Old Markets and New Mindsets at the BoP MyZA

Ludwe Sityoshwana – the EH Walton Packaging marketing director and a Rhodes MBA student studying the Bottom of the Pyramid (BoP) and business into Africa piqued our interest at a recent Institute of Packaging South Africa (IPSA) breakfast. Sityoshwana postulated that, as Motherwell is the 3rd largest township in South Africa, it is an ideal case study for business to hone their skills for future delivery of product to the 877 million people estimated to make up Africa’s BoP.

“If you understand the route to the market, especially into places like rural Transkei, then you can do business anywhere in Africa,” he said.

In economics, the bottom of the pyramid is the largest, but poorest socio-economic group. In global terms, this is the 4 billion people (out of 6 billion on the planet) who live on less than US$2.50 per day. The phrase “bottom of the pyramid” is used in particular by people developing new models of doing business that deliberately target that demographic, often using new technology. This field is also often referred to as the “Base of the Pyramid” or just the “BoP”.

The phrase “bottom of the pyramid” was first used by U.S. president Franklin D. Roosevelt in his April 7, 1932 radio address, The Forgotten Man, in which he said; “These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power…that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

877 million African BoP households (out of 1 billion Africans) fall within the LSM 1-4 grouping. These households are the most materially poor and under-serviced households. LSM (the Living Standards Measure) has become the most widely used marketing research tool in South Africa by measuring the material affluence of households (rather than individuals) and dividing the population into 10 groups, 10 (highest) to 1 (lowest).

Various estimates are made about the LSM 1-4 segment:

That it makes up between 27 and 48% of all South African households
That is represents between 13 and 22 million South Africans
That it represents 25 to 35% of SA’s annual food purchses
That 51 to 78% of this population is unbanked
The majority live in three provinces – Eastern Cape, KwaZulu-Natal and Limpopo
That up to 80% are unemployed and rely on a grant
That South Africa has the largest number of social grants per capita in the world.

In terms of addressing the BoP market Ludwe says that education of the customer is critical. An example used was a Danone yoghurt product which allowed for longer shelf life, no refrigeration, vitamin fortified, low price and packaged in smaller units.

In another example he said; “we have to acknowledge what Capitec has done – Capitec has not created a new market, Capitec has taken an existing market and worked well with it.”

An Eastern Cape company, Twizza, got their traction at the bottom of the pyramid in 2007. According to Ludwe Twizza; “got the price point and distribution right”.

Business also needs to be aware of the change in market competitors, an example used by Ludwe was the shift away from young suitors buying chocolates for their sweethearts to buying airtime. The R5.00 airtime has now become an unintended competitor to the more traditional ‘chocolate as a gift for my sweetheart’. By the same token banks no longer only compete with other banks. For example mobile network operators have been aggressive to leverage their large customer base, existing backoffice infrastructure and billings capability as well as what is often perceived as a bottomless marketing budget to compete in the payments services space. A classic example of this is M-Pesa.

One other example of a traditionally high end product (from the point of view of capital outlay) is SodaStream’s pilot project in Soweto, that targeted informal retailers or “spaza” stores. The strategy is for spaza shop owners to make their own fizzy drinks using SodaStream’s products and then sell it on to customers, either in cups or bottles, at a cheaper price than what brands such as Coke or Fanta would cost.

Business needs to design physical products for a hostile environment and be aware of secondary and unintended use of a product, display stand or packaging. A local example put forward by Sityoshwana of ‘unintended use’ was the deployment by the Nelson Mandela Metropole of a number of ‘wheelie-bins’ for trash collection. An unintended use of these was that they make wonderful free wheel barrows, portable ice buckets etc.

An interesting observation around the secondary use of products put forward by Ludwe was around the fact that leaded petrol sales in Kwazakhele far outstrip the sales of leaded petrol in areas such as Humewood and Summerstrand. The answer is simple he said; “South Africa does not have a culture of crushing cars, so the car that you drove in 1988 is probably still being driven right now – it might not look the same but someone is still driving it.”

It is critical to know how a product gets to a spaza shop once it leaves a factory when servicing the BoP. The wholesaler is not the end of the chain and spaza shop owners are the ones who make the decision to carry your product. This decision is based on many factors which include; working capital limitations, space limitations and agility of product within the market.

Taking the above into account Sityoshwana held up the Kenyan SABCO Coca Cola distribution model as one that makes great strides towards solving the BoP shop owner limitations. Essentially a coca cola factory goes into partnership with a number of Micro Distribution Centres who then distribute the product into the rest of the market place. This is a model that will now be used by the World Health Organisation for the distribution of ARV’s.

Bