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TFN #123 | January 16, 2022

This week Deepankar Rustagi, Co-founder and CEO of OmniRetail, takes over The Flip Notes.

A recurring theme here at The Flip is the notion that the big winners in the African tech ecosystem will be those who are building most appropriately for the realities on the ground and the characteristics of the markets in question. It’s these realities that have led to the divergent models of B2B ecommerce versus formal, centralized retail.Yet despite the major differences between these two retail models, both use the same metric - gross merchandise value (GMV) - to measure themselves.

In today’s edition, Deepankar argues that in order to transform Africa’s traditional trade, B2B ecommerce companies need to help retailers profitably scale from owning one store to two or more. And that starts with measuring growth differently. The B2B commerce industry should look at revenue per retailer instead of GMV.If you’re already subscribed, thank you! If you’d like to subscribe, please do so here.

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Rethinking Metrics in B2B Ecommerce

Out with the old, in with the new.

As we begin a new year in earnest, it’s time for the African B2B ecommerce industry to challenge conventional ideas.

We can start with GMV.

Ecommerce businesses globally are measured by gross merchandise value (GMV), the total aggregate value of goods sold.

As a metric to measure B2C ecommerce, GMV makes sense. Margins are high, ranging on average from 40-60 percent. This partly stems from centralized supply chains that use economies of scale to lower fulfillment and logistics costs. A classic example is Amazon.

Since the vast majority of ecommerce businesses globally are consumer-facing as opposed to B2B, the trend has been to evaluate all companies based on GMV. It is no different in Africa’s B2B ecommerce industry. But, the focus on GMV, in the context of Africa’s informal retail, is myopic.

Unlike Amazon, Walmart, or closer to home, Jumia, our customers are not individuals, but informal retailers and small businesses. While informal retailers collectively sell 90 percent of all goods in Africa, they are individually shrinking in size. In 2022, retailers faced unprecedented headwinds. High inflation has put pressure on consumer spending, while weak currencies - in Nigeria, the Naira slumped 37 percent against the Dollar - led manufacturers to increase the costs of their goods. Retailers have also been hit by higher transportation costs given the surge in diesel prices. In Nigeria, diesel prices have soared by 200 percent.

If retailers are to scale their operations and become profitable, they need incredible merchandising, a solid supply chain, and access to credit. A diverse product selection (merchandising) drives higher average order value (AOV) from their customers. When retailers have access to affordable credit to purchase inventory, they increase their margins and prevent stockouts - a particular problem rife in African retail - to avoid lost sales. Rock solid logistics that near just-in-time delivery of goods with broad selection juice the turnover of goods.

If B2B ecommerce is going to succeed in transforming Africa’s traditional trade, we need to help retailers scale from owning one store to two, three, four. And to measure whether we’re helping retailers to grow, our industry should look to revenue per retailer instead of GMV.

The limitations of GMV

In Africa’s B2B ecommerce, we pay too much attention to GMV as a metric. GMV is a measurement of top-line growth; it does not give insight into the margins, and thus profitability, of B2B ecommerce companies. As margins are low in FMCG distribution, ranging from 3-10 percent, B2B ecommerce players that aim to be GMV machines must sell absurd volumes of goods. This is predicated on the ability to streamline costs as they scale. Yet, this can be too long of a journey for low-margin retail businesses to endure. Given the high cost of logistics and low reliability, retail businesses have exited African markets, like Nigeria, as they can’t bear the losses. They never hit the scale needed to generate superior returns. The operating environment in African markets is simply too hostile to import low-margin businesses from elsewhere.

Given the incentives in our industry to focus on GMV, B2B ecommerce companies shield retailers from high fulfillment and last-mile delivery costs through subsidies and discounts. It is a common industry trend that companies offer steep product discounts or subsidize the cost of logistics to boost retailer numbers. As retailers are price-sensitive, this strategy works in the short term to juice GMV. But, it leads to high losses for companies and it is contingent on a company’s fundraising war chest.

