Top tips for distributors in frontier markets

Planning on moving goods in Africa? An expert points you to the best path to success. 

Setting up a distribution system in emerging and frontier markets can be a challenging undertaking. Below are a number of issues to consider:

Fragmented markets 
What is the balance between modern and traditional trade? Modern trade (e.g. Shoprite supermarkets) in most African countries, with the exception of South Africa and Kenya, is still in the very early stages of development. The contribution is in the low single digits. Reaching large numbers of traditional outlets (e.g. Mom & Pop, Dukas) is a difficult and costly business.

Product flow and reasons for purchase
How do products flow in the market? Often small groceries purchase product directly from the wholesale channel. The wholesaler is often in close proximity to these outlets (2-5km radius). They provide a basket of goods, and in some cases credit, if they have a good relationship with the small grocery.

Market and key business areas 
Define the key market and business areas. Identify feeder markets and hubs for product distribution.

Regional differences 
Define the regional, urban and rural differences in distribution. 

Channel strategy
How do channels function and operate? Define the key channels, characteristics and key buying decisions.  Are traditional and non-traditional channels well defined?

Outlet base 
In most emerging markets, determining the outlet base can be a challenging undertaking. Companies need to understand both the existing and potential outlet base, including the outlet density. A well defined every dealer survey (EDS) is a key component of any successful distribution strategy.

Territory 
When working with distribution partners, does the distributor have the ability to service the territory? Are routes and maps in place?

Services
Assess the service and delivery for each channel and the service partners. Review the key issues with service and delivery and map out the distribution models employed.

Customer service frequency
What is the frequency of product replenishment and reasons for the frequency? Outlets in emerging markets often have limited cash flow and, in some cases, limited space to stock product. Review the required service frequency and the need for micro supply depots or wholesalers.

3rd Party Logistics 
Where do the 3PLs operate in the country?  3PLs often cover the major roads well. However, in emerging markets they normally have a limited footprint in rural areas.

Selection criteria 
What are the key components of a successful distribution partnership? Many distributors fail because critical components of the selection criteria are overlooked. The selection criteria will likely include important components such as capital, infrastructure, warehousing, transportation and required organisational structure.

Role definition
When working with distributors, are the roles for the company and distributor well defined? It is important to review the organisational structure and how the company will support the distributor. Ensure that each profile (e.g. salesperson) has a clear understanding of his or her role.

Account development
How should account development be managed? This a critical component of any distributor operation. Not all accounts are equal. In most cases, companies need to prioritize and focus their attention on high value or strategic customers. Companies also need to determine how they will split the account development activities between the company and the distributor.

Value chain
Do we understand the value and margin of partner in the system?

Cost to serve 
What is the true cost to serve? The true cost to serve is sometimes underestimated and companies must have a clear understanding of the cost to serve for both the distributor and the company. In many cases in emerging markets, financial cost centers provide limited data and financial modeling is essential to determine the true cost to serve. Many distributors fail because the remuneration is set too low and not adjusted for inflation on a periodic basis.

Low cost distribution
What local distribution solutions exist in the market that can be leveraged? Often small groceries are situated in congested areas, with narrow gravel roads where trucks can’t enter. In these markets you might find pushcarts, trolleys or motorbikes (e.g. Tanzania). Tapping into their distribution structure can lower cost and increase product availability.

Key performance indicators
What are the key performance drivers? By focusing on the key performance drivers of your business, avoid overextending yourself. Sometimes less is more. Include key performance measurements in your business planning process and evaluate on a yearly basis whether you are using these measurements to track and improve your business. There is no point in tracking something just for the sake of tracking.

Processes
Are processes and systems well defined and standardised? Always aim to eliminate non-value adding activities where possible. Standard Operating Procedures (SOPs) simplify your business procedures and help to ensure the same quality in all operations.

Skills
What skills need to be recruited or developed? Emerging market operations often lack critical skills.  It is dangerous to make assumptions about what people can and can not do. For any principal working with a distributor, conduct a skills gap analysis to determine the training recruitment needs.

