Last year on this blog, I announced the GAIN Business Model Research (BMR) Project: funded by the Netherlands Ministry of Foreign Affairs, this project aims to identify promising business models to reach consumers on lower incomes with nutritious foods. Such approaches could help to improve the quality of diets—which currently are often lacking in food diversity and quality—if they can provide food that meets customers’ needs at an affordable price. But they must do so in ways that are profitable and sustainable for the company. How can they do this?
To find out, the BMR project undertook a systematic review of existing research and evidence. We screened about 8,000 documents before selecting 74 documents, and 99 case-study companies, that were eligible for inclusion. We included companies producing highly nutritious foods as well as those producing less nutritious alternatives—with the understanding that they might offer insights that could be applied to nutritious foods. We then analysed these documents to extract and synthesise 13 specific approaches used by firms to reach lower-income consumers with food and beverage products. Here, we discuss the final three of these approaches.
Distribution hubs to centralise activities and cut costs
Serving the needs of lower-income consumers requires getting food products to where they are—which often includes remote rural areas as well as underserved urban neighbourhoods. This makes distribution a key, but also costly, aspect of the business model. Using a ‘hub’ model, in which aspects of distribution are grouped together instead of done separately, can improve efficiency and cost-sharing, reducing costs overall. For example, Copia in Kenya allows customers in rural areas to affordably access a range of goods (including food) through assisted e-commerce. They can purchase through local sales agents, paying in cash or with mobile money and obtaining assistance as needed. The agent then passes on the order, which is grouped with others in the area to be fulfilled through one shipment to the agent, at a much cheaper cost than single-customer deliveries. The model currently covers about 22% of Kenya’s rural population and has about 1.4 million customers. A similarly innovative approach in India uses a distribution hub to reach dispersed tea estates and lower delivery costs by making goods (including nutritious foods) available in a ‘company store.’
Other firms use a hub approach for cooked foods. For example, in Papua New Guinea, Nestlé developed a hub system to support the sale of their Maggi-brand instant noodles through street food vendors. Nestlé created a central hub where they sell the noodles with a pre-prepared vegetable mix to company-approved vendors; they also provide branded clothing and vending supplies. The vendors then mix the noodles and vegetables with boiling water and eggs to make a soup, which is sold on the street at a cheap cost (USD 20 cents per meal, as of 2012). Through this strategy and others, Maggi instant noodles rapidly achieved penetration among PNG’s poor, even though they are very different from (and more expensive than) the local traditional staples. In Indonesia, the social enterprise KeBal used a similar approach for providing fortified foods to street children. They created central cooking centres where foods are fortified during cooking; this centralisation cut costs and controls quality. The meals were then distributed via street vendors in slum areas.
As with all ready-to-eat foods, hubs distributing ready-to-eat foods must pay careful attention to food safety and instruct their vendors on how to maintain safe handling to the point of sale. When done well, though, hubs have the potential to improve food safety compared to a model in which each vendor prepares on his/her own, using his/her own food safety practices (or lack thereof).
Supporting existing last-mile distribution networks
Using existing retail is often the most cost-efficient and sustainable distribution channel and helps to ensure steady supply. Such retailers are often close to customers, have existing relationships with them, and may allow them to purchase on credit, helping increase access and manage customers’ variable cash flows. For example, in Kenya, small shops known as ‘dukas’ account for two-thirds of the country’s annual retail sales and about 80% of sales of fast-moving consumer goods such as food; about 95% of Kenyans shop at dukas.
However, retailers may demand high margins and thus raise sales prices, particularly for small players. They may also be hesitant to engage in marketing of new products and may lack the infrastructure needed to distribute perishable foods. Small retailers can thus be supported through various micro-distribution models (i.e., small, regular deliveries; custom product assortments; local distributors; and small transport like pushcarts or bicycles), capacity building to help them grow their businesses and encourage loyalty, and providing credit or facilitating access to financing. This can both incentivise them to sell the new product and improve their capacity to do so.
Some firms focus on improving the distribution of products to retailers that are hard to reach. For example, Coca Cola and its subsidiaries in East Africa have developed ‘manual distribution centres’ that distribute to small shops and kiosks that are on narrow, unpaved, or unmaintained roads that could not be served by standard delivery trucks; they support small, independent distributors who cover about a 1 km range using motorcycles and pushcarts. This also enables small and frequent deliveries, which are better suited to the low-cash-flow, small-storage-space reality of local retailers. Adopting this approach led to a significant increase in sales due to the increased distribution range and lower costs and is implemented in various formats in 25 countries, with more than 80% of products distributed through the model in Ethiopia and Tanzania. Alqueria, a dairy company in Colombia, targets small retailers in very small towns and remote areas by deputising a local resident to act as their distributor, using his/her home as a warehouse for its UHT milk, and providing financing for a small delivery vehicle adapted to the rural conditions. These ‘micro-sales’ account for 5% of company revenue, with strong growth.
Other firms focus at the retail level itself. Wrigley in Kenya developed a new route to market for its chewing gum products by supporting existing street hawkers with ‘stock points’ where they can pick up products and marketing/vending material; they are also free to sell non-Wrigley products. An SME in Kenya uses existing vegetable vendors to sell its chicken products: these ‘mama mboga’ can buy chicken offal and off-cuts at a lower price in exchange for helping with the chicken slaughter, and can then sell them on to their existing (often low-income) vegetable consumers.
Direct Sales in Underprivileged Areas
Finally, some firms undertake retail sales themselves, directly, which can help cut out the costs of intermediaries and allow them to more directly control pricing. When done in low-income settings with limited access to affordable nutritious foods, this can help reach lower-income consumers. Ten firms covered in the BMR review used this strategy, particularly for animal-source foods such as chicken and eggs.
For example, several Mozambican egg producers offer direct-to-consumer sales from their production site, making eggs available more cheaply (due to no transportation costs and few intermediaries) than in the open market, in a place that consumers can easily access on foot or bike. One of them is able to sell eggs at 12-15% below the market price by using this strategy. Nestlé uses an innovative approach to this strategy in Brazil: it created a barge that can sell its products in remote parts of the Amazon that cannot be reached by road.
All three of these approaches aim to bridge the gap between food producers and food consumers at a reasonable cost. Where this succeeds – and where it does so by focusing on nutritious foods – it can help improve access to affordable, healthy diets among those who need them most.