The case for investing in the digitalisation of Africa’s informal retail supply chains

Recent years have seen the emergence of numerous start-ups digitising the informal retail sector in African countries. Platforms like Wasoko (previously Sokowatch), TradeDepot, MarketForce and Twiga all offer versions of linking small shopkeepers with merchandise suppliers through apps and other digital channels. Many of these players also provide retailers with credit lines to enable them to access inventory and pay back in instalments as they sell on to their own customers.

Omnibiz, founded in 2019, is another entrant in the B2B e-commerce space. It’s a network of networks for retail supply chains in Nigeria and Ghana. Omnibiz acts as an infrastructure layer that connects supply chain players (from manufacturers to distributors to logistics providers) to the retailer at the last mile. The start-up is differentiated from some other players in that it digitises and coordinates the existing supply chain instead of building its own logistics operations.

Omnibiz recently closed a US$15 million pre-Series A fundraising round – structured as $5 million equity and $10 million debt – led by Timon Capital. Other investors that participated include Ventures Platform, Lofty Inc, Chapel Hill Denham, Chandaria and Musha Ventures. In the below article, Nikos Katsaounis and Chris Muscarella, partners at Timon Capital, make the case for the digitalisation of African informal retail supply chains and explain why they chose to invest in Omnibiz.

Why African informal retail?

A decade ago, pundits spoke of a new dawn in African retail. In 2010, Walmart entered sub-Saharan Africa by acquiring South Africa’s Massmart. Three years later, Carrefour announced its expansion into the continent.

Despite representing a mere 4% of retailing value in sub-Saharan Africa, it appeared as though modern retailing was starting to take hold on the continent. Large retail is a combination of logistics, pricing power, brand, and returns to scale – if the model works well.

Fast forward to 2021. Shoprite, the South African retail chain, announced it was pulling out of some of its African markets to double down on its domestic operations. A local consortium of investors bought its Nigerian subsidiary, which included 24 stores. Reporting 2-3% cash flow margins, Shoprite didn’t have much room for error in Nigeria, a difficult operating environment with challenging logistics.

Shopping malls will undoubtedly exist in African markets. But they will cater to the affluent. Or, remain an aspirational destination where people socialise and take selfies. The real market is informal retail. While we expect some formalisation to happen over time, for the vast majority of Africans for quite a while, retail will continue to look like this:

These mom and pop shops – which go by different names depending on the country, like duka (Kenya), spaza (South Africa), oja (among the Yoruba of southwestern Nigeria) or diallos or mauritians (Côte d’Ivoire) – are the face of retail.

Though there is variability in size, the average retailer is small. In Nigeria, a typical retailer sells 60-100 SKUs from a 20-50 m² store. On average, their turnover is 250,000 to 500,000 naira per month and makes about 15% profit (that would be about $375-$800 per month in topline given current USD/NGN rates).

Despite their small size, they are a mighty force in aggregate, driving 70% of food, beverages, and personal care item sales across the continent. It is estimated that there are 2.5 million small retailers in Africa. They generate $1 trillion in sales annually.

The retailer is a fixture of local neighborhoods. In Nigeria, the average retail shop is located 30-100 metres from houses, catering to 100-150 families. A family visits a retail shop two times per week to buy the necessities: eggs, bread, biscuits, soft drinks, cooking oil, semo, Golden Penny spaghetti, Indomie, Milo, and powdered milk. In provincial cities or rural areas, people visit retailers on a daily basis as they use their daily wages to buy food for that day.

As a neighborhood institution, retailers enjoy unparalleled trust from their customers. And, given their access to the consumer, they are the most valuable player in the retail supply chain. Until now, they have not been treated as valuable because there weren’t good technology-enabled ways to work with all of them in aggregate. Fundamental rule of technology products: the closer you can get to the consumer at the end of the value chain, the more you can dictate the economics of the value chain to everyone else.