Complexity
Can the distributor handle the level of complexity in the business? In many cases distributors that distribute all SKUs (Stock Keeping Units) to all channels fail. Always aim to reduce the complexity in the business.

Collaboration
How will the distribution partners share information with the company? Too often critical information is only available at distributor level and not shared with the company. Also consider the role that technology can play in information sharing.

Appropriate technology 
What technology is necessary? Evaluate mid tech solutions and identify the “appropriate technology” for your operation. Don’t overdo it.

Patience
How much time do you have? Ensure you have management buy-in. A Route-to-Market roll-out requires patience and a continuous improvement mindset. Small incremental changes can sometimes go a long way.

Regulatory environment
Review the regulatory environment including cross county or district tariffs where applicable. In some countries distributors and transporters are subject to multiple charges for crossing county borders. Assess transport bands (e.g. times truck can enter central business district) and traffic restrictions.

Culture
What are the culture issues? Take time to understand culture issues and don’t assume anything. Change your thinking when working in other markets.

Take note of the evolution
Are you taking the necessary steps to adapt to change? Too often supply chains in emerging markets evolve without any strategic plan. Modern trade and retailing are expanding and middle class consumers shopping patterns are changing. Consider how these changes in the market will affect your distribution.

This article is supplied by Frontier's content partner, The Supply Chain Lab. 

The Supply Chain Lab is is a group of supply chain improvement specialists with a focus on factory to village supply chain solutions in frontier and emerging markets. The company focuses on strategy, assessments and implementation.

Contact Tielman Niewoudt to learn more about the company's focus areas.

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Free download:  How to source goods in Africa

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How to manage micro distribution in emerging and frontier markets

There is increased interest in micro distributors and the potential they hold within an inclusive business model.

By Tielman Nieuwoudt

Well documented micro distribution models include the Coca-Cola MDC (Micro-distribution centre) in Africa and Unilever’s Shakti model in India. Micro distributors can be found in emerging and frontier markets where markets are fragmented and modern trade (e.g. Walmart, Tesco) is still in the very early stages of development. Below are a number of issues to consider when activating a micro distribution model.

Advantages of micro-distribution

Entrepreneurial spirit - A micro distribution system allows companies to tap into the entrepreneurial spirit that is so evident in many emerging markets. However, entrepreneurs must have a long term view to ensure the same consistent quality service is provided to customers.

Flexibility - Micro distributors tend to be more flexible in responding to customer needs. For example, they trade longer hours and can also provide weekend and night deliveries. They can act as a credit provider to low income customers. They “live and breathe the streets” of the communities they work in and are in a much better position to control accounts receivables.

Issues to consider prior to implementation 

Channel focus - A micro distribution model is not a one size fits all solution for all channels. Micro distributors generally focus on selected channels in traditional trade e.g. mom & pop shops, Dukas (East Africa) and Spazas (South Africa).

Complexity - Due to the complexity of sale and distribution, micro distributors will likely struggle to service modern trade effectively. It is best to reduce the complexity (e.g. reduced stock keeping units) for the micro distributor, including expected tasks and activities. It is important to understand what the micro distributor can successfully take care of in the supply chain.

Role definition - Companies needs to determine which aspects of the business they would like to control. For example, the Coca-Cola model separates order generation from delivery. This allows the company sales person to focus on more value adding activities (e.g. meeting customers, getting orders) and the micro distributor to focus on warehousing (neighbourhood warehousing) and distribution.

Supply chain impact - When implementing a micro distributors system, companies must assess what impact the distribution model will have on the rest of the supply chain. For example, compared to larger distributors, micro distributors will require smaller drops sizes that will impact the warehouse and transportation infrastructure and processes.

Shared infrastructure - Profit margin are normally thin and it is important to determine if there are any opportunities to share infrastructure (e.g. warehouse, transport) with other non competitive manufacturers and distributors. This can significantly reduce cost and make the distribution model viable.

