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.

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Seven things to consider when exporting products to Ethiopia

With a population of over 90m and a fast-growing economy, Ethiopia is a ripe market for distributors.

By Tielman Nieuwoudt, Principal at The Supply Chain Lab

Ethiopia is the second most populous country in Africa (after Nigeria) and one of the fastest growing economies, with an average GDP growth rate of 10% (IMF) over the last eight years.

When entering Ethiopia, there are a number of issues to consider when designing your Route-to-Market: 

Infrastructure and territories

Ethiopia has made great progress in infrastructure development with the country spending US$-1.3-billion or 10% of its GDP annually on infrastructure development, according to the South African Institute of International Affairs. However, as impressive as these numbers are, distributing products in upcountry areas remains a challenging undertaking.

Port

Ethiopia lost its port in 1992, when Eritrea became independent. They now rely on the port of Djibouti where costs are high. It costs more to transport a container from Djibouti to Addis Ababa than China to Djibouti (The Economist). The Lamu Port-South Sudan-Ethiopia Transport Corridor (Lapsset) holds future potential.

Territories

In comparison to other African countries, Ethiopia has a low urbanisation rate (11% vs. 30%). Addis Ababa, the capital city, contributes the bulk of the volume in Ethiopia. Ethiopia’s second city, Dire Dawa, has a population of 274,000 (ESA) compared to Addis Ababa’s estimated three million. It is estimated that 38% of the population still resides five hours or more away from a city with a population of 50,000 (IFPR).

Trade channels

Modern trade is in the very early stages of development and there are currently no international supermarkets operating in Ethiopia. In a very fragmented trade market, souks/kiosks remains the largest trade channel in Ethiopia.

Market

The Mercato market in Addis Ababa is one of the largest markets in Africa and the largest in Ethiopia. The market is dominated by wholesalers. Some companies generate more than 70% of their sales from Mercato. Wholesalers make low margins (2-5%) and most tend to be passive, waiting for customers to collect. While the role of Mercato wholesalers cannot be overlooked, they are not always a good option for building relationship with retailers and building brands. Most MNCs (Multinational companies) we talked to highlighted the importance of direct distribution, as it remains difficult to build a brand through a wholesale system.

Route-to-Market Models

MNCs are entering Ethiopia though distributors as they lack the required knowledge, scale and product portfolio to build their own distribution. However, beverage companies with local bottling operations also make use of direct distribution (key accounts) and micro distribution (such as the Coca-Cola Micro distribution system). It is important to note that foreign companies cannot distribute imported finished products, whether sourced directly or from local importers.

Organisation

Most MNCs are still operating out of their Nairobi offices. However, companies are increasingly opening new offices in Addis Ababa. Ethiopia is significantly different from the other East African markets and care should be taken to understand the culture aspects. Including when displaying role models for advertising purposes.  Foreign investors are increasingly recognising the consumer goods potential in the country, as recent acquisitions from Diageo, Heineken and Tiger brands have demonstrated.

Top ten export products to Angola

Download Frontier's free eBook now and get advice on how to export goods to Angola, a fast growing economy with attractive business opportunities.

More businesses are now exploring cross border trade to take advantage of the huge export and import opportunities in fast-growing markets in sub-Saharan Africa. Angola is one such market promising market. 

With an estimated 43% of its population under the age of 15 and a rapidly emerging middle class that is fuelled by oil wealth, Angola has a huge consumer base with money to spend. 

The South African Institute of International Affairs put the scenario in context in a recent report on Angola: “…despite only having a population of around 19 million, the country is the third-largest domestic market for alcoholic drinks, behind South Africa and Nigeria. With so little being made or produced locally, there is enormous scope for exports...”

As the oil-rich nation continues to grow (about 6.2% this year, according to the IMF), so does its appetite for South African made products. Angola aims to attract US$4-billion a year in non-oil foreign investments by 2017. Foreign direct investment, excluding oil, was US$1.9-billion by the end of September 2013.

China is the top source of imports. Statistics by the National Freight Council in Luanda show 810 000 tons recorded in the second half of 2013, a significant rise from last year. Portugal is the second-largest trading partner with 410 000 tons of products, 8.8% less than the 450 000 tons recorded in the same period in 2012. Brazil, Vietnam, Turkey, Belgium and South Africa followed closely. Imports totalling three million tons were recorded in the period under review. Hydraulic cement was the biggest import product, at 526 000 tons.

Frontier has put together the top ten products that are in demand in Angola, and expert advice on how to get your goods into the country. 

Download the Top ten export products to Angola report.

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What and how to export to Sweden from Africa

There are great opportunities for fruit and vegetable exporters to sell to Swedish stores.

Sweden is a rich country with a well-educated and sophisticated population, but its supermarkets don’t have all the quality products that consumers want. Agricultural producers in Africa - particular in the food and beverage sector - have a great opportunity to export to the Scandinavian country and to its Nordic neighbours.

The Nordic region (Scandinavia plus Iceland) has a population of about 25 million, most of whom share tastes in food, have high incomes and long life expectancies. With the Swedish market for food alone being worth about $1-billion, there clearly are incentives for African exporters to sell their products into the region.

