The digitalisation of the traditional retailer in Africa

The humble mom-and-pop shop or traditional retailer has been getting a lot of attention of late. It seems like not a month goes by with another announcement of a start-up or big tech giant looking to partner or target the traditional retail sector. What was previously viewed as a relic of an unorganised and unstructured retail past, are now seen as a massive opportunity.

In African markets, whether you are Lagos, Nairobi, Cairo or Casablanca, traditional retailers remain a big part of your shopping experience, and the numerous traditional trade outlets remain the biggest segment in most markets.

What is traditional trade?

Traditional trade in emerging markets is often a complex distribution network of micro-retailers, kiosks, hawkers, stockists, open market traders, wholesalers, and distributors. For shoppers, their local neighbourhood grocery is often at the heart of this. These small groceries are known by many names: duka in East Africa, spaza in South Africa, souk in Ethiopia, hanout in Morocco, and bakkal in Egypt. Stores are mostly one outlet run by an entrepreneur or employee and shops are generally small, ranging from 25 to 50 square metres with limited shelf space to stock and display products and point of sales material.

1. Why are tech giants and startups targeting the informal sector?

Traditional trade’s size and large retail contribution makes it an attractive segment

Sub-Saharan Africa’s consumer spending is expected to reach $2.1 trillion by 2025, according to McKinsey. More than 70% of consumer goods pass through the hands of traditional retailers in Africa, according to Boston Consulting Group (BCG). In most African countries, they contribute more than 85% of total sales, even in key markets such as Nigeria. South Africa remains an exception, with a large and developed modern retail sector – contributing more than 65% of consumer goods sales.

Estimates about the number of retail outlets range wildly; from 2.5 million (BCG) to more than 20 million. Wasoko, an East African based ecommerce platform, estimates there are 10 million traditional retailers in Sub-Saharan Africa, and 1.2 million in Nigeria alone, according to Nielsen, a market research company.

Numerous intermediaries and a market prime for disruption

Supply chains in emerging markets have numerous intermediaries, and this market is ripe for disruption. The long supply chains have many middlemen, which result in higher prices. In many African countries, traditional retailers usually have only a few suppliers per category. Unfortunately, there is little price visibility in the market, and shop owners are often unsure whether they are paying a fair price for their products.

Traditional traders often use intermediaries like wholesalers to break bulk into smaller, more affordable quantities and provide credit when required. Although smaller quantities may be more affordable, they often come with higher unit costs. This situation often leads to shop owners getting stuck in a credit-trap with only one or two wholesalers, making it difficult to shop around for better deals.

Dealing with multiple intermediaries who store, handle, and transport goods along a lengthy supply chain also causes wastage and additional costs. Unfortunately, farmers and suppliers often transport fresh produce without boxes and with limited or no refrigeration. As a result, fresh produce is often exposed to unfavorable environmental conditions, which leads to reduced quality due to limited cold chain storage.

Informal retailers are in the very early stages of digitalisation

Numerous traditional retailers have yet to embrace digitalisation, while many small businesses have not been touched by technology. In markets such as Nigeria and Egypt, most traders lack accounting and inventory management software and still rely on large notebooks or pieces of paper to record transactions and monitor short-term customer credit.

However, changes are happening in traditional trade in many countries, and the COVID-19 pandemic has hastened the adoption of ecommerce and digital retail services in several markets. According to BCG, in Kenya, for instance, the proportion of retailers offering remote ordering rose from 27% in early 2019 to 39% in late 2021. As the informal retail sector adopts more technological solutions, tech companies can play a crucial role in digitalising traditional retailers – especially in large urban centres.

The explosion of mobile technology and internet-enabled smartphones

Fixed line connectivity remains low in most African markets, and ecommerce is still in its infancy. Africa accounts for only 2% of the world’s ecommerce sales, and the continent still lags behind other regions. Only three countries, Nigeria, South Africa, and Kenya, account for half of all ecommerce shoppers.

However, the increased penetration of mobile devices and the availability of internet-enabled smartphones are changing the landscape, and lower data costs are making online shopping more accessible. According to GSMA’s Mobile Economy Report Series, 84% of the African population will have access to a SIM connection by 2025. But smartphone penetration remains below 40% in most African countries, although it is above 70% in the informal retail sector, according to a BCG report.

Informal retailers lack funding and remain largely unbanked or underbanked

Traditional traders in Africa remain largely underserved by financial institutions, which presents an opportunity for growth. Banks usually do not work with small traditional retailers due to their reliance on cash transactions and lack of a financial footprint to determine creditworthiness. Assessing credit scores and offering loans is therefore difficult and risky.