Regulatory issues - Companies also need to assess the impact that regulatory issues will have on the micro distribution system. This could include business licenses, zoning and transport bands (e.g. restrictions on delivery trucks during peak hours).

Standardization - During the design phase, companies need to standardized processes and systems as it will reduce set-up and training costs. For micro distributors, distributor turnover (the number that close down) is high and it is important to evaluate how set-up and training costs could be reduced.

Support - Micro distributors also have limited resources (e.g. capital, employees) and normally require a bundled approach (e.g. training, finance, process design) to ensure their operations are sustainable and viable.

Register on Frontier to view a comprehensive database of distribution opportunities in Africa

Top 5 real estate opportunities in Africa

Commercial property development in Africa provides the opportunity for good returns.

By Kurt Davis

Of the near 23 million m2 in shopping malls in Africa, 21 million m2 sits in South Africa and 0.5 million m2 is in the rest of sub-Saharan Africa. Similar figures are found in the office space sub-sector – 2 million m2 in sub-Saharan Africa (excluding South Africa) as compared to 4 million m2 in North Africa and 15 million m2 in South Africa. Navigating a blank slate in many instances, real estate investors approach the continent with the mixed ambition of Michelangelo and Donald Trump. Yet, as any veteran real estate investor will characterize the “Africa opportunity”, commercial real estate can surely earn north of 25% per annum returns, but only after navigating unexpected hurdles, including poor urban planning, unfinished neighbouring infrastructure (i.e., unpaved roads), and unreliable local developers. If you can stomach the risk and find the right partners, these five countries offer the greatest opportunity:

Nigeria

On the surface, Nigeria is the real estate investor’s dream canvass. It is Africa’s second largest economy (soon-to-be first by many accounts) with burgeoning middle class. Its 170 million-plus population loves to shop and consume. As companies flood the market, office space is lacking, such that prime office space rents as high as $85 per square meter, according to local renters.

The Ikeja City Mall, a 28,522 square metre mall in Lagos, which was backed by London-based private equity firm Actis in 2011, is unofficially considered the second mall to open in the country. Numerous malls have opened throughout the country since 2011. Even the recent boon in commercial space might not meet Nigeria’s rapidly growing demand.

Still, investors must approach with caution. Corruption and regulatory ordeals come without warning. Joining with a strong local partner is accordingly necessary to avoid the downward spiraling effect of a reactionary approach amongst unexpected obstacles you can assume to come.

Kenya

The growth of Kenya’s middle class and the country’s robust economy bids well for commercial real estate. The country may not see the same growth in malls experienced in South Africa. But the country is starting to hit a similar trajectory as economic growth projects well for the long term and tourism tries to find its footing again after terror threats. Office rents and space have moderated, as reported in local daily, The Star, and will exceed demand by 2016. But, as one local investor characterized it, building malls surpasses office spaces on the investor’s profitability meter based on consumer spending and natural returns per annum that follow from it.

Angola

Often loss in the discussion of burgeoning economies is oil giant Angola. A growing middle (and upper) class in Luanda makes the country an attractive hub for commercial real estate investors. As oil prices stay high, global companies flock to the country to capture a piece of the consumer market. Data on office space remains opaque but local developers estimate that rents for prime office space goes as high $100 per square meter.

The growing pockets (and expanding tastes) of Angolans have sprouted new malls with luxury occupants. The Sky Gallery, scheduled to open in June, will include Prada, Armani, and Gucci brands among many others. Once the mall reaches full occupation, the total cost of the project could exceed US$85-million, according to sources associated with the project. Investors warn, however, that these success stories should not obscure the ‘true’ challenge in Angola of finding a dependable and capable developer who can navigate the country’s ‘unclear’ property laws.

Tanzania

Offshore natural gas and a growing middle class underscores the changing real estate landscape and the country’s global reputation. Yet, as a country on U.S. President’s Barack Obama’s Africa tour, hotel supply barely met demand. The situation will gradually worsen as the gas comes out of the ground.