However, it does not translate into retailer retention. GMV without insight into retailer retention verges on being a vanity metric. As ecommerce companies compete with each other for retailers, by discounting goods, retailers jump from one platform to another in search of the cheapest prices. This triggers a race to the bottom in the industry. If ecommerce startups do not solve the broader problems facing retailers, they are unlikely to remain loyal. Strong top-line growth with low retailer retention (30 percent or lower) and negligible wallet share is not a sustainable business strategy.

The shutting down of Wabi illustrates the risks of a hyper-focus on GMV at any costs. Wabi, an ecommerce platform backed by Coca-Cola, announced in January that it was closing its operations in five African markets, including Nigeria, Kenya, and Egypt. To boost its GMV, the company heavily discounted products to drive adoption in the supply chain. Yet, it had no visibility into the last mile, and it discovered that its retailer numbers were fake. In reality, sub-distributors bought and rotated the products without selling to retailers. Despite its deep pockets, even Coca-Cola could not sustain the losses, and after a year and a half, shut Wabi down.

The nuances of retailer profitability

Revenue per retailer - or the profit a B2B ecommerce company makes by servicing a retailer in a month - is a more salient industry metric than GMV.

If a B2B ecommerce company is focused on growing its profitability per retailer, it can’t lean on inventory discounts or logistics subsidies. Rather, it must find the right retailers - those small businesses that can use the tools to scale - who will be loyal to the business in the long term.

To drive retailer loyalty, B2B ecommerce has to help retailers scale their business and become profitable.

While we measure revenue per retailer, the outcome we’re aiming for is retailer scalability.

If retailers are to scale their stores, they need help with:

• Procurement: inventory and logistics
• Working capital to stock up on the right variety of goods
• Merchandising (promotions, manufacturer discounts, SKU recommendations, inventory management)

Seamless procurement has two defining characteristics: inventory and logistics. Retailers need diverse inventory, made up of a broad selection of SKUs. This point often gets overlooked in conversations on African retail. In a typical supermarket in the US or Europe, a shopper is bombarded with choice – they can pick from tens of dozens of cereal brands, with different flavors, sizes, and nutritional profiles. Contrast this with the shopping experience for Africans: there is a dearth of choice. Informal retailers carry a minimal range of SKUs. In Nigeria, the average retailer keeps only 60-100 SKUs on their shelves.

Limited inventory caps retailers’ profitability in two ways. Firstly, they lose out on sales. If they lack a product, the customer will go elsewhere. Or, retailers miss out on opportunistic sales (impulse purchases). It also limits the AOV of their customers. To increase their margins, retailers need to keep a range of low-margin, fast-moving goods and slower-moving, higher-margin goods. For example, in Nigeria, an informal retailer should equally stock popular food staples, like Indomie noodles, Gino tomato paste, and cooking oil, but also more expensive luxury items for mass-market buyers, such as personal care products likre diapers and sanitary pads.

Once they’ve placed an order, retailers need their goods delivered at their doorstep quickly and reliably. In large African cities, like Lagos, last-mile delivery is rife with complications. But ecommerce startups have to deliver to retailers within 48 hours. If deliveries are delayed, retailers will go to the wholesale market to buy their goods to avoid empty shelves. And, startups will have to process returns.

Retailers also need access to credit. Globally, retail companies can run on negative working capital, but due to a lack of data, retail in Africa is dependent on a retailer’s working capital. Yet, operating in the informal sector, retailers are unable to obtain loans to purchase goods, much less invest in bigger ticket items like generators, refrigerators, and freezers. Even relatively small credit lines for 50k Naira can have a massive impact on the retailers’ bottom line, boosting margins and increasing turnover of volumes.

With detailed insights into retailers’ operations - inventory, store management, and revenues - B2B ecommerce startups are uniquely positioned to lend to the sector. Indeed, lending is becoming a mainstay in African B2B ecommerce with startups offering goods on credit with Buy Now, Pay Later (BNPL). Credit in the form of goods carries less risk of default than cash loans when providing working capital for an informal business.

