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13 August 2023

How much digitisation will be enough for Africa's B2B retail market?

Beautiful photo of a windsock fluttering on a rock beside the sea at Rostock, Deutschland

A change in the makeup of retail in Africa? Photo by Philipp Deus on Unsplash

This week, I’ll take a break from the ecosystem review series to share a bit of my evolving thoughts on B2B retail digitisation in the past few weeks. The summary is that hurting FMCG sales leaves a question mark over how thick the digital layer in FMCG retail should be.

It’s hard to write about digitising FMCG from the outside. You don’t see the people issues, infrastructure problems and numbers that insiders deal with 40+ hours every week. But there are threads and jigsaw pieces that we can put together to create a picture. Besides, digitising FMCG exists inside the context of the traditional consumer goods business, a world that I am not completely unfamiliar with at the retail distribution level.

Google is not the best place to find an accurate picture of most things. But it can be a useful puzzle piece. So let's start from there. A quick web search with the keywords “b2b e-commerce in Africa” returned this.

Screengrab Sunday August 13, 2023.

The top two results that could fit into this screengrab were a partner article on TechCabal and a Rest of World’s report on how the venture downturn has affected these firms. Here’s a quote from the Rest of World piece.

In March 2023, Zumi, a Kenyan B2B e-commerce startup, shut down due to its inability to raise capital. In January, Wabi, an e-commerce platform backed by Coca-Cola, announced it was shutting down operations in five African markets, including Nigeria, Kenya, and Egypt. Before its closure, the business had heavily discounted its products to drive customer growth. Late last year, MarketForce, a Kenyan B2B startup, had a round of layoffs six months after raising $40 million in funding, citing harsh market conditions.

The full RoW story points to razor thin margins and an unwillingness by venture firms to fund the business that they mostly encouraged to optimise for growth, as a reason for the struggles B2B retail firms in Africa face. But that is not all of the picture. An important part of the story is that Africa’s fast-moving consumer goods sector is itself changing. A big part of these changes has nothing to do with venture funding since it comes from the impact of inflation, lower consumer spending, rising energy costs, and heavier import bills courtest of tight forex conditions. What's more? It is impacting everyone. B2B retail startup or regular distributor. The national specifics differ, but the broad contours are similar.

Changing winds

The set of the sails not the wind. Photo by Richard Horne on Unsplash

When I visited Copia’s headquarters, which doubles as a distribution centre in Tatu City, just outside Nairobi three months ago, I was impressed by the well-oiled operation, thoughtful processes and vertical integration (Copia runs a packaging operation for its rice and sugar brands). Could I have predicted a layoff two months later? No. I absolutely did not expect it. And I don’t think Tim Steel foresaw telling 350 people there was no work to accommodate them three months after leaving Uganda, either. The same goes for Twiga’s several rounds of layoffs and a transfer of what was seen as a move to integrate crop production into its business mix to another firm. But it happened.

Even though we did not (at least I didn’t) foresee this trajectory, the markings of a slowdown in the pace of B2B e-commerce were already clear by the start of this year. While there are probably funding–tied factors, some of the biggest trials facing a future where FMCG is broadly digitised have little to do with more VC money.

In "Walking through the valley of the shadow of death", one of this year’s March issue of Next Wave, I wrote that a chain of economic crises facing African countries was expressing itself at retail shops across Africa by both strengthening informality and reducing spending. Here’s an excerpt from that piece.

All of this economic mumbo-jumbo is most accurately expressed at food stalls and grocery shops.

As Egypt clearly understands, ahead of the Ramadan fast, the country’s national leadership opened Egypt’s annual Ramadan food drives three months ahead of schedule to help combat rising food prices, courtesy of a shortage in the supply of food and, more importantly, a shortage of the foreign currency needed to release food that has already arrived from Egyptian ports.

As the economic crisis bites, it is strengthening informal retail markets. For example, the Tuesday street market in the densely populated El Talbia neighbourhood, one of Cairo’s poorest, is growing in popularity and attracting new shoppers every week who come from all over the Cairo area, for cheap prices.

…I’ve walked you through all of this just to say that the economic situation as expressed in FX and debt crises for countries where imported food makes up a huge chunk of how people are fed is not looking bright.