Retailers face immense challenges

Despite their paramount importance in supply chains, retailers face immense challenges in scaling their businesses (hence the average topline numbers of

• Procurement: They have to travel to wholesale markets to buy their goods. They lose income as they have to close shop for a day. They also pay high transport costs. Yet, once they arrive at the market, they might only be able to buy two-thirds of the SKUs they need. This is because wholesale markets have limited product availability because manufacturers can’t accurately match supply to meet demand.

• Stockouts: Due to the challenges of buying inventory, retailers often run out of their most popular items. (On a separate note, eliminating stockouts is also a major revenue opportunity for manufacturers. Many estimate that they could increase their revenues by 50-100% if they could solve stockouts.)

• Inventory: They also keep a limited inventory because they don’t know what products will sell quickly. So, even though there might be demand for more “luxury” higher margin consumer goods (like a Unilever shampoo or branded baby diapers), retailers wouldn’t know to stock them. No retailer wants or has the ability to tie up precious capital in inventory.

• Working capital: As small informal businesses, retailers don’t have access to credit, so they have to make due with limited working capital. On average, retailers sell goods worth 75,000 naira per week (current parallel market exchange rates have fluctuated ~680-700 NGN to 1 USD)

Not only that, retailers are vulnerable to price hikes. 2022 has probably been the most difficult year yet. In July, Nigeria’s inflation rate climbed to 19.64%, a 17-year high.

Food prices have soared due to widespread inflation:

And soaring diesel prices – which have surged 200% in Nigeria – are leading to higher transportation costs.

Given their existing place in supply chains as the small fry, retailers are the most vulnerable to price increases. Whereas distributors will increase the cost of goods, retailers are reluctant to pass on those costs to their customers for fear of hurting sales. In response, they often reduce their orders.

If these problems were solved, Africa’s retailers could scale their business, generate more profit, offer a better experience to their customers, creating a retail industry that was orders of magnitude bigger. The potential of retail in Africa has barely scratched the surface. The sector contributes $2.6 trillion to Africa’s nominal GDP. If you increase retailers’ profitability by three to four fold, it is not unreasonable that the industry could double in size to $5 trillion. Those are big numbers.

Let’s dig deeper: the challenges of the retailer point to deeply broken retail supply chains.

Broken supply chains

Africa’s retail supply chains are highly complex. They depend on multiple layers of intermediaries to deliver goods to the consumer at the last mile. For a can of Coke or a bar of Unilever soap to reach the retailer at the last mile, it passes through a layer of key distributors who pay for the goods in bulk and resell down the chain to many wholesalers. They in turn sell the goods to smaller wholesalers and agents. For most, it’s a cash-and-carry relationship as there isn’t clear data to underwrite credit.

The reality on the ground looks messy:

These convoluted supply chains, which depend on layers of redistribution, result in many problems (we already elaborated on the ones facing retailers). By far, the biggest one is: last-mile delivery is freaking expensive.

Logistics adds 75% to the cost of goods in sub-Saharan Africa. For the typical delivery service in Lagos, it is a genuine obstacle course to deliver goods to retailers. They get stuck in gridlock; they get detained by traffic cops; their vehicles suffer from breakdowns. And, everything becomes twice as hard in the rainy season!

Logistics players can struggle to make enough deliveries to pay off the high costs of fuel and turn a profit. And the cost structure of fast-moving consumer goods (FMCG) distribution – razor thin margins – doesn’t allow much room for error.

This is why distributors have proliferated in African retail supply chains: they are in close enough proximity to retailers. Despite this, retailers still have to travel to market to buy their inventory, having to absorb high logistics costs to procure their goods. Retail needs to unwind the culture of cash and carry if it is to scale in a meaningful way.

Demand and supply is disconnected

We’ve already talked about the retailers’ unique challenges, but other FMCG players are equally frustrated by fragmented supply chains.

For FMCG manufacturers, it is a constant headache not having access to the end consumer:

• It’s difficult to develop new products since they’re unable to do market research.
• They can’t pass on promotions, or discounts, to move inventory because distributors will absorb them.
• They have no visibility on stock in trade, what inventory is available in the market, to guide their production. This partially drives stockouts.