Lastly, retailers also need help with merchandising to boost their sales, and in turn, increase profitability. At its core, merchandising is a diverse product selection. But it is also concerned with the presentation and promotion of goods to increase sales with marketing strategies, display designs, and competitive pricing, including discounting. Although informal retailers might want to offer a diverse product range to their customers, they do not want to take the risk buying inventory that might not sell. This is where B2B ecommerce startups step in: they can advise retailers on what SKUs to purchase and their retail price as well as offer brand-sponsored promotions.

Decentralization: the only way to scale African retail

If the B2B ecommerce companies are to drive retailer growth, they have to adopt a decentralized supply chain.

In the US or Europe, where retail is highly organized, large retailers, like Walmart, Amazon, or Costco, build centralized supply chains to streamline fulfillment, reduce costs, and scale. With their immense purchasing power, they are able to negotiate better purchasing agreements with suppliers to pass those costs on to customers, fuelling sales.

But, in Africa, centralized supply chains are a handicap, not a strength. Even if a company has its own warehouses and logistics fleets, it still has to contend with a lack of visibility on the stock in the supply chain, poorly developed road infrastructure, paralyzing traffic, and long distances to the last mile.

With large centralized infrastructure, companies don’t gain the efficiencies that stem from economies of scale. While land located on the periphery of large cities is cheap to build massive fulfillment centers, the costs of last-mile delivery are so prohibitively expensive that it eliminates any cost savings gained from centralizing inventory. In Africa, the cost of logistics is three to four times higher than the world average, according to The Economist. This increases the price of goods by 75 percent.

Ecommerce startups that build centralized supply chains face challenges in scaling as they are unable to address VUCA (volatility, uncertainty, complexity and ambiguity) in the traditional trade. An asset-heavy model, owning warehouses and a logistics fleet, is capex-intensive and puts pressure on take rates. In African FMCG, where margins are razor-thin, startups have to increase drastically their volumes (GMV) to generate revenues. This is often a losing battle. The inability to address VUCA, and resulting high costs, have caused startups in emerging markets to shut their doors, including Airlift in Pakistan and Capiter in Egypt.​

More importantly, an asset-heavy model limits the ability to which ecommerce startups can focus on the retailer. As the costs of last-mile delivery are too high, it is more effective to sell to bulk buyers (wholesalers) who can purchase higher volumes at lower marginal costs. Wholesalers who can purchase $5,000 worth of goods are easier to service than a retailer who buys on average $68 (50k Naira).

When it comes to Africa, conventional wisdom is turned on its head: retail needs a decentralized supply chain to scale operations. B2B ecommerce startups have to go hyper-local.

If B2B ecommerce startups are to service the retailer, they need to outsource their logistics to third-party logistics players (3PL) and bring distributors onto their marketplace. In other words, they need an asset light model. A fulfillment network made of smaller warehouses allows B2B ecommerce platforms to distribute inventory closer to customers, expand reach, while cutting shipping costs and transit times. By assigning orders to 3PL partners by proximity to the retailer, startups can also guarantee faster delivery times.

Digitizing the supply chain

But the critical role that asset-light models play in African retail goes beyond cost savings.

This point is often lost when we debate whether B2B ecommerce players should own or outsource their infrastructure.

Under an asset-light model, B2B ecommerce startups are digitizing the existing supply chain. This has huge ramifications for African retail and is the only way we as an industry can scale it. The biggest shortcoming of an asset-heavy model is the limitation that it places on what a B2B ecommerce can become. It’s the difference between a solid company valued at $200M and a unicorn. Because as B2B startups build their own supply chains, they only have visibility on what they distribute, which is a tiny sliver of Africa’s massive $680BN traditional trade.

However, startups that digitize the existing supply chain have greater insights into inventory at the distributor level and demand at the retailer level. By stitching up fragmented supply chains, B2B ecommerce platforms help all supply chain players from manufacturers to distributors to logistics players to make more money by connecting them to retailers. They transform into digital backend infrastructure on which a large chunk of the traditional trade can operate. This delivers more value to the trade as opposed to being a distributor that competes with the existing trade.