Prime office space rents as high as US$45 per square meter and new businesses are starting to arrive, so expect the price to increase. Accompanying high class apartments and condominiums for executives operating in these new facilities rent out as high as US$8,000 per month. Rapid urbanization in the financial capital, Dar es Salaam, and improved infrastructure has gradually created fertile ground for commercial property. Still a relatively new concept, local investors predict a rapid boon in a high rise commercial headquarters and multi-story malls in the near term.

Ghana

Prime office space in Ghana may be of interest to real estate investors, as rent go as high as US$50 per square meter. But it is not office space that has real estate investors giddy. One single mall dominates the discussion in Ghana. The Accra Mall, which reportedly attracts nearly 4 million visitors per year, is so busy that locals suggest carpooling to the mall on weekends as parking is limited. The West Hills Mall, which would be completed by the end of the year, should relieve congestion at the Accra Mall. But, if real estate investors are only partly correct in their projections, both malls will be clogged on the weekends and a third mall will ‘supposedly’ be required to ease the congestion.

This article is re-published with permission from Frontier's content partner Ventures Africa

View Frontier's database of business and investment opportunities in property/real estate sectors.

Water producer's success story in Ghana

Voltic's successful distribution strategy primed it for investment from leading brewing and beverage company, SABMiller.

By Tielman Nieuwoudt

In the early 2000s, Voltic Ghana’s leading bottled water producer faced a common problem encountered by many beverage companies in emerging markets. How to sell water to the bottom of the pyramid (BoP) with hundreds of informal vendors already selling sachets at cut throat prices? The BoP water market held significant potential, but with low prices and little brand loyalty among consumers, it was viewed as a segment with high volume but with very low value. At the time, Voltic’s focus was concentrated on higher income Ghanaians servicing high-end outlets including hotels, bars and restaurants.

Rethink the business strategy

The company clearly had to rethink its business strategy in order to compete. Voltic realized that transporting water from centralized bottling facilities to the respective markets and high traffic areas was costly. Furthermore, with smaller package sizes the transportation cost per liter would increase, as sachets (or pouches) are not really known for stowability. Poor infrastructure and transport utilization in emerging markets likely compounded the problem. So, Voltic took a radical step to decentralize its bottling through more than a dozen franchisees and in the process, brought their water product closer to the market.

Selecting the right partners and sharing cost

Franchisees are local entrepreneurs with the ability to invest and grow the business. This includes bottling (including quality control) and distribution. In this partnership, Voltic pays for just over half the capital cost, with the rest of the costs covered by the entrepreneur. Voltic and the franchisees split the operating margin.

Branding and pricing

Voltic introduced a new brand called Cool Pac and priced it at a slight premium above the numerous informal competitors. In the BoP segment where water functions more as a commodity, Voltic changed all of that with a strong emphasis on the brand and quality. Even though Voltic outsourced bottling and distribution, the company maintains close control over all brand building activities.

Route-to-Market

The sachets are distributed using a network of informal street hawkers. Sachets (500ml) are sold to consumers for $0.03 per sachet  on a cash and carry basis. Today more than 10,000 street hawkers sell nearly 480,000 Cool Pac sachets daily.  Following Voltic’s success, in 2009 Voltic was acquired by SABMiller.

Top 9 private equity deals in Africa

The month of March saw an abundance of activity in the private equity sector in Africa. Below are some of the transactions realised.

1. Citadel Capital Subsidiary acquires additional stake of Rift Valley Railways (Kenya, Uganda)

Africa Railways, a core subsidiary of investment company Citadel Capital, has acquired a 34% stake in the national rail operator of Kenya and Uganda. The US$ 37.8m transaction brings Africa Railways’ total ownership of Rift Valley Railways (RVR) to 85%.

The selling party is TransCentury, a Nairobi-listed infrastructure company.

As part of this transaction, Africa Railways shareholders including Citadel Capital have together committed US$80m to increase Africa Railways’ capital to US$200m. Of that USD$80m in fresh capital, US$37.8m has been used to finance the acquisition of shares from TransCentury, while the balance will be injected into RVR to support the ongoing five-year turnaround program.