To gain access to the end consumer, the multinational FMCG manufacturers rolled up their sleeves and built their own distribution channels. Few FMCG manufacturers are able to handle distribution themselves as it is extremely capital intensive. There are the costs of warehousing, logistics (vehicles, fuel, and maintenance), and staff, ranging from distributors to marketing and sales teams.

Only the giants – Nestle, Unilever, Coca-Cola, and the likes – have cracked distribution to gain access to the retailer. Yet, even with their own supply chains, built over decades and costing millions of dollars, manufacturers still aren’t able to go entirely direct to retailers. It is simply too expensive to reach 200 million Nigerians at the last mile.

Able to only partially reach the retailer at the last mile, the FMCG manufacturers still end up selling their goods via the large wholesale markets. In Nigeria, for example, only 30% of total FMCG goods are sold directly to retailers. The vast majority, 70%, are sold via wholesale markets.

Coca-Cola or Unilever have the deep pockets to pay for high distribution costs – even though it is far from a perfect system.

But what would African informal retail look like if there was a solution that provided rock solid logistics and provided visibility into the whole chain by connecting supply and demand? How much bigger can the $1 trillion informal retail sector be if all the frictions in the supply chain were removed? How much more money can retailers, and all supply chain players, make?

Enter Omnibiz.

Why Omnibiz

Deepankar Rustagi: a phenomenal operational CEO

First, we invested in Omnibiz because of Deepankar Rustagi, the CEO/founder, and his team of FMCG experts. Some founders are master storytellers, excelling at fundraising, but they’re not great operational leaders. That can work for some businesses. When you’re dealing with massively fragmented markets, thin margins, and genuinely hard problems that is not the right kind of founder.

Deepankar is a phenomenal operational CEO. He has brought his 15-plus years of African FMCG experience into Omnibiz’s products, strategy, and business model. It truly is the magic of the company. And people in the FMCG industry have noticed – the depth is in the cap table. Deepankar’s insights were earned working on strategy and digital transformation with the Tolaram Group (makers of Indomie).

Bottoms up: starting with the retailer

Omnibiz realised you have to make the retailer your first point of contact, your first customer. It’s the retailer who drives tech adoption back up the chain. They are the market pull. When retailers start ordering inventory online, the market will have to change and adopt technology. They have no choice. Pushing technology from the top fizzles out fast.

This bottom up approach – starting with the retailer – is in stark contrast to how the FMCG sector has operated in the past. For example, a major Nigerian FMCG manufacturer, gave out tablets to its distributors to track their sales, but they weren’t incentivised to use it. The technology was never pushed deeper down the value chain. The real question on serving the retailer is retaining them. In other African markets, retailers hop between B2B e-commerce companies looking for the lowest price and the cheapest financing – as investors, we don’t love races to the bottom on pricing power.

The big tent: asset light and collaborative approach

So it could focus on the retailer, Omnibiz adopted a third party logistics (3PL) model. Not to throw too much shade, but we believe that when a company says everything is a priority it just means they don’t know what direction True North is yet. In this B2B e-commerce space, there’s a lot of experimentation around payment processing, trying to become a bank, and so on – all of those things are very hard businesses in their own right. And various players are taking them on because their margin structure relative to gross merchandise volume (GMV) is terrible. We are deeply appreciative of Omnibiz’s clarity on focusing on the value to be unlocked by just having the goods in the right place at the right time and absolute clarity on their primary customer, the retailer. Omnibiz brings on logistics providers and distributors, who both own their fleets and warehouses, onto their platform. Omnibiz coordinates the deliveries, but doesn’t actually do them.

This has a massive impact on cash flows and margins. A first party logistics model (1PL) typically yields a 2-3% take rate on the total GMV, while a successful 3PL model produces margins that are 2-5 times better. What’s truly exciting is that the 3PL model massively decreases the capital needed to scale. More orders from retailers leads to more deliveries, attracting logistics providers who are looking for customers vs. having to raise more and more capital to continue to build your own warehouses and delivery fleets.

By being asset light, Omnibiz not only saves on costs, but it positions itself as an ally to supply chain players, especially distributors. Traditional trade is an enormous source of employment in sub-Saharan Africa, providing up to 80% of jobs. Large-scale distributors have been in the business for decades, with the business being passed down in the family, and are some of the heroes of mid-sized businesses on the African continent with top line revenues in the millions and tens of millions.

