Investing in Africa: Successful Route-To-Market Through Informal Retail

February 2022

Despite the growth of modern retail, the informal retail channel continues to reflect the typical shopping experience of a large proportion of consumers across all income groups in Sub-Saharan Africa and will continue to do so in the future. The report will provide insight into this retailing landscape, looking at consumer purchasing and payment habits and at how the informal market plays a crucial role in any route-to-market strategy.

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Key Findings

Sub-Saharan Africa’s diverse frontier markets offer many opportunities

The diverse frontier markets of sub-Saharan Africa present opportunities across a broad range of industries and product categories. The region's growing middle-income and sizeable low-income populations create numerous and diverse investment opportunities for forward-thinking investors. In addition, the low penetration of modern retail suggests significant investment and business opportunities, even more so when rapid urbanisation and rising household incomes are considered. As a result, consumer market growth prospects are expected to create opportunities for retailers and consumer-orientated businesses alike.

Informal retailing is here to stay

Despite the growth of modern channels, informal retail channels reflect the typical shopping habits of many sub-Saharan African consumers across all income groups. Informal channels developed as a result of the history, traditions and trading preferences of consumers in the region. Additionally, this channel has adapted to local consumers' purchasing habits, purchasing power and product preferences. Understanding how informal retailing channels operate can aid in developing a regional channel distribution strategy. In addition, understanding how and where a product is consumed, as well as the various types of informal traders and their specialities, enables the development of more targeted product offerings, which is necessary for developing an effective regional route-to-market strategy.

Affordability is key in developing an African strategy

Affordability remains a critical competitive advantage in the region. The final link in the supply chain, which is frequently fragmented and complex, determines the price. Within the informal retailing market, price competitiveness is achieved by repackaging products in portions that meet the demands of consumers with limited disposable income. Additionally, bargaining power, credit-based payment flexibility, trust, loyalty, credit sales, and proximity to consumers all contribute to the attractiveness of informal markets. Companies entering the region are increasingly offering value for money basic formats. Therefore, businesses must adapt their product portfolios and distribution strategies to capitalise on these new channels of opportunity or devise innovative alternatives.

Digitalisation provides opportunity to reach more consumers

E-commerce is thriving in the region as a result of investments in innovative digital business models that address specific customer needs in both formal and informal environments. Digitalisation is enabling businesses and consumers in sub-Saharan Africa to access new retail and payment opportunities as a result of improved internet connectivity and rising penetration of mobile phones. Mobile technology is particularly transforming the region's delivery of essential services. As a result, tools that aid informal retailers in growing their businesses, such as integrating new digital services with established distribution networks, are required.

Innovative distribution models and partnerships are key for a route-to-market strategy

Innovative distribution models are critical for reaching and promoting new products to sub-Saharan African consumers, particularly those at the bottom of the pyramid (BOP). Partnerships with established local partners which are connected throughout the value chain can also be a cost-effective way to expand market presence. When combined with adaptive supply chain and logistics strategies, this can assist businesses in overcoming distribution challenges.

Scope
Key findings (1)
Key findings (2)
Retailing in sub-Saharan Africa is characterised by a multitude of channels
Modern retail is expanding in line with economic development and urbanisation
Sub-Saharan Africa's rapid economic growth makes it a popular retail investment destination
Despite the growth of modern retail, traditional and informal channels remain important
Pervasive in African cities, informal trade ranges widely in size, structure and permanence
The downside to informal retail’s proximity to customers is its low bargaining power
Informal sector's contribution to GDP reflects informal retailing's penetration
Authorities across the region are attempting to increase control and formalise the sector
Packaged food leads value sales of fast-moving consumer goods in the region
Large portion of consumers’ monthly grocery spent through traditional and informal channels
Fresh foods are the most purchased food across all income groups
Informal retailers also offer a wider range of packaged and processed foods
Repackaging provides price competitiveness
Innovative distribution models are key to reaching African consumers
Partnering with established locals along value chain can expand market presence
Mobile money is emerging as a powerful payment tool for informal retailers
Informal retailers are playing a key role in expanding financial inclusion in the region
Sokowatch: s tocking via intermediary support
Fan Milk: leveraging local partnerships to expand distribution network
Nomanini: providing inventory needs via unsecured stock loans
Copia: b ridging the last mile via catalogue agents
By knowing where and how products are consumed, businesses can customize their offerings
Key takeaways and how to win
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Retailing

Retail is the sale of new and used goods to consumers from a business for personal or household consumption from retail outlets, kiosks, market stalls, vending, direct selling and e-commerce. Retail is the aggregation of Retail Offline and Retail E-Commerce. Excludes specialist retailers of motor vehicles, motorcycles, vehicle parts. Also excludes fuel sales, foodservice sales, rental transactions, and wholesale sales (e.g. Cash and Carry). Sales value excluding or including VAT/Sales Tax. Retail also excludes the informal retail sector. Informal retailing is retail trade which is not declared to the tax authorities. Informal retailing encompasses (a) sales generated by unregistered and unlicensed retailers, i.e. retailers operating illegally, and (b) any proportion of sales generated by a registered and licensed retailer that is not declared to the tax authorities. Unregistered and unlicensed retailers operate predominantly (although not exclusively) as street hawkers or operate open market stalls, as these channels are harder for the authorities to monitor than permanent outlets. Activities in the illegal market, which is usually understood to refer to trade in illegal, counterfeit or stolen merchandise, are included within our definition of informal retailing. Activities in the “grey market”, which is usually understood to refer to trade in legal merchandise that is sold through unauthorized channels – for example cigarettes bought legally in another country, legally imported, but sold at lower prices than in authorized channels – will be included as informal retailing if no tax is paid on sale by the retailer. However if the retailer pays tax – for example on cigarettes bought legally in another country but sold at a lower price than standard – the sale is included within formal retail.

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