Bottom of the Pyramid: Beyond the blue chips
Targeting Africa's small-scale consumers is the key to huge revenues from burgeoning middle classes in countries like Kenya, Nigeria and South Africa
The decades ahead belong to those companies that recognise Africa as a market, rather than as a problem. So says a raft of academics and management gurus who see the opportunities offered by a growing continent of more than a billion people. More importantly, there are swathes of companies already realising that potential. Beyond the blue chips, there are those nimble enough to access the vast numbers of ?people who are purchasing phone credit, running businesses, buying groceries and putting their children through school.
The classic in the genre was C.K. Prahalad and Stuart Hart’s 2002 article ‘The Fortune at the Bottom of the Pyramid’, which spoke of untold wealth generated by the world’s four billion poorest people who had not previously been a target for top- flight corporates. More recently, Vijay Mahajan’s book Africa Rising brought continental-level analysis of African companies that flourished by meeting the needs of the many rather than the few.
Africa is not a standard business-school case study: it has fragmented markets that do not offer obvious entry points and consumers who generally cannot afford Nike shoes and Sony flatscreen TVs. “The companies responding to very basic needs are the ones who will do well in Africa”, explains Mahajan. “People need shelter and nourishment, people need healthcare, education, transportation, eating and so on”. It comes as no surprise that Asian economies revolve around meeting similar needs. “China is the biggest exporter of bicycles, and India has the largest motorcycle company in the world, as well as a booming pharmaceutical sector. It’s not a coincidence”.
Consumer goods company Unilever took off in India when it started designing products for the people, asking such questions as what kind of shampoo does the average person want, what colour and how much are they ready to pay for it? Unilever has taken the same approach in Africa and its Nigerian subsidiary announced that pre-tax profits more than doubled to N5.5bn ($36.4m) for the first nine months of 2009. The same principle holds true for electrical- goods manufacturers in China, which are designing $30 television sets. Though you might want to buy a beautiful Volvo truck, Africa’s favourite is India’s Tata because it is easy to repair and the parts are cheap.
Correct design, delivering products which fit a majority of people’s tastes and budget, is a critical part of business success in Africa. Nokia has released a mobile phone with an Amharic keyboard to allow many in Ethiopia’s population of 80m to write in their native language. The same market understanding is applied to the production of small packets of washing powder and the concept of small increments of mobile-phone credit.
The South African supermarket chains are the most visible expression of these businesses targeting the emerging African consumer. Shoprite has led the charge, with Pic ‘n Pay and many others in its wake. Both have expanded to over a dozen African countries, selling to urbanised middle classes. Because there are many more people not in this bracket, Shoprite has expanded to address a different segment of the market with its discount Usave stores. Unsurprisingly, these are doing well also.
A good retail-level logistics operation is central to any successful business that aspires to serve many minnows instead of one whale. The supermarkets have honed their logistics and supply chains to keep costs down. An example is the Kenyan supermarket Nakumatt, which opened a store in Kigali in 2008 which is open all day, every day. It has been working with local farmers to supply meat, eggs and other produce, helping them improve the quality and quantity of their products to meet customer demands.
Distribution at the retail level is also important when customers are harder to reach. Suppliers of consumer staples have become very sophisticated in their structures. Coca-Cola and SABMiller, which bottles and distributes Coca-Cola in 10 African countries, have tapped into Africa’s informal economy to supply a large percentage of their customers. SABMiller’s subsidiary, Zambian Breweries, has a manual distribution programme which targets zones, often densely-populated urban areas, where it is not possible to make a standard delivery drop by truck. Generally there are two people involved – one who sits in the store and takes the money, and a runner with a wheelbarrow serving the surrounding area.
Companies that have tapped into the growing levels of domestic consumption over the last decade have recorded some of the most impressive levels of revenues. Topping the list are the mobile phone companies which arrived in the late 1990s and have been raking in profits ever since; the South African company MTN had revenues of R9bn in 2004, reaching R43bn in 2008.
The phone companies managed to access this pent-up ?demand for communications by having a similarly well-developed distribution system: the fleet of street vendors selling chunks of credit that anyone can afford, costing anything from $1 to $20. These re-sellers work in just the same way as Coca-Cola’s fine-grain distribution system. Whether standing by the side of the road or on street corners, the vendors’ gaudy colour schemes have become a permanent fixture of African street life.
The evolving story of African banking mirrors the story in telecoms and retail – the sectors most sensitive to the fluctuating spending power of Africa’s domestic economies. For decades, banking in Africa meant financing the needs of large corporations and high-net-worth individuals. In Kenya in the 1990s, Barclays was the largest bank by number of customers, Standard Chartered the largest by capital base and KCB had the largest ATM network. All three catered to an elite whose trickle-down was limited, to say the least. But as yields on treasury bills fell because of government intervention, and with extra liquidity injected by a change in the capitalisation rules for Kenyan banks, suddenly the conditions were ripe for a new model.
When Equity Bank arrived in 1984, the landscape for small companies changed. Growing out of a microfinance base, Equity Bank’s patient work withsmall and medium-sized companies paid off, with customers loyally staying with the bank. Just as phone and consumer-goods companies realised that there was a market to serve, Equity Bank made it its business to seek out unbanked companies with decent cash flows. Even if the grocery shop or the mechanic yard did not have much in terms of assets for more traditional collateral-based lending, Equity Bank looked at the money coming in over ?several months, helped clients with their business plans and then lent to them.
More important is the impact Equity Bank has had on the banking-sector mindset. Ten years ago, Barclays raised the minimum amount required to hold in a checking account from $30 to $300. Today, Barclays sales girls are wandering the beaches of Lake Victoria, chatting up farmers and trying to sign them up for commercial accounts. The investment arm of Equity Bank is putting together the beginnings of a financial market for commodities in the region.
There are dangers attached. The bad loan portfolios, which had been a feature of the 1990s, have returned. Retail banking is an extremely expensive operation, as the Nigerian banks that have recently overstretched themselves with hundreds of new branches will testify. And bottom-of-the-pyramid business is not necessarily great value for the consumer: a contract telephone service is always cheaper than buying pre-paid instalments of $2-5 dollars.
Accessing the bottom billion is not only about good technology; Coca-Cola’s distribution ?model is as low-tech as one can get. It is about smart methods, such as the mobile-phone scratch card which reveals a code to punch in. It is also about understanding local needs, like the liquefied petroleum gas-powered refrigerators that are sold in South Africa in places where electricity is not available. Researchers Niti Bhan and David Tait cite the case of Procter & Gamble in India, where PUR water purification tablets failed in commercial trials because people simply did not believe that they had made the water safe.
At the heart of these strategies is the idea that people once considered ‘sub-prime’ are now seen as a fantastic opportunity, but they also cannot be taken for granted. Plans and operational difficulties aside, the penny has dropped and millions of non-affluent consumers are now being courted assiduously.