Empowering Micro-Retailers Through Digitization: Hype or Promise?

Richard Wright: The digitization of supply chain holds many benefits, both for the micro retailer and for the large corporates who manufacture fast moving consumer goods. 

Everybody wins if you can get a good supply chain, and an efficient supply chain, and reduce the cost to serve the poorest people. There's a price to pay for being poor. It's more expensive to distribute products to a poor rural community in sub-Saharan Africa than it is in a large urban center in the northern hemisphere. 

Lamis Daoud: Wherever you are, wherever you live, if I asked you to identify your closest mom-and-pop corner shop… you probably could… and fairly easily. This is true no matter where you are in the world, from a duka in Kenya to a tienda de barrio in Colombia or a kirana in India. 

Hello and welcome to this episode of inclusive finance frontiers, a podcast by CGAP. I’m your Lamis Daoud. 

In today’s episode, we’re focusing on mom-and-pop shops that sell fast moving consumer goods – or FMCG and how their lives are beginning to transform through digitization. 

In low-income areas in particular, corner shops, – also known as micro retailers – are absolutely vital to the communities they serve. A micro retailer that stocks FMCG can provide so many necessities for daily life: food, beverages, toiletries, cleaning supplies… you name it. 

And they should not be underestimated. Globally, small and informal retailers make up a 900-billion-dollar industry. That’s not to mention employment across small and informal retailers, which is harder to quantify.  

For decades, the financial inclusion community has struggled to provide traditional financial services to small shop owners, particularly in remote areas. Through it all, these small stores have held their place in the market despite the persistent inefficiencies in their supply chains and their limited access to finance compared with large enterprises.  

Today, a growing number of companies are digitizing FMCG supply chains to connect micro retailers more efficiently to various manufacturers, generate transactional data, and provide embedded financial solutions. Could this be a game-changer for micro retailers? 

Regular listeners to this podcast would know that for any topic we like to look at both the pain points and opportunities. To understand how to unlock supply chains for mom & pop shops that are cheaper and more efficient, we need to look at two, inextricably-linked subjects: money… and data. 

For micro retailers, the money problem comes into play from the very beginning: when building the business from scratch.  

Alexander Sotiriou is a senior financial sector specialist at CGAP. His work spans a range of issues, including micro and small enterprise finance and the linkages between financial services, improved livelihoods and access to basic services. 

He tells us why it’s so hard for micro retailers to get the financing they need to start up. 

Alexander Sotiriou: Lenders have a very difficult time understanding and quantifying the risk of lending to micro retailers. Micro retailers operate in the informal economy typically. They don't have financial [00:13:30] statements or reliable credit histories. And so if the lender is only making $5 on a loan, there's only so much they can invest in understanding the business. 

Lamis Daoud: If a bank won’t help, then where do they go for cash? They commonly dip into their personal savings… or ask people that they know for help. 

Alexander Sotiriou: It's nearly impossible to get formal finance to start a business. Most people rely on friends and family, and these are the biggest sources of informal finance. A study that cgap did a couple of years ago found that informal sources of credit accounts for about a third of the total credit available to all micro and small enterprises.  

Lamis Daoud: Fast forward in time to when a shop is up and running: it is now operating steadily, serving customers and replenishing shelves for continued sales. So what does their supply chain operation look like? 

We spoke to Richard Wright to help get a better understanding of last mile supply chains. He worked at Unilever for 26 years on product innovation and meeting consumer needs. Now, Richard runs his own business helping others think about behavior change. His passion is small shopkeepers and corner stores, and how to help them help themselves. 

He simplified the supply chain operation for us. 

Richard Wright: We can distinguish between two routes to market. One is that Unilever, or similar large corporate, or manufacturer, works with a distributor who takes their products and then sells onto the shopkeeper. 