Citadel Capital first acquired a minority stake in RVR in 2010, eventually becoming lead shareholder via Africa Railways. The firm has since led the creation and full financing of a five-year, US$287m turnaround program for what was then an ailing railway at risk of defaulting on its concession agreements with the governments of Kenya and Uganda.

The first phase of the rehabilitation of 500 kilometers of track that links Kenya with Tororo in Eastern Uganda and Gulu in the north has been completed. The railway is now more efficient and is supported by world-class technology.

2. AfricInvest Group achieves third closing of its AfricInvest Financial Sector Fund (Africa)

The AfricInvest Financial Sector fund, which garnered €60.6m in commitments, will focus on financial inclusion in Africa through investments in financial institutions that service, amongst others, micro, small and medium-sized enterprises (SMMEs). It is one of the first funds to focus on these market segments.

New commitments came from KfW,BIO, Desjardins Group, and the Adolf H. Lundin Charitable Foundation and other private investors.

The AFS was initially launched in June 2007 with a capital commitment of EUR 20m by FMO5, the Dutch development bank, and was then increased to EUR 31m in April 2010 with additional capital commitments by PROPARCO through its FISEA fund6, and by Développement international Desjardins.

The AFS fund has made 13 investments and has realized two full exits and one partial exit. Given the track-record, opportunities and the high impact of the Fund, the shareholders and the Manager of the Fund decided to increase its size and term in order to create a real pan-African Financial Sector Portfolio. The Fund now has the ability to both increase its exposure to promising and fast-growing portfolio companies and to execute a pipeline of new investments.  It makes investments in the range of EUR 1 to 5-million.

This closing comes at a time when many African Central Banks are increasing minimum capital requirements and tightening regulations across the financial sector.

3. AIIM’s IHS Holding Ltd secures $490m to fund expansion in Africa (Africa)

IHS Holding Ltd., Africa’s largest independent telecommunications infrastructure company by number of towers managed, has secured US$490m of equity and debt in its latest financing round.

Existing shareholders contributing alongside new investors are Goldman Sachs, the IFC Global Infrastructure Fund (GIF) and African Infrastructure Investment Managers. Standard Chartered Bank is providing senior debt, for expansion of IHS’ business in Zambia.

This funding round brings the total amount of capital raised by IHS to more than $1.5bn over the last 12 months.

IHS will utilise the proceeds of the round to finance acquisitions, help its customers expand coverage and capacity by building new towers and continue investing in alternative energy and green solutions.  

IHS Towers currently owns and manages over 10,500 towers and has built over 3,500 for its clients in Nigeria, Cameroon and Côte d’Ivoire. In Q4 2013, IHS signed agreements with MTN in Zambia and Rwanda to acquire over 1,200 sites in Zambia and Rwanda.

4. Emerging Capital Partners invests in bottling business, Atlas Bottling Corporation (Algeria)

Pan-African private equity firm Emerging Capital Partners (ECP), has announced a 33% stake in Atlas Bottling Corporation (ABC), the exclusive PepsiCo bottler of carbonated soft drinks (CSD) in Algeria, as part of an $80m investment plan.

Founded in 1995, ABC signed an Exclusive Bottling Agreement with PepsiCo in 1998, and has grown to become one of Algeria’s leading beverage players with a portfolio of global brands including, Pepsi Cola, Pepsi Max, Mirinda and Seven-up.

A mix of growth equity, provided by ECP, and debt, from commercial banks, will be used to increase bottling capacity, build a new production site and give the company flexibility to develop new product categories. ECP will also provide technical assistance to the management team, supporting them in professionalizing business functions such as governance and compliance.

Algeria is Africa’s third largest soft drinks market

5. Fusion Capital acquires stake in REMU Microfinance Bank (Kenya)

Private equity firm, Fusion Capital, has completed buying a 25% stake in REMU Microfinance Bank, in a move that will see it inject working capital and divest its ‘debt only’ portfolio to focus on providing pure equity and real estate financing to mid market companies in East Africa.

