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Challenges of micro retailers in frontier markets

February 26, 2015 by  
Filed under Africa, Asia, Featured Articles

The life of a micro retailer in frontier markets is often less than envious.  High uncertainty and limited capital is often topped with harassment.  But what is a micro retailer? Micro retailers are often classified as enterprises employing fewer than 4 people, with a monthly turnover of less than $2,000 a month. They are generally independent, stock a small selection of stock keeping units (SKUs) and operate out of fixed locations or remain on the move (e.g. hawkers).

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Some companies have built their distribution systems around them (e.g. biscuit sellers in Lagos), while others have chosen to ignore them. Whether you are in agriculture, consumer goods or even pharmaceuticals (they might be selling a single antibiotic tablets), these traders matter. Below are a number of issues to consider when dealing with micro retailers.

Low purchasing power – Most micro retailers have limited capital and, as a result, limiting purchasing power, meaning less ability to purchase large quantities and to qualify for volume discounts. For cash flow, they often tap into personal savings or reach out to family members.

Frequent delivery – Due to the lack of purchasing power and limited inventory, they often require more frequent delivery services, in some cases daily. For distribution companies, it is often unprofitable to provide high frequency delivery due to low volume purchases and high delivery cost.

Hard to reach- Due to the fragmented nature of micro retailers and limited number of large retailers, companies find it difficult to identify micro retailers as limited outlet information is available (some remain unregistered). Micro retailers are often in hard to reach areas and congested urban centres where conventional delivery vehicles can’t reach. Hence, micro retailers often remain underserved, leaving the retail base to informal distributors and wholesalers.

Reliance on intermediaries – Micro retailers often make use of intermediaries, such as wholesalers or distributors, to break bulk (e.g. smaller and cheaper quantities).  These wholesalers and distributors often provide a credit line when required. However, though smaller quantities are more affordable, they often pay higher purchase prices.

Lack of knowledge – Micro retailers often lack the knowledge to identify growth opportunities, credit sources and micro finance providers. They often lack the required market knowledge to purchase the right product categories and varieties. Poor purchase decisions might lead to low returns on investment that tie up cash flow in slow moving items.

Limited trading spaces – Hawkers are constantly on the move and often have to travel long distances to get to the market and trading spaces.  As they operate in high traffic and dense areas, adequate space is both limited and expensive. Local authorities often view them more as a nuisance than small enterprises that provided employment and services.  In some cases they might collaborate to hire security guards to protect their goods. This cuts into their profit margins, especially taking into consideration their low margins.

Survivalist model – Micro retailers often follow a survivalist business model and are pushed into entrepreneurship out of necessity. These micro retailers operate in weak social networks and lack the required trust to collaborate with other retailers to make volume purchases at reduced costs. They often struggle to compete against more organised groups such as Somali traders, who collaborate closely and effectively employ risk pooling (e.g. spreading the risk by investing in multiple businesses).

Counterfeit products – Micro retailers are susceptible to purchasing counterfeit and substandard products, as they often don’t deal directly with distribution companies. They often lack the knowledge to identify counterfeit and expired products. Counterfeit and substandard products also have a health risk to consumers, especially at the bottom of the income pyramid.

Criminal groups and harassment – Micro retailers also face harassed by criminal groups such as the ‘Mungiki” in Kenya or “Area Boys” in Nigeria. These groups control certain areas and extort money from micro retailers. Furthermore, hawkers often complain about police harassment including the confiscation of goods and in some cases policemen consume their products (e.g. food & beverages) without paying.

Even considering all the challenges and cost implications to effectively service these outlets, organisations are looking at micro retailers with renewed interest. An increasing number of organisations have developed distribution models to service and collaborate with micro retailers effectively. Furthermore, in most frontier markets and for a large number of categories, micro retailers are still the main contributor of sales, even with a growing modern retail sector. Consumers make frequent visits to micro retailers and they have a close relationship with their customer base, even providing credit in some cases. Furthermore, developing a successful business model can be a huge competitive advantage, a major contributor to growth and a critical step in reaching the bottom of the pyramid.

 

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