That's what I think of as the direct route to market. There's a strong link between the manufacturer and the end retailer. Then, there's a more indirect route, which I think is very common, actually. Probably the more common route is that a third-party distributor takes the product and then sells to a wholesaler, and the wholesaler will receive goods from lots and lots of different companies. Then, when the shopkeeper needs to stock up, they go to the wholesaler, and they can buy a whole range of products. That's a more challenging way to market. Of course, the wholesaler needs to earn their own margin, to add an extra link in the chain between the manufacturer and the shopkeeper.  

Lamis Daoud: Stella Klemperer leads strategy and research at flourish ventures, a venture capital fund that aims to support better financial health for households and small businesses.  Stella took us through some of the daily challenges of micro retailers. 

Stella Klemperer: Shopkeepers today are incredibly savvy small business owners. They're managing their inventory, they're managing many, many different distributors who are serving them. Sometimes in places like Indonesia, as many as a hundred different distributors. They're building close relationships with their customers. They're really a trusted part of the community, but most of their operations to date have really been analog. So paper-based bookkeeping, intuitive management, and they just don't have all the resources that they need in a lot of times. So often they face stockouts either because they don't have access to credit to purchase more inventory, or because their distributors don't have access to the right products at the right times. 

Lamis Daoud: This is when data and digitization factor into the equation. For these shopkeepers that run mostly analog businesses short on resources, digitizing their lives can help them not only free up time, but save them money and help create the data flows necessary to access formal credit.  

Alexander walked us through the business models of digitized supply chains and how they result in embedded financial solutions for micro retailers. He broke it down into three layers: 

Alexander Sotiriou: There are a variety of different business models that we've seen that can be used to embed financial services in an FMCG supply chain, and in particular when it's digitized. Those opportunities come in layers, each one building on the next, and ultimately leading to that opportunity for embedded finance.  

The first is digitizing the data in warehousing, the second is digitizing the ordering [00:09:30] process, and the third is digitizing the embedded finance. 

The foundational layer is the digitization of the data that's related to the warehousing and the distribution within the FMCG value chain, and that digitization of the warehousing and distribution is a significant undertaking in and of itself. But once you have that data digitized, the next layer is to digitize the order process for micro retailers. So for example, an e-commerce company can provide the micro retailer with an app that can allow them to order remotely without needing to leave their store to visit a wholesaler. 

Once the b2b e-commerce platform digitizes the ordering, that opens up the opportunity to start digitizing the finance. And the first part of that finance that gets digitized usually is the payments. The payments get digitized. And now once you have the digital records of the orders, and also of the payments, you can use that data to create a picture of the retailer's cash flows. And that can be used to generate a credit score to facilitate lending or buy now, pay later lending.  

Lamis Daoud: Embedded finance has the potential to make a huge impact on advancing financial inclusion among micro retailers. Alexander explains.   

Alexander Sotiriou: Many of the costs of lending are driven down dramatically through embedded finance and b2b e-commerce value chains. For example, the customer acquisition costs and the marketing costs, which are often quite high in micro lending, are low in this case because you're already piggybacking on the e-commerce platform that the customer's already using. You're also piggybacking on FMCG supply chains, which are well known for reaching deep into the smallest, most informal, most rural parts of the economy. In most places in the world, you are able to get products like a Coca-Cola or a Nescafé. And part of the allure of embedded finance, from a financial inclusion perspective, is that it does have the potential to go as far as these FMCG companies do.  

On the risk uncertainty side, the platform that's providing the inventory has your order data and your cash flow data, and they can use that to create a picture of the business's financial situation.  

Lamis Daoud: In 2022, flourish ventures published research on corner shops across Brazil, Egypt, India, and Indonesia to better understand how digital platforms can help micro businesses. They surveyed corner shops and shop customers to investigate their needs. Stella tells us why b2b digital platforms can be transformational for mom-and-pop shopkeepers. 

Stella Klemperer: It allows merchants to plan for what inventory they need and have the credit. When you're able to embed credit, then to have the credit that they need to keep their stores well-stocked, it helps in fact the FMCGs and the distributors get a better sense for what inventory is needed when, which can really increase efficiencies. And then there's a whole range of other opportunities that platforms have the potential to provide when it comes to managing bookkeeping, providing credit to the end customers at these corner shops, helping with sales, et cetera. So there's really a lot of opportunities here. 

