Inclusive channels: High Touch-Low Cost
By Nicolas Chevrollier
The author makes an impactful case for inclusive channels across sectors when targeting the over 4 billion Base of Pyramid market. The article cites successful examples of its deployment across geographies, from Bangladesh to India to Indonesia to Kenya.
“The World Bank estimates BoP markets globally at $20 billion for water-related projects, $433 billion for energy, and $2,895 billion for household food needs for a combined market value of over US$ 5 trillion.”
“While the “last mile” probably represents the greatest challenge for global economic development, it also represents a significant opportunity for innovators to come together across sectors and across borders to develop inclusive channels.”
You can buy a Coca-Cola anywhere in the world, but affordable products that provide essential value like water treatment or lighting often do not reach billions of poor populations around the globe. In fact, a majority of the population in India or Africa lives in rural areas often accessible only by poor quality road infrastructure. In addition, geographical isolation or limited access to relevant information disconnects populations in many developing countries from any business value chain. The consequence—which can affect ultimately both urban and rural populations—is that products providing essential value either do not reach the intended customers or are more expensive or lower quality than the standard products that are accessible by other populations.
However, in what is commonly known as the “last mile distribution challenge”, entrepreneurs are providing innovative solutions to make the last mile a first opportunity. With passion, perseverance and patience, they invent ingenious ways of reaching these underserved communities engaging them into their sales and distribution systems creating “inclusive channels”.
Low-income groups or the Base of the Pyramid (BoP) refers to the more than four billion people who earn less than US$ 8 per day. Given the sheer size of the group the market potential for the BoP is enormous. The World Bank estimates BoP markets globally at $20 billion for water-related projects, $433 billion for energy, and $2,895 billion for household food needs for a combined market value of over US$ 5 trillion.
In these markets, distribution networks of BoP products take place mostly in the informal economy. Most sales still go through informal and fragmented channels such as small shops, market stalls, and street vendors. However supermarket are gaining shares. For example, in consumer goods retailing, more than 70 percent of sales in Nigeria still go through these informal and fragmented channels but modern retailers are making inroads, and sales through modern-format stores are growing by 28 percent per year.
Furthermore, wholesalers do not necessarily care about brands. Manufacturers often complain that wholesalers do not abide to brand requirements. For wholesalers it is all about price, and about how fast the product moves. This is a big barrier for using existing routes, especially if a new brand or product is introduced that does not have the same demand guarantee as existing products. Companies like Unilever are looking for ways to secure their brand presence and connect directly with retail, even some of the smallest shops. For instance, Unilever launched the ‘Perfect Store’ program which transforms simple trading stalls into small businesses. Unilever provides marketing support to key retailers and stays in close contact with them and in return increase sales and distribution costs and ensure that stores get improved margins and sales volume.
Three inclusive channel strategies
While looking at companies successfully distributing products in low-income markets, three main distribution strategies surface:
Leveraging existing retail channels. By making use of limited existing channels and infrastructure for distribution, enterprises can create new routes to markets. For example, Hapinoy Stores in the Philippines improves a network of small neighborhood convenience stores (Hapinoy sari-sari stores) by introducing new business opportunities to sell products like medicines, solar solutions, or financial services through mobile platforms. Storeowners—often women—are trained on business management and personal development to increase profitability of the store and, if needed, gain access to finance to grow and build a bigger store.
Creating hybrid partnerships. Non-profit organizations or microfinance institutions that are well established in the local scene can provide a direct network of targeted communities. The rise of Grameenphone in Bangladesh—the result of a partnership between Grameen Bank and the Norwegian mobile operator Telenor—is an example of such a win-win situation. As part of the cross-sector partnership, existing women borrowers of Grameen Bank are equipped with a mobile phone and become mobile public call offices commonly known as village phone. It allows the for-profit Grameenphone to reach rural areas often neglected by mobile operators.
Tapping into village entrepreneur forces. Empowering leaders and entrepreneurs in the community to play the role of sales agents is another path for creating reliable distribution networks in underserved communities. Micro-entrepreneurs are usually paid a commission for sales, sometimes combined with a fixed salary. A great example of micro-franchising in distribution is JITA in Bangladesh. JITA is a sales distribution network of low-income women (aparajitas) selling consumer goods to rural households in Bangladesh. JITA has taken an innovative approach to building a commercially successful business by developing a multi-company basket of goods and leveraging local trust in NGOs to introduce the aparajitas as new market channels. Goods are transported to independently owned hubs, from there; service agents employed by JITA transport the goods to the homes of aparajitas. They sell the goods in (mobile) stalls or door-to-door.