Omnibiz doesn’t seek to replace distributors; it wants them to make more money. Omnibiz deepens their market by connecting them to new retailers, suggesting new sales of higher margin products, and increasing their inventory turnover and cash flow cycle. This keeps stability in the sector. Manufacturers like it too as they are not keen to jeopardise their distributor relationships which they’ve spent decades building.

Omnibiz’s model is yielding outstanding results. Distributors are increasing their inventory rotation velocity by 50%, while logistics partners have boosted their deliveries by 200%. Emmanuel Mmerichukwu, owner of Ebebiz International, a FMCG distribution company in Asaba, Nigeria, has tripled his rotations since onboarding with Omnibiz. When Stephen Ajeniya, owner of Stake Logistix Solution, joined Omnibiz in 2019, he was making 20 deliveries per day; two years later, his deliveries have increased to 150 per day. His number of employees have grown from two to 25 people. We believe in technology platforms providing a base layer for great entrepreneurs up and down the stack to build bigger businesses – and we are watching that happen in real time with Omnibiz.

How a network of networks drives digitisation of the supply chain

Lastly, Deepankar and the Omnibiz team have a unique worldview about digitising the entire value chain as a mission which has transformed Omnibiz into a network of networks. Thanks to this singular drive, he has given the company a broader perspective on deepening informal retail and making it profitable.

One result of this worldview was Mplify, a key differentiator for Omnibiz. Mplify is a salesforce automation platform that helps large manufacturers run their own distribution and logistics networks side by side with Omnibiz’s network.

Plenty of folks have tried to build salesforce automation software for the FMCG sector. And, none of them really worked out. These types of tools don’t work well when you try and push them down from the top, because the incentive structure breaks down. A Unilever, or a Flour Mills of Nigeria, can force their super agents to use a software product, and they push it down to their agents, but why would people further down in the supply chain care? Tapping tablets is just more work for them.

These past failures showed the difficulty of making technology adoption stick. Where Omnibiz has succeeded is they brought their insights from building a product for retailers to the tools that manufacturers can use directly.

With multiple overlapping networks, Omnibiz is coordinating over a $100 million a month in movement of goods. Omnibiz, along with Mplify, are growing faster at scale than anyone else in Nigeria. That wouldn’t have been possible if it weren’t for Deepankar’s worldview on digitising the entire value chain – a mission that lets Omniz be asset light and collaborative in its approach.

Future of African retail

For the moment, Omnibiz is focused on removing the frictions in informal retail by solving for:

• Logistics
• Procurement
• Inventory management
• Capital (buy-now, pay-later)

This points to a big, ambitious vision: Omnibiz is positioning itself to become the enabling layer that transforms informal retailers into modern retail in sub-Saharan Africa.

If you look at modern retail in developed markets, what do Walmart, Costco, and 7-Eleven all have in common? They have great merchandising and rock solid logistics. With those fundamentals, they are able to build a brand that resonates with consumers and gains their trust across different geographies.

We’ve already seen that formal retail, Shoprite and the like, struggle to gain a foothold in some sub-Saharan African markets. The market rejects their cost structure – it doesn’t make sense.

But what if the neighborhood informal retailer offered its consumers a similar experience as Shoprite?

Provided the tools and capital, informal retailers would be able to create scale for themselves built on top of a platform like Omnibiz. They can expand to three to six locations in adjacent neighborhoods. That’s the exciting vision of Omnibiz. It’s why it couches its success in terms of its retailers’ profitability. This year, Omnibiz aims to increase its retailers’ revenues by 4X.

What the future will look like for Africa’s informal retail is still not clear. One interesting parallel to Omnibiz is mPharma which has provided logistics, inventory management, and drug procurement to its own and franchisee pharmacies.

Omnibiz could become the 7-Elevens of sub-Saharan Africa, rolling out its brand to partner retailers who use its tools to improve their services and scale. This would grow Africa’s traditional trade by orders of magnitude.

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