Lamis Daoud: Mugi, a shop owner in Nairobi who sells everyday household food items like milk, sugar, and cooking oil is one of the business leaders CGAP has spoken with. She is a customer of Wasoko, a b2b e-commerce company, which has re-imagined the ordering and delivery system for small retail stores in parts of Africa. Wasoko connects small retailers directly connecting with vendors to help them achieve same-day or one-day deliveries. Mugi says that Wasoko has helped her grow her business, and she now has a total of three shops.   

Mugi (with voiceover): In addition to my shop, I also have one next door which is run by my husband. While the other shop is run by a lady employee.  My business is everything to me and it is my shelter. It has helped me provide for my children and pay for their school fees.   

All the products for my shops come from Wasoko. I alternate the weeks I order new stock from Wasoko for the shops. I start with my shop, the following week, I order for the shop where my husband works, and the next I order goods for the shop in riverside.   

Before wasoko, I used to get my stock from wholesalers in the market. However, they would not deliver. I then came to know about wasoko through their field agents and since then, i have always received my stock once I’ve ordered and then they (wasoko) deliver.  I’ve never been concerned about loss of money or fraud with wasoko. I am also very grateful to wasoko for their credit (BNPL). I have grown my limit over time because i always repay and my current BNPL is worth KSH. 70,000 (USD 536.40). I anticipate that they will continue increasing my limit because i do not default.   

Lamis Daoud: And the benefits aren’t just for shop owners like Mugi. Suppliers are able to push products out more efficiently as well. 

Richard Wright: The digitization of supply chain holds many benefits, both for the micro retailer and for the large corporates who manufacture fast moving consumer goods. 

For the micro retailer, they can track their stock and their purchase more carefully. They can also be informed of things like offers, or promotions that they can take advantage of. Quite importantly, they can find out, also, what the price is, because often, when the prices go up, they become suspicious of the person who's actually going to see them and supply them with the goods, that actually, they're taking a cut themselves. It takes a lot of fraud out of the supply chain as well. 

Very importantly is that the small retailer lacks liquidity, lacks the cash to buy products, and that means that they do need to do top-ups very frequently, and also stops them from taking advantage of bulk discounts. If you can embed finance into a digital ordering system, then you can improve the liquidity of the shopkeeper. If you can show that the shopkeeper pays back on a regular basis over time, they can also get more access to financial products. It's a real tool, or footstep onto digital financial inclusion. For the manufacturer, these are really important marketplaces.  

The markets in sub-Saharan Africa and south Asia, there's a growing middle class. The growth potential is huge. To be able to take advantage of that, though, you'd need to have more efficient supply chains, because margins are very thin, profitability is not good, so the efficiency is quite important. These markets are not served by big supermarkets. Very often, the majority of stock, or fast-moving consumer goods are provided through these small shopkeepers. They're a key battleground, but driving their efficiency and transparency, and driving their ability to grow is really important. Everybody wins if you can get a good supply chain, and an efficient supply chain, and reduce the cost to serve the poorest people. There's a price to pay for being poor. It's more expensive to distribute products to a poor rural community in sub-Saharan Africa than it is in a large urban center in the northern hemisphere.  

Lamis Daoud: But we can’t just snap our fingers and end up with this digitally transformed world we want to create. Realities are always more complicated than the big vision. Innovation and technology ultimately need to meet people where they are – with the tools that they have – in order to even start to make these changes. And there are usually risks involved. 