But barriers for entry into the European Union are high. Health and safety standards are high and consumers are discriminating in terms of quality. However, the rewards are great for farmers and food manufacturers who can get their products accepted. 

Swedes spend about 14% of their income on food, and many of them, about 34%, live alone so there are that many more people buying the groceries than might be the case in a society where large families are the norm.

Charlotte Kalin is the CEO of Chamber Trade Sweden. Speaking at an investment conference in November, Charlotte pointed out that every kilogram of coffee consumed in the country is imported, as are large percentages of the country’s fruit (95%) and vegetables (60%).

“That represents a big opportunity”, says Charlotte. She noted that a delegation of South African stone fruit producers had recently visited Sweden. “They know what Swedish companies are looking for when they import from SA”.

And what Swedish companies are looking for apparently is high-quality goods, and choice.  She pointed out that shoppers in South Africa have great variety when it comes to fruit and vegetables. “In your shopping here, you have a very sophisticated diversification in what consumers can buy. Shopping here is so much fun, there is so much to buy, you could really revolutionise the consumer choice, be it in spices, be it in fruits…”

Charlotte expanded on the shopping experience for a Swede in South Africa - which was something of a surprise for the South Africans in the audience!  Said Charlotte, “Shopping here is like in California, you just have it all, I am very impressed actually“.

Charlotte made a specific call to African exporters, “There is a lot you can do in engaging the Swedish consumer in persuading them to buy new brands.”

Trends in Swedish food retail

In encouraging African agri-producers to export to Sweden, Charlotte pointed out that there are certain key trends that are guiding the food market now. These trends are for;

• Exotic foods (including spicy sauces)

• Organic foods

• Gluten-free foods

• Energy bars and drinks

• Ready-to-eat dishes

A member of the audience at the conference, a Swedish manufacturer, suggested that exporters had a real chance to make inroads into the ready-food market, what with lower input costs for the packaging of food in Africa. South Africa, with excellent refrigeration facilities, has a particular advantage.

Retail specialist Nils Tunebjer, of strategic brand and design agency BAS, pointed out that exporters must also have something to distinguish them from the rest of the pack.

“There must be something more,” said Nils. “If you just come with a product and regular packaging, you will have a tough time!”

“South Africa is a premium country for fruit and vegetables and food and you can answer the question, ‘What should I use when I step in?’”

He stressed that Swedish consumers are very quality-aware and urged potential exporters to tell their story, be it of the process that goes into making the product or the story of the people involved in the making the product.

“Be transparent and open about what you are doing, tell your history,” says Nils. “It can be online, or it can also be in the packaging, which is an important touch point between the retailer and the customer.”

Sweden represents really ‘tough competition’. “The big retailers appreciate if you give them something more: how you merchandise in the store, how you interact with the consumer, how you give information. There must be something more!”

Continuing on the theme of trends as mentioned by Charlotte, Nils pointed out that there is a pizzaria and a sushi store in just about every village in Sweden. “There is great interest in foreign foods and new ways of consuming.”

He mentioned Asian and Thai speciality stores that sell spices like cardamom and saffron. In the health market, South African tea brand Rooibos is very popular. Nils loves Rooibos but complains because he can’t get his favourite tea in the morning. “In our office, even though we have 50 different kinds of tea, I can’t get English Breakfast! Swedes love lots of green teas, red teas, all sorts …”

Other trends highlighted by Nils that are driving customer choices in Sweden are:  

• fair trade

• ecological quality

• openness and information

• interesting back stories.

Nils pointed out that South African wines had created a lot of trust in the Swedish consumer, and generally Swedish consumers were very educated about the country they are importing from.

Price is still important according to Nils, but if producers are able to differentiate their product in one of these ways, then they will increase the chance of success.

Free export advice

Open Trade Gate Sweden is a section of the National Board of Trade of Sweden that offers a one-stop information centre for exporters interested in the Swedish market. It helps traders and aims to increase exports from developing countries to Sweden. Open Trade Gate Sweden specialises in trade rules and regulations, covering areas such as labelling, packaging, health and sanitary requirements and customs procedures.

The organisation has its headquarters in the Swedish capital, Stockholm.

If problems occur in the process of exporting, Open Trade Gate Sweden investigates and acts to overcome the problem. Open Trade Gate Sweden’s services are free of charge.

In 2003 the Swedish parliament decided that the entire government shares the responsibility to contribute to the objective of achieving an equitable and sustainable global development. All future policies would take into account the effect of policies on developing countries.

As outlined by Open Trade Gate Sweden, ‘within the area of international trade it [the policy] specifically says that the Swedish government should work for improved market access for developing countries and remove trade barriers to facilitate trade and try to increase exports from developing countries to Sweden.’

Information about Open Trade Gate Sweden services and general information about exporting to Sweden and the EU can be found on the website www.opentradegate.se

Visit www.frontiermarketnetwork.com to access a database of distributors, agents, importers and exporters in Africa. 

Business and Investment Opportunities in Africa

Access to finance is a major challenge for traders in Africa. But things are improving, as we report in this month's issue of FrontierInvest - banks are stepping in to fill the gap and are offering a wide range of trade finance products. 

Visit www.frontiermarketnetwork to view investment and business opportunities in various sectors and countries.