The very next week, Chernay Johnson, then the Research Director of DFS Lab followed up that issue with a stellar contribution on the intricacies of serving the consumer goods market in Africa. The conclusion was that:

The very next week, Chernay Johnson, then the Research Director of DFS Lab followed up that issue with a stellar contribution on the intricacies of serving the consumer goods market in Africa. The conclusion was that:

…no one B2B market player is near maturity in Africa’s retail sector. At full scale, the dynamics around unit economics could (and will) look a lot different as strong network effects multiply the profitability of a few market leaders. This is only starting to happen in the race to digitise retail in Africa, and we’ll continue to patiently keep an eye on emerging trends. Some careful combination of experimentation will no doubt bring progress, on a continent for which there is no tried and tested formula. But we think this will take more time than the pitch decks predict.

Reread the last sentence. Why could it take more time for B2B players serving the retail market to reach maturity and find scale? Some thoughts.

#1 Building asset-light but fully digital platforms might have a scale problem. In other words, growth is a limit to how much digital we can embed in the fragmented world of consumer retail in Africa. From my conversations with the few people I know (again not a statistical observation, but I’ve got a good observational mind, I think), the more you grow, the more your partners at all levels demand from you. Retail partners, distributor partners, logistics partners and manufacturing groups will all want more from you for the simple reason that you are now a big part of their business. It is either that or you don't grow to become important enough. Of course there are possible caveats to this.

#2 Consumer manufacturing firms are restructuring their operations, supply chains and business units. As the impact of national economics and foreign currency shocks bite, manufacturers are rethinking the very core of their operations from where they source for raw materials to how their business economics work. I don’t know how this will affect the digital B2B retail firms, but I know that business restructurings will come with demands on the pieces that make up the distribution chain for manufacturers.

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From Egypt to Nigeria, and Kenya to Malawi, consumer goods manufacturers are facing foreign currency and inflationary pressures on their cost of production. The result has been a spate of reported losses or lower profit (due to FX) and in some cases exits. In her contribution to Next Wave, Johnson pointed out one vulnerability B2B retail commerce players had, which was that they all connect to a handful of fire hydrants, i.e. FMCG manufacturers.

To work around this weakness, some B2B retail commerce firms have opted to either integrate parts of the supply chain like packaging and creating branded products. Others have opted to focus on serving as a simple software later.

A thin layer of digitisation will work and be integrated into informal business processes without causing too much disruption. But a layer that is too thin is probably not much use for digitising informal retail at scale (again). How much farther than Jumia would you go, if you only provided an app and limited support in things like market entry/deepening, sales turnover and/or logistics for both sides of the marketplace?

Given this, how much or how deep and wide can we digitise FMCG? The answer, from where I sit (which is admittedly, not inside the operator or investor boardroom), is: not much. Except the consumer goods landscape in Africa changes significantly. And change is possible.

#3 Retail in Africa will not remain informal.

What will this change look like? As I’ve said, from the manufacturing side, a change is already happening that could look like significantly more investment into import substitution and the integration of local supply chains into the manufacturing processes. More importantly, the retail change will look like the quasi-formalisation of retail and the growth of corner shops into small modern retail outlets like small supermarkets and niche retail outlets. Open air and mass markets will not disappear completely, but they may shrink significantly as margins become even smaller on the back of growing tax burdens etcetera. This is an uneasy prediction but the growth of a more modern but modest retail space (so definitely not South African scale) is already taking shape.

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When a MarketSquare mall opened near my neighbourhood late last year, I was pleasantly surprised to find long queues at every till almost every evening. People seemed to like the combination of more products which they would previously have had to plan a shopping trip for. And the formal shopping experience. The implementation of Nigeria’s cashless policy a few months later also helped. This is a single random data point and not something I would use in a business plan, but it is valuable context and I welcome disagreements via email or Twitter/LinkedIn or both. The opening of this supermarket, no doubt had an effect on other smaller retail businesses. But I have to tell you that I struggle to see any effective and efficiently robust digitisation of a retail market as fragmented and informal as is currently obtainable.

Not to say it’s impossible. It clearly is possible and a lot of good businesses are being built today. But it is a rate-limited space for asset-light growth only. The informality in retail is probably more of a function of low consumer purchasing incomes and the adaptation of manufacturing to accommodate cheap item purchases than anything else. And if we focus on building for this then it is a defacto bet that income won’t improve much in the future and that consumer goods manufacturing will still carry huge import bills. Under this vision, being light on operational assets is a tough place to get to and still scale from as a simple digital middleman.

There is no magic bullet, but a reordering of the African retail experience that makes retail less informal will help both FMCGs and the emerging digital distributors evolve and mature. Because of this, B2B commerce firms will probably look less like what they are today and they will probably be fewer. But that would place what we call B2B retail today in a fundamentally different place from where it is now. Hopefully, it will be a better place. Big dreams, I know.

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Abraham Augustine,

Senior Reporter, Business and Insights