Africa's e-commerce industry only accounts for 1% of the continent's retail sector. Current e-commerce players cloned Amazon's model and transplanted it on the continent for Africa's middle-class. Go for the lower middle-class and above-poverty Africans who constitute a majority.
How do you make e-commerce work when not all of your target customers are connected to the internet? That’s a billion-dollar question. It’s actually possible to overcome this hurdle using currently available tools. Before delving into that, it is imperative that you understand who this target customer is.
Africa, just like other continents, has different classes of consumers. The middle-class has very similar attributes to the middle-class in America and Europe. Your target customer lies in the lower middle-class to those living above the poverty-line. Statistically, people in this income band constitute a majority. The lower middle-class and above poverty Africans have one very strong attribute—they are price sensitive. So how do they shop? You will be surprised to learn that, for their household shopping, their lifestyle is the most expensive! Not by choice, but due to circumstances. Let me paint this picture for you.
These folks conduct most of their household shopping almost entirely in small shops or kiosks.
They shop in small quantities almost on a daily basis. In fact, manufacturers have had to adapt to this class of consumers by packaging their products in tiny packets. Unfortunately, the marginal costs of doing so means that the smaller packages are more expensive in the long run.
In building this startup, your focus will be on urban areas. The folks in this income bracket live in densely populated neighborhoods and you will soon see why this will play to your advantage.
Now let me take you on a journey these tiny packages make until they reach the hands of these consumers. Note that every step results in a price mark-up. From a factory, goods are transported to a warehouse where they are temporarily held. From the warehouse they are picked by distributors who transport them to wholesalers. Wholesalers stock them until they receive orders from retailers to have some goods delivered to their shops. The shopkeepers stock these goods until a consumer shows up to purchase an item. These shops are usually located inside residential areas within close proximity to their customers. In a neighborhood with several shops, if there is a shop that has priced its items even just by a few cents cheaper, you will find people bypass five other shops, to this particular one, just to save those few extra cents. That’s how price sensitive they are. Pause. Have you started smelling something?
I'm about to step on the pedal. If you have not fastened your seatbelt, now is the time to get tucked in. If you are not an entrepreneur, prepare to be freaked out. If you are an entrepreneur with a disruptive mindset, then you are simply entering a familiar territory. Put yourself in the shoes of Brian Chesky and Travis Kalanick telling the world for the first time, that a person will be offering a spare room in his house to host strangers from halfway round the world, and that a person will be offering the spare seats in his car to share rides with strangers, being hailed to pick them at their location and drop them off at their destination. That’s how strange disruptive ideas like Airbnb and Uber sounded at the beginning.
To explain this startup, let’s make reference to Amazon. One thing I would like to point out to you is how ruthlessly focused Jeff Bezos was on delivering convenience to his target customers—American middle-class. At first, Amazon was this place you could find every book you wanted rather than waste time driving from bookstore to bookstore. Jeff Bezos then went ahead and patented the 1-click button to eliminate the friction of filling out your details each time you checkout. He did not stop at that. He went ahead to introduce smart ordering Wi-Fi Dash Button to add onto this convenience. He still felt there was more he could add to this suite of convenience. So he went ahead slashing shipping times until he attained same-day delivery. His target customers have no problem paying $119 for Amazon Prime Membership fee, let’s just call it “convenience fee”, a testament to how this factor is important to them. Let’s now turn to your target customers, which factor is most important to them? By now you already know—price. You want to be equally ruthlessly focused on this. Even more ruthless.
Amazon asks for $119 from their customers in exchange for convenience. In your case, you'll reverse this model and move in the opposite direction! You want to squeeze as most money as you can back into the wallets of your customers in exchange for just a little bit of their convenience. Here is how your startup is going to work.
If you examine a month-long household shopping cart for people in this income bracket, you will notice that there is a “core”. Let’s say you took shopping lists for 10,000 households and noted down each of the items they bought. You will notice that there are items recurring in almost all the lists. This is the “core”. In a Venn diagram this is the region of overlap for all the circles.
Due to their limited purchasing power, this core is actually a significant portion of their shopping list. Now, you pick the core and leave out items in the fringes for other retailers. You will soon understand the logic behind this. Among other reasons, this will reduce your operational complexity exponentially. Can you guess what items may appear in the core? Your most probable candidates are: toothpaste, sugar, salt, flour, cooking oil, soap, detergent, tissue paper etc. You will not be selling individual items, but a bundle composed of these items.
Here we go. People will make orders from their phones. From a set of points, they will select the one from which they will pick their orders from, each point having a specific time assigned to it. The points are easily identifiable locations by the roadside, familiar to them, along the roads passing through their neighborhood, and these pick-up locations will be at intervals of about 300m (less than quarter of a mile). Since these are densely populated neighborhoods, within quarter of a mile radius you will have many customers you can serve.