This is in line with Fusion’s current strategy to invest only in private equity deals between US$1million to 5 million targeting this segment.

REMU is a Microfinance Bank that offers deposits and credit services to small and medium size enterprises. Presently, there are eight regulated microfinance banks in Kenya.

The partnership will see the bank implement its new strategic plan to grow and expand its branch network and widen its product offering to include mortgage and housing products and electronic banking.

The banking sector in Kenya has seen more than a decade of rapid growth, as institutions aggressively moved to bring people who were previously excluded to using banking services. It is estimated that over 30% of the population remains unbanked, offering opportunities for further growth, according to FinScope Survey report 2012.

6. PIC invests €19m in Phoenix Capital Management’s West Africa Emerging Markets Growth Fund (Cote d’Ivoire)

South Africa’s Public Investment Corporation (PIC), the largest asset manager in Africa with assets under management of about US$150bn, entered into a strategic alliance with Cote d’Ivoire-based financial services group, Phoenix Capital Management (PCM) S.A.

PIC will, on behalf of the Government Employees Pension Fund (GEPF), invest an initial investment of US$30m in the West Africa Emerging Markets Growth Fund (WAEMGF), the Private Equity (PE) fund sponsored by PCM. PIC will take a 30% shareholding in PCM Capital Partners (PCP), the Fund Manager.

This dual investment reflects the group’s developmental strategy for sub-Saharan Africa, which revolves around investing some 5% of its assets under management on the continent.

The partnership envisages potential co-investment opportunities between the two groups and will give PIC a solid channel for any investments in the ECOWAS region.

7. PROPARCO extends US$10m Loan to Central Africa Building Society (Zimbabwe)

PROPARCO signed a 5-year loan agreement of US$10m with Central African Building Society (CABS) to support its growth in Zimbabwe.

With total assets over US$575m, a strong mortgage asset base and a range of financial service offerings, CABS ranks in the top three of Zimbabwean banks.

PROPARCO’s loan will allow CABS to finance the development of its credit portfolio and extend the maturity of its financing for Zimbabwean businesses as funding is only available on a very a short term basis.

8. Swicorp lists paper producer, Sotipapier, on the Tunis Stock Exchange (Tunisia)

Swicorp, a leading investment banking and asset management firm focused on the MENA region, listed Sotipapier on the Tunis Stock Exchange.

Sotipapier manufacturers paper for industrial use in North Africa.

Swicorp acquired a strategic stake in Sotipapier in May 2012 through Intaj Capital II (Intaj II), a private equity investment vehicle managed by Swicorp.

The listing, which covered 9.5 million shares representing 40% of the company’s shares, was oversubscribed nearly 10 times, with demand for the shares exceeding TND400m  (US$ 250m) for a total expected market capitalization of TND120m (US$76m).

Sotipapier is poised to drive further growth in the coming years, by investing in expanding its production capacity and geographic footprint, while continuously improving the quality and performance of the products it manufactures.

The deal demonstrates the compelling investment opportunities that the MENA region, specifically Tunisia and Egypt, provides to private equity investors with in-depth insights into the region.

9. Anjarwalla & Khanna enters into a strategic relationship with ATZ Law Chambers (Tanzania)

Anjarwalla & Khanna (A&K) has entered into a strategic relationship with ATZ Law Chambers (ATZ), a law firm in Tanzania. Shamiza Ratansi and Amish Shah (both formerly of Adept Chambers) set up the new firm in March, shortly after Fred Ringo of Adept Chambers was appointed Head of the Fair Competition Commission in Tanzania. Shamiza and Amish are joined by substantially all of the other Adept staff members.

The increasing number of Tanzania-Kenya cross border deals makes a tightly knit strategic alliance between A&K and ATZ valuable to each firm. The new connection will allow for seamless interaction on deals, sharing of know-how and the exchange of lawyers between the firms.

Tanzania has a rapidly evolving market with exciting developments across multiple sectors. The relationship will allow the firms to help clients to take advantage of the new economic opportunities in Tanzania.