By digitizing the existing supply chain, ecommerce players gain unparalleled insights into online and offline inventory - who has what goods where? - and retailer sales. On top of this granular supply and demand data, B2B ecommerce players can layer embedded finance on top, processing transactions and offering credit.

This in turn stimulates powerful network effects. As double-sided marketplaces, B2B ecommerce startups have to onboard distributors to build their inventory and geographic presence. This helps cut fulfillment and delivery times. In tandem , they need to increase retailer retention. As more retailers order through online platforms , distributors are incentivized to join as well to increase their customer base. It is a virtuous cycle that allows for scaling.

Transforming into backend infrastructure to power trade

In the first year of operations we realized that if we were to transform into backend infrastructure that drove the growth of informal retailers, we had to tie up our different supply chain solutions into one integrated platform. Last year, we restructured the business into an umbrella company, OmniRetail, that was made up of three different arms:

• OmniBiz: a procurement platform on which retailers can order over 900 SKUs
• OmniStore: a POS solution that provides retailers access to manufacturer-backed consumer promotions at their store
• Mplify – a Distributor Management Software (DMS helping FMCG distributors increase sales and efficiency

We also layered our embedded finance solution on top. Retailers can pay for goods through the OmniBiz wallet, or access credit in the form of goods.

This has helped us to add value-added services to our revenues from gross merchandise delivered: payment processing, loans disbursed, and insights for brands.

One of the biggest changes we made was with our solution for distributors. Before the reorganization, OmniBiz and Mplify were siloed. Mplify was originally a sales force automation tool for multinational manufacturers, which struggled to gain visibility into their distributors’ inventory and stock in trade (what distributors give to their sales agents). By digitizing their distributors’ operations, manufacturers could plan their production to avoid stockouts and reduce shrinkage (theft being the big problem).

Last year, we made a pivotal switch: we enabled the distributors to generate both online orders and manage their on-field sales on the same platform. This means distributors could choose to generate orders from our network of 65K+ active retailers.

What’s even more exciting: our visibility into the flow of goods - both online and offline - in the supply chain grows as we increase the number of distributors on our platform.

As we grow our distributors and retailers simultaneously - a requirement in a double-sided marketplace - we can facilitate transactions in the supply chain even when we do not originate the order through OmniBiz.

Distributors make sales one of two ways. Either a customer comes into the store to place an order or they dispatch agents (sub-distributors) into the field. While a retailer might only procure 10 percent of their goods through OmniBiz, she will order the remaining 90 percent directly from the distributor or his agent. But, they can pay the distributor and their agents through our wallet, eliminating the need for cash. As Nigeria embarks on demonetization and has limited weekly cash withdrawals, we expect that more retailers will pay digitally for goods.

Fueling retailer growth

This year, we’re on track to onboard another one thousand distributors, bringing our total to three thousand on Mplify. This will allow us to capture 25 percent of Nigeria’s total FMCG flows which we can monetize through payment processing and brand insights. We can even collaborate with other B2B ecommerce startups. The asset-heavy startups who are focused on GMV can grow their volumes by registering as a distributor on Mplify to generate orders from our network of retailers.

By building backend infrastructure that provides procurement, logistics, merchandising support, and credit to retailers, B2B ecommerce can have a dramatic impact on retailers’ profitability. We’ve seen great traction in our retailers’ growth. While we do not have granular data on their profits post expenses, the overall trend in revenues, basket sizes, and retention are promising. In Nigeria, the average retailer has increased their basket size and is ordering more often, leading to higher revenues. In June 2020, retailers placed one order per month with an average order value (AOV) of $95. In August 2022, average basket sizes increased 3x to $285. Over a six-month period, retailer spending retention has soared by sevenfold. Our retailer retention stands at 70 percent.

Instead of B2B commerce companies becoming GMV machines, they should plan to be the backend technology and process partner to the most successful retailers in Africa. They should help retailers turn into chains of super retailers. For inspiration, we can look to 7-Eleven in the US, Jiomart in India, and AlfaMart and Indomart in Indonesia. This is how we can truly transform Africa’s traditional trade. And it all starts with the industry measuring our growth differently.

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