Richard Wright: It's all about people. Innovation is more about people than it is about technology. It's how technology meets people and solves their problems. There's two big areas in which the digitization of the micro retail is challenging. One is around motivation. Do they want to be digitized? What's in it for the micro retailer? How much do they understand the benefits, and how much are they prepared to invest in those benefits? I think this is often missed, because i think the people who are seeking to do innovation take it as read, that it's obvious, and it's often not, particularly in economies which aren't particularly used to b2b e-commerce, or e-commerce, or even use of the internet. The motivation is principle, because if the shopkeeper doesn't want to be digitized, then you've failed straight away 

Lamis Daoud:  Not to be forgotten… digital inclusion is a huge factor in doing this right. Digitization occurs on a digital device, either a feature phone or a smartphone, meaning shopkeepers need to own or have access to one, in addition to the skills they need to use them. Then comes the issue of reliable internet access… easier to find in urban environments but less so in last-mile, rural places. 

The digital divide is very real. According to GSMA, those who are not using mobile internet are more likely to be poorer, rural, and women among other demographics. Affordability and skills remain the two greatest barriers to mobile internet adoption and use. To really solve these problems, inclusive approaches have to take centerstage in order to see the impacts for those most in need. 

So is it viable for companies to make the investments necessary to push digitization in last-mile areas around the world? Stella thinks so. 

Stella Klemperer: The margins in this business are tight, but we absolutely believe that you can manage operations tightly and get to a place where you can reach economies of scale across inventory, purchase, logistics, and sales. But to get to that scale, you need access to capital. Particularly in more nascent markets where these b2b commerce platforms are investing more heavily in assets like warehouses, delivery, and logistics. 

Lamis Daoud: If the companies are doing it, and can scale, alexander thinks the sky’s the limit. 

Alexander Sotiriou: Our team has studied the emergence, as well as a disappearance, of dozens of business models around the world that have been created to meet the inventory needs of micro retailers by digitizing FMCG supply chains. And by doing so, these b2b e-commerce platforms, they've created a channel for delivering efficient, affordable, and tailored in-kind working capital loans in the form of buy now, pay later lending products. At CGAP, we've spoken with customers, business leaders, investors, and other experts to better understand this phenomenon's potential. And i can say that we're very confident that at least some of these companies are providing a vastly superior working capital loan compared to traditional micro lenders. 

And if those businesses and those lending products can scale, I don't think it's an exaggeration to say that they could revolutionize working capital lending to micro retailers. But that is a very big if. We've witnessed a lot of new entrants into the space and they've each taken a variety of approaches to building their business and to serving their customers. Some of those businesses have failed, some have completely changed the direction that their company's going in, and some have been merged or acquired. So as of yet, there is no single reliable recipe for building these businesses that we've seen emerge.  

Lamis Daoud: A recent CGAP publication goes into much greater detail on both the potential of these newly emerging b2b ecommerce business models as well as the obstacles to realizing the potential.  

So the big question is… can digitization actually – and efficiently – reach and support micro retailers at the last mile who want to be included in the digital transformation? And are these new b2b e-commerce companies offering inclusive, responsible credit at scale sustainably? Stella thinks it’s a promising space… if everyone comes to the table. 

Stella Klemperer: There's a huge role for donors and investors to play when it comes to supporting new fintech innovation, especially in the b2b commerce space. We need patient capital behind these businesses, particularly where the industry is more nascent. Embedded finance platforms can succeed and they really can deliver commercial returns, but investors should recognize it takes time to build the infrastructure for these businesses, and you have to get that core business right before you layer in financial services.  

Lamis Daoud: Richard shares a similar perspective. 

Richard Wright: We know there's cost, there's innovation challenges as well. There's many different issues involved in doing it, but I think if we come together as a global community, donors, manufacturers, agencies like CGAP and the world bank, I think we need to find a way of making it work. 

Lamis Daoud: This is a space we will be watching closely.  

Lamis Daoud:  That’s the end of today’s podcast. I’d like to thank our guests, Richard, Stella and Alexander for joining us today and Mugi to share their expertise on this important topic. And thank you, as always, for joining us for this episode of inclusive finance frontiers, a podcast by CGAP. I’m your Lamis Daoud.  

For more information on our work in inclusive embedded finance and micro retailers and other topics, visit our website at cgap.org. And if you liked this episode, please share it with friends and colleagues so more people can hear how inclusive finance is transforming lives.