thing, is that it's rare in our world that we're talking about centralizing, commercializing, large-scale. It's quite a rare narrative.

The narrative that always exists is, and that we've talked about to death is a lot of like, how do you enable, with technology, right, and being like that backbone, what did he say, the back office, the Walmart back office. You have a lot of that kind of conversation. So it's interesting to me, and I think actually a good thing that we're kind of having a different level conversation that kind of stinks of, you know, being punched in the face by reality. And I wonder to what extent the cycle has to just, it has to look like that necessarily in order to achieve the outcomes. This is actually the quickest way from A to B is actually thinking in a more, top-down, taking a more top-down approach. But I also wonder what kind of implications there are for that because it is very different.

Justin Norman: Well, it's very interesting when you just look at fragmentation, like fragmentation will necessarily exist because of the nature of urban cities in Africa at the retail level, but fragmentation should not exist at the supply level.

Sayo Folawiyo: Says who?

Justin Norman: Says Peter Njonjo.

Sayo Folawiyo: Okay. He said it or you said it very definitively.

Justin Norman: Alright. Should fragmentation exist at the supply? Question mark.

Sayo Folawiyo: I don't know the answer. But I would imagine that the most ideal world is a world where smallholder farmers exist and are sustainable and there is food security. But that might not be a possible world where we are today. And in which case, I suspect that the impact of larger commercialized farms, et cetera, et cetera, would probably outweigh the costs. But there are costs. And I think that's an important thing to think about, talk about.

Justin Norman: So let's think about this linearly for a second. Why is there fragmented retail? There's fragmented retail to service hyper-local demand because of the nature of cities, the nature of consumer behavior. They don't necessarily have cars. They might not have refrigeration. They may not be able to buy things in bulk. And so you need to have this hyper-local small-scale retail to service that. So that's the point, I guess if consumers are buying stuff in small quantities, does that mean fragmented last mile retail is going to proliferate?

Sayo Folawiyo: I see what you're saying.

Justin Norman: Then if you move one layer up the chain, how do you service fragmented retail? So before it was brokers and middleman and all of this stuff and...

Sayo Folawiyo: Also by the way, I really love how we forget the platforms are the middleman.

Justin Norman: Yeah, they are.

Sayo Folawiyo: Just better middleman. It's not that we're not...

Justin Norman: They're just less, less middleman.

Sayo Folawiyo: ...not eliminating them. I think that's a false narrative.

Justin Norman: Yeah, so then what ends up happening is We're seeing this aggregation at the middleman level, and these super middlemen, let's call them, these B2B commerce platforms are just doing the aggregation of last-mile retail better, right?

And as you move one level up, why do smallholder farmers exist? The reason why smallholder farmers existed previously was because of the fact that they couldn't get their produce to market at scale profitably, so they could never invest in up-scaling their farms if, you know, like Peter said, 40% of their harvest was just going to be lost right?

Then the question becomes, we're operating under the assumption that last-mile retail will always look the way that it will, there's not going to be consolidation because of all of the reasons we explained, but if there's consolidation one level up, then doesn't that inevitably and invariably mean that there will continue to be consolidation up the chain? And it's an inevitability that we see aggregation at the supply level.

Sayo Folawiyo: Why does the chain just stop?

Justin Norman: Because the retailers are servicing their customers, the customers need this hyper-local retail, right? So that's going to proliferate, but then the smallholder farmers are now servicing this big middleman Twiga Foods. Twiga Foods needs bigger suppliers, so inevitably there's going to be a consolidation of smallholder farmers or of a proliferation of commercial farming to service that demand.

Sayo Folawiyo: That's not inevitable.

Justin Norman: But it sounds like that's what’s happening.

Sayo Folawiyo: It sounds like that's what's happening. But, you know, to me, the thesis was, or the approach was like, can you make smallholder farmers produce more? And then can you get more smallholder farmers? Which is not the same as can we consolidate smallholder farmers or can we make them employees? Those are all very different options.

So one of the things I'm generally excited about is the opportunity that we have, that creator economy kind of thesis, right, where you can essentially share more because you can reduce your overheads, company X, Y blah, blah, blah, using technology, you can share more upside with more entrepreneurial individuals, and all this kind of stuff. And it's like a boon to me to employment and self-determination. This smallholder farmer thing is quite interesting to me in terms of how I actually might have to change or improve my worldview a little bit to allow for a world that's essentially, it's a lot of power to Twiga Foods.

Justin Norman: Or whoever becomes the commercial farm.

Sayo Folawiyo: That's the bit, which, which is a norm that we have seen a lot already, that I'm always quite excited about disrupting, but might just be stupid to disrupt. It might just not work in certain things. And it's quite interesting to think about what are the conditions where it just doesn't make sense. And then what are the costs of doing it? And then how might we even, maybe still, even within that structure, be a bit more imaginative about how we do it?

Justin Norman: Right, I guess that is the question, which is if the problem smallholder farmers have is they're sub-scale and like just such sustenance farmers.

Sayo Folawiyo: Is there any difference between that being an employee?

Justin Norman: But is there a difference between being a sustenance farmer and an employee?

Sayo Folawiyo: That’s what I'm asking.

Justin Norman: What he was saying was solving a smallholder farmer problem is solving a stable income problem.

Sayo Folawiyo: Exactly. And I think that's the right thing to actually say, because in my experience as well, we have pros that, they're plumbers, but they don't want to be business people. It's just, that was the best way to use their skills.

Justin Norman: So for some people they should be employees is what you're saying?

Sayo Folawiyo: Yeah. Yeah.

Justin Norman: And, for those who want to live in a world in which sustainable smallholder farming is an outcome, that might be a tough thing for people to hear is that some people just want to be employees.

VO: That's it for this week's episode of The Flip. As always, we hope to see you on social media. We’re @theflipafrica, where we're sharing more content from our podcast interviewees. We also publish a weekly newsletter, The Flip Notes, and share our podcast episode show notes via email. You can subscribe on our website, theflip.africa.

Next week, episode six of the season. We'll see you then.