Let's work with an example. Say, you received 1000 orders from a given residential area, and the road through this area forms a loop around the estate, from which you designated 10 pick-up locations, and at each point you will deliver to 100 customers. Prior to this, you did some research and after optimization you found Sunday afternoons to be the top selected time by your customers as they will mostly be free and chilling at home. Say, your first pick-up point was assigned 3:00pm. On the day before, all your customers will receive SMS alerts reminding them that their orders will be delivered the following day. On the D-Day, customers will receive real-time SMS alerts. First one 3 hours before arrival, then at 1 hour ETA, 30mins, 15mins, 10mins and finally at 5mins ETA, from the delivery vehicle fitted with GPS for precise time estimates as it moves. When it arrives at the first point, its arrival will coincide with that of your customers who selected that point as their pick-up location. The first set of customers will be served their orders (hassle-free snappy process) and the vehicle will move on to the second pick-up location, also this second set of customers receiving real-time SMS alerts on ETA for their location. Then the next one, and one after that, and so forth, until the 10th location. This vehicle, if empty, can then go back for a quick refill at your command station and then head on to serve another residential area.
Now let’s compare your model to that of your competitors namely: shops, supermarkets and e-commerce players (Jumia). Supermarkets have many costs to take care of. These include: high rents due to the big premises they occupy at prime locations; huge electricity bills from air-conditioning, lighting, refrigeration etc; high wage bill to compensate the many workers they employ ranging from security guards, shelf attendants, cashiers etc; storage area to keep inventory so that no shelf becomes empty during business hours. How about for your startup? All these costs are zero! Zero—nothing, zippo, nil, nada, nought. You pay no rent, as your pick-up locations are like ‘virtual shops’. No electricity bills. And compared to the number of staff needed to run a supermarket, your wage bill is almost zero in comparison. So there is no way supermarkets will compete with you on prices.
For shops, they have to pay their owners, pay rent, and they sit at the end of the supply chain. For your case, you have cut out the middle-man. Zero middle-men. Since you will be aggregating orders from a massive customer base well ahead of the delivery times set by the customers, you will be a huge client to directly negotiate with manufacturers for better deals and leverage on economies of scale to pass on these huge savings to your customers. The shops can’t compete you on price.
Jumia is the dominant e-commerce player in Africa. Their model works perfectly for the upper middle-class who have no problem paying a few extra dollars to have their orders shipped to their doorsteps. They deliver to individual customers, but this convenience comes at a cost. One thing I should point out here is that, if I have ten times more income than you, it does not mean that I spend ten times more on toothpaste than you. So in this game, to capture most profits, you optimize on the number of units sold, not on the margins per unit. Your target customer base is bigger in numbers than that currently served by Jumia, and this is backed up by UN data on Africa’s income pyramid. If Jumia were to match your prices and aggressively encroach into your customer base, because of their model, they will start bleeding cash. They can’t keep bleeding for long. Now that they are trying to solve their last mile challenge by partnering with agents, just note there is an associated cost they have to pay these agents. You don’t have these costs in your model. Any way you look at it, it’s impossible for Jumia to floor you on prices.
After this long explanation, how would you describe your startup in one sentence? UberPool for retail. That’s it. In 3 words. Investors will love you for that. You may find a hard time convincing them about this model, where consumers are willing to forego on convenience but save on cash. Perhaps only in Africa? Not really. Those trapped in the Bay Area bubble may not understand, but actually in America, of all places in the world, consumers have exhibited this kind of behavior. So much so that they catapulted Wish into its unicorn status in 2015. Peter Szulczewski, the founder of Wish, has already done the hard work for you, proving to the world that, there exists a class of consumers who are so willing to trade-off convenience for the sake of saving those few extra dollars.
How far can you scale this startup? Can it join the unicorn club? More Africans are getting uplifted out of poverty into the lower middle-class. More Africans are moving into urban areas. These two trends are already in your favor. How big is the consumer base? Africa has 50 cities with a population of more than 1 million people (USA has just 10 such cities) with Lagos topping out at 21 million people (3 times New York). Since you want to firmly secure your position in the unicorn club, you will be interested to explore more opportunities in other emerging markets outside the continent in cities such as Jakarta, Manila, Dhaka, Hanoi, Mexico City etc. Even then, if you execute so well, you probably may not need to expand beyond Africa to attain the unicorn status as according to a recent study by KPMG, Nigeria alone had a household spending of US$41.7bn on FMCG goods. Nigeria is just one out of 54 countries in Africa.
You may be wondering, are you going to disrupt and kill small shops, whose owners have depended on for many years as their source of income? Absolutely not. You will be delivering to your customers, items within the core (i.e. bought by almost everybody), resulting in huge annual savings for them (think of it as boosting their disposable incomes). They will spend less money on x items and have more money to spend on y items. Shops will see an uptick in sales of y items. This is a noble mission that you should be excited about.
It is about to get even more exciting for you. Remember about being ruthlessly focused? There are still many innovative strategies to further reduce costs which you are about to learn. Remember reading your target customers buy small packages, which are more expensive in the long run? Learn the solution for that. There is also that initial hurdle mentioned at the beginning of this post, of not all your target customers being connected to the internet. The solutions to these problems are very exciting. Let's now look at these solutions in very clear detail.
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