Typically, banks require collateral for loans, which poses a challenge for asset-poor traditional traders. Credit terms are often too long and high in value for traders who require quick small loans, resulting in unmanageable repayment terms. According to the IFC, micro, small, and medium enterprises (MSMEs) face a funding gap of $5.2 trillion. Cash-strapped traditional traders struggle to stock sufficient inventory, leading to stockouts and unhappy customers, missed sales, and lost customers. This leaves traditional retailers at the mercy of informal lenders or loan sharks, who charge above-market interest rates, further eating into their profit margins.

2. How are tech startups impacting informal markets?

Start-ups and investments are focused on four areas of informal retail: providing technology solutions to source products such as ecommerce platforms, assisting owners to manage their business by providing tools such as inventory and accounting management software, providing finance and short-term loans, and helping them diversify their business by providing support services such as digital products and becoming online-to-offline agents.

Source – Affordable goods and wider range of products

In countries like Egypt, goods often have to pass through six to seven layers of intermediaries before reaching their destination. Deliveries can take more than a week to arrive, and sometimes they don’t arrive at all. The numerous players and long supply chains are not only a hassle for shopkeepers, but also inefficient, and significantly impacting their razor-thin profit margins.

Ecommerce players such as MaxAB in Egypt, TradeDepot in Nigeria, and MarketForce in Kenya are able to negotiate bulk purchases and offer better prices to traditional retailers by aggregating orders from informal retailers.

Ecommerce platforms also provide a range of options for informal retailers to order products, such as via mobile app, USSD, or in some cases even SMS and WhatsApp. By removing the middlemen and reducing the number of wholesalers that informal retailers have to deal with, these platforms can increase price visibility in the market and reduce complexity.

Source – Social ecommerce platforms

In China, social ecommerce platforms like Pinduoduo have had a major impact on the country’s ecommerce sector by reducing the acquisition cost for tech companies and making affordable goods available to Chinese consumers. This is particularly true in lower-tier cities, where prices are often higher due to distance and logistics inefficiencies, and customers are more price-conscious and in contact with lower-quality products.

In many social ecommerce models across Asia, the community leader plays a central role in the success of the model, responsible for placing orders, receiving goods, and completing last-mile delivery. Community leaders are often stay-at-home moms or local traditional retailers who act as influencers and community marketers, earning an average commission of 10%.

Each community leader manages their own small network of around 100 customers and uses social media apps like WeChat to share deals and the latest product information. Community leaders also bring significant cost savings for last-mile delivery and reduce prices for customers living in lower-tier cities.

Social ecommerce platforms also hold potential for the African continent, with players like Kenya’s Tushop and Kapu poised for expansion.

Source –  innovative distribution strategies

Small traditional traders buy limited quantities and often require frequent delivery services. They are also often in hard-to-reach areas, where delivery vehicles can’t enter. Delivery teams sometimes need to search for parking spots in congested commercial districts or travel on foot to reach these outlets. This creates delays and inefficiencies, further driving up delivery costs.

In East Africa, tuk-tuks are an important part of Wasoko’s last-mile strategy to service more than 50,000 informal retailers. The startup has a fleet of tuk-tuks that function as mobile warehouses — to service outlets on-demand.

Wasoko uses data analytics to predict what shoppers will order, and preloads tuk-tuks stationed in designated neighbourhoods. This enables quicker deliveries, without a shopkeeper having to leave his or her shop. The startup also introduced a geotagging and mapping system to ensure improved delivery to East Africa’s hard to reach outlets, where street addresses are sometimes lacking.

Copia Global, an East African ecommerce platform, aggregates multiple consumer orders and delivers items to pick-up points such as traditional traders for collection, rather than providing a costly one-on-one delivery system. This allows Copia to provide products to customers without formal addresses and limited internet connectivity, and the company can deliver a package at one-sixth the cost of other best-in-class ecommerce businesses in the world.

Manage – Inventory management

Traditional retailers also require assistance to manage their businesses. Many informal retailers have not yet digitised their businesses, and inventory management is often limited and paper-based. Shops often lack insight into the frequency of stockouts, which products are selling faster, and which products should be reduced or eliminated to free up cash flow.

In South Africa, A2Pay provides point-of-sale terminals to empower and support small to medium-sized grocery or spaza shops. Their services include stock management and a vending platform for virtual prepaid products, such as electricity and airtime.

Many inventory management systems in Asian markets are also mobile solutions, providing full business intelligence and stock management records. They can help traditional traders log transactions and establish transaction history, enabling them to better manage inventory, measure performance, track costs and payments, and make better decisions. Data is often backed up in the cloud to safeguard against power cuts and load shedding.

Manage – financial management

Many traditional retailers still rely on paper-based record keeping and accounting, resulting in poor insights and limited information for shopkeepers. However, with the rise of mobile phones and the decreasing cost of smartphones, many retailers are turning to mobile-first solutions, including accounting apps.

While accounting apps are still in their infancy for traditional traders in Africa, they have made significant inroads in markets such as India. Players such as Khatabook, OkCredit, Vyapar and GimBooks are all active in this space, with Khatabook being the market leader and claiming over 10 million active users in 4,000 cities.