To determine which model is best for which company or product line depends greatly on the type of business one company is engaging in, its strength and the context it operates in. Two important trade-offs include:
Investment versus control: Tapping into village entrepreneur forces tends to require a larger initial investment than partnering or leveraging existing channels. In return, more control throughout the channels is ensured via micro-entrepreneurs. This is a major trade off when brand awareness is a key element in a new product launch.
Speed versus competitiveness: A micro-franchising model may take a long time to develop due to the selection and training needed for the workforce. However, once a micro-franchising model is established, it is not easy for competitors to replicate it, hence a significant competitive advantage.
Three key success factors for developing inclusive channels include:
When developing inclusive channels, the selection of agents and the implementation of the right incentives to motivate them to sell products are critical. Furthermore, often new expertise and skills need to be developed for these sales agent to act efficiently. In low-income markets, trust is key and sales agents are often recruited as prominent members of the community where your sales need to happen.
Incentive can come in various forms. For instance, Nazava, in Indonesia, has a sales force of more than 60 resellers selling innovative water filters. Incentives include discounted prices based on volume of sales or rewards such as TV. In West Africa, Fan Milk offers unique frozen dairy products, juice and juice drinks to a total population of more than 200 million people. The biggest enabler of Fan Milk’s growth was their distribution system. They are also a pioneer in the development of sales and distribution systems. Bicycle vendors were introduced in the early days in Ghana and today consumers can still see thousands of Fan Milk vendors on their bicycles all over West Africa. Fan Milk has more than 30000 sales agents and was recently acquired by Danone. FanMilk requires vendors to save 10% of their earnings, which is kept on a company bank account and paid out to vendors when they leave the company. Vendors stay at company approximately 8 years!
A number of companies use also the concept of “Business in a Box” that provides all the necessary materials to the sales force which can include training session, brochures and catalogues, advertisements through radio and newspapers or micro-loans to acquire stock.
Selection, incentive, training are the three activities in terms of engagement to keep in mind to ensure long-lasting loyal sales forces.
When distributing products to low-income groups, local retailers and village entrepreneurs have little cash at hand to buy the products they want to distribute. Access to the right finance is crucial to stock up and operate these distributors. Access to finance can be provided by the company itself or via a partnership with a financial organization. Nazava provides KIVA loans to resellers for them to buy the necessary amount of products to sale. KIVA lets individuals lend as little as $25 to help create opportunity around the world.
Hapinoy makes capital available to women storeowners (called Nanays) to ensure that they can start up new enterprises or expand existing ones. After 5-6 months, Nanays that would like to expand their business can access more capital via Hapinoy’s microfinance partners like CARD Bank.
Reducing the need for financing in the distribution chain is also a way to solve the finance issue. For instance, Copia, based in Kenya, is selling devices through catalogue system for non-perishable goods with easy mobile order system. Less permanent stock means less fixed cost for the sales agents.
Using Information and Communication Technology, like mobile phones, can make inclusive channels more efficient and effective.
Using innovative point of sale material like videos through mobiles and beamers is a simple way to introduce these technologies into a sale and distribution process. Sales ladies of JITA, use small beamers to project the benefits of the products they sell to prospective customers.
Enabling access to (real time) easy-to-use stock information is also enable by communication technologies. Hindustan Unilever Ltd in India distributes goods via the Shakti network, a network of micro-entrepreneurs. It uses a low cost mobile IT solution called Shakti Mobile. Shakti Mobile is a mini-enterprise resource planning (ERP) package run on an entry-level smart phone. By the end of 2012, it was already being used by more than 40,000 Shakti ammas across the country.
Furthermore, often in BoP markets, information on products and services is scattered and awareness of the benefits of these products remain at a low level. Online/mobile platforms can be used to aggregate demand and provide a portfolio of options to consumers.
Finally, the uptake of mobile banking has been unprecedented in regions like Africa and enables more efficient access to payment modalities. M-PESA in Kenya is a mobile-phone based money transfer and microfinancing service launched by Safaricom that can facilitate payments in sales channels.
So whether for presenting more efficiently, for accessing stock information, aggregating of demand or facilitating payment, using ICT improve the efficiency of inclusive channels and ultimately allow a swifter deployment of these forces in the most remote places. While the “last mile” probably represents the greatest challenge for global economic development, it also represents a significant opportunity for innovators to come together across sectors and across borders to develop inclusive channels.
If executed correctly, the impact could be unprecedented. The balancing act is to create “high touch” – “low cost” channels. “High touch” because low-income groups are risk adverse customers that need a relation with trusted distribution agents. This trust is enabled via frequent interactions or touch points between sale forces and consumers. “Low-cost” because affordability in these markets is key. Some companies in India and over the world have started to pave the way, let’s walk with them to create the next generation of inclusive channels that deliver value to billions.