Courtesy of The Financial Times (subscription required), an article on how technology and a ‘few to many’ model are reinventing the informal sector’s supply chain:

Nancy Auma, a 35-year-old market trader, sits by a large mound of finger-sized silvery fish caught in Lake Victoria. Her stall is in one of the crowded thoroughfares of Mathare, a huge informal settlement in Nairobi, seven hours by bus from Kisumu, the Kenyan lakeside city where she purchases the fish. She must make this journey often — at the hefty cost of Ks3,000 ($26), thanks to rising fuel prices — to buy fresh supplies.

These repeated trips to Kisumu are a waste of time and money, Auma admits, but she lacks the cash flow to buy larger amounts of inventory.

Millions of small kiosk-holders such as her — selling products from rice and sugar to batteries, cleaning products and household supplies — suffer the same costs as they struggle to secure and pay for stock.

But a new wave of start-ups, including Wasoko — which tops the FT’s Africa’s Fastest Growing Companies ranking, compiled with data company Statista — is now trying to help informal shopkeepers by reducing friction in the retail supply chain. Others in the field, broadly defined as digitalising the informal sector, include TradeDepot, Sabi and Twiga — the latter focusing on fresh produce.

Wasoko started in Kenya in 2016 as Sokowatch, rebranding in March. It has expanded to 60,000 merchants in six countries, with Tanzania, Rwanda and Uganda added in east Africa and, more recently, Senegal and Ivory Coast. The company, which makes about $30mn of sales a month, recently raised $125mn in a Series B funding, valuing it at $625mn.

Daniel Yu, a California-born software developer and linguist, dropped out of the University of Chicago to start the business after winning a $10,000 entrepreneurial grant for his idea. The concept came to him during an overseas study period in Egypt, where he noticed stallholders struggling to get their inventory.

“The ordering and restocking for the store were quite difficult,” he says. “So I started working on this idea of ordering systems to connect the shopkeepers to suppliers.” 

The theory was that a Unilever or a Procter & Gamble could not profitably deliver, say, $10 of inventory to a stallholder, he explains, so they sell instead to a large wholesaler.

Wasoko, by bundling multiple orders from thousands of shopkeepers and stallholders and placing them with big manufacturers, would solve the economy of scale problem, getting the products quickly and cheaply to stallholders, while taking a slice of the transaction cost.

First, a prototype was built, enabling orders to be made on an app or via numerical codes sent from a “feature phone” — a basic mobile with limited additional capabilities. Then, Yu started cold-calling big companies, presenting a solution to their distribution problems. Eventually, Wrigley, the chewing gum manufacturer, decided to try the model in Kenya.

The original idea, says Yu, had been an asset-light model where software did all the heavy lifting. But he soon realised that Wasoko would need to get into the logistics business, organising distribution points and running a fleet of vehicles, mainly small vans.

“When you’re running out of rice, you can order from us another 25kg bag or whatever, and we will deliver it to that shop the same day and free of charge, in an average of about two and a half hours,” he says. Established customers can order now and pay later, generally a week after delivery.

If the proposition seems too good to be true, Yu says the key is what he calls the “few to many” nature of his business.

A relatively small number of suppliers provide the 300 or so goods he offers to thousands of customers. That is good for Wasoko’s model, though it does not yet solve Auma’s fish supply problem, as Wasoko does not deal in fresh produce.

In Nigeria, where TradeDepot operates along similar lines, the offering is 10 times larger, at 3,000 goods, reflecting the scale of Africa’s most populous country. TradeDepot serves 110,000 merchants, whose typical order, made two to three times a month, is $100-$150.

Like Wasoko, TradeDepot extends credit to shopkeepers, using the picture built up of order patterns and customer footfall to determine a credit rating.

Typical fees are a 4-6 per cent effective monthly interest rate, with loans normally paid back within two weeks, explains Onyekachi Izukanne, chief executive and a co-founder of the business.

“We have the thesis that the big problem is access to financial services,” he says. “There’s a broken supply chain and these informal merchants and small businesses have some access to inventory, but it comes to them expensive, and we want to rationalise that.”

Aubrey Hruby, co-founder of the Africa Expert Network and an investor in African start-ups, says she thinks the next wave (companies with market capitalisations above $1bn) will be those that successfully digitise the informal retailer supply chain.

“The problem with the informal market is not that it’s informal — it’s that it’s inefficient,” Hruby says. “I went down to see a big outdoor market in Lagos and saw this woman who was a big buyer of tomato paste. She used to buy her supplies from a friend down the street. Now, she compares prices to get the best deal. Her kids helped her use the app as she’s not that digitally savvy.”

Even if the trader pays in cash, says Hruby, the transaction can be digitised as it moves through the system. “This is certainly going to embed fintech, and it also gets at this other area,” she says, referring to the vast informal trading sector that is much bigger than the narrow middle-class interests targeted by many fintechs.