These apps manage financial transactions, accept online payments, and improve transparency and efficiency in businesses. They also help retailers keep track of short-term credit provided to customers and send out periodic reminders to creditors via SMS and WhatsApp.

Moreover, tax authorities are increasing pressure on traditional retailers to be tax compliant, which is also driving adoption rates. Therefore, African traditional retailers are likely to follow suit, as tax agencies seek to expand their tax base.

Finance – Provide short-term credit to customers

Credit remains a significant challenge for most traditional retailers, as cash-strapped shopkeepers sometimes struggle to maintain sufficient inventory, leading to stockouts and unhappy customers, missed sales, and lost customers.

Point-of-sale data provides ecommerce platforms with insight into retailers’ purchasing patterns, enabling them to extend a credit line to qualifying customers, regardless of size. The credit provided to buyers and sellers is financed by ecommerce platforms and financial institutions.

Wasoko provides short-term working capital to help traditional retailers fund inventory purchases and run their businesses more efficiently. Often, tech start-ups work closely with major fast-moving consumer goods (FMCG) companies, which share data. Credit provided is only used for inventory purchases from FMCG companies, and credit lines are managed through mobile phones.

In South Africa, Nomanini collects data from retail point-of-sale devices for prepaid services or bill payments, such as airtime and electricity. It analyses transactions and unlocks credit flows from financial institutions. Similar to FMCG and accounting data collected, they can calculate the risk and connect traditional retailers with financial service providers for loans and credit.

Diversify- online-to-offline (O2O) strategy

Ecommerce start-ups are also helping traders diversify their income by offering a range of services to grow their businesses. In Asia, ecommerce platforms see traditional traders and the offline space as an important channel. They trust that traditional traders’ large footprint and close relationships with customers can help connect more shoppers to the online world, even if they cannot make online payments or have never participated in ecommerce before.

Ecommerce platforms can enroll traditional traders to become online-to-offline (O2O) agents. Shoppers without internet access, or those who do not feel comfortable making purchases online, can visit their local traditional trader, place an order, and pay for it in cash. Stores earn a commission for each order.

Reliance plans to create the world’s largest online-to-offline ecommerce platform in India called New Commerce, and it is connecting traditional traders or kirana stores to its network. The retailer is digitising retail stores and aims to expand its retail presence to over five million outlets in India by 2023. JioMart, Reliance’s ecommerce platform, has already launched in more than 200 cities, leveraging Reliance Retail’s store network and partnerships with kirana stores across 20 cities.

Amazon is expanding its local delivery system in India with its “I Have Space” (IHS) program, which includes more than 28,000 traditional traders or kirana stores in close to 350 cities. Amazon partners with traditional retailers to deliver products to customers within a 2 to 4-kilometre radius of their store. On average, Amazon India’s store partners deliver between 30 and 40 packages a day, earning a fixed amount per delivery.

African startups are also exploring partnerships with traditional traders. Copia Global, for example, operates a network of over 5,000 agents in Kenya, many of whom are traditional retailers. These agents earn commissions by aggregating orders and serving as pick-up points for remote, unbanked, and often unconnected customers in rural areas of Central Kenya.

Diversify – Support services

Selling digital goods, such as airtime, and providing financial services creates additional sources of income, increases foot traffic and profits. In Egypt, Fawry provides customers with utility and bill payment services through terminals located at service points such as traditional retailers. In South Africa, Flash and, as previously mentioned, Nomanini offer digital and payment services.

Kenyan fintech start-up Tanda connects traditional retailers, or dukas, to financial services through its digital platform. The start-up provides access to digital financial services, such as airtime, utility payments, banking and insurance services for their customers. Tanda allows traditional retailers to sign up as banking agents, providing cash-in and cash-out services, and extends unsecured credit to its agents. With only 3,500 ATMs across Kenya for a population of 50 million, the East African nation lacks access to cash services.

3. The future of traditional retail

As a result of structural and infrastructure challenges such as the absence of modern malls, transportation issues, currency fluctuations, and unreliable electricity supply, traditional retailers remain an integral part of the retail landscape.

Traditional retailers are often the heart of a city, and a day is seldom complete without a visit to the local trader or open market. Their close social connections, community trust, and significant presence make them a desirable partner for many industry players. Supporting traditional traders by financing, modernising, and digitising their operations will not only benefit the traders themselves, but also the wider community.

Framework and Digitalisation

For a complete framework and steps to design and develop a route-market plan, see our Route-to-Market presentation (220+ slides). It discusses each step in analysing, designing, piloting, and scaling a route-to-market model to service micro-retailers, and includes 18 tools to analyse the market and design processes. The presentation also includes 35 case study snapshots of companies and startups in Africa, Asia and Latin America — digitalising informal retailers in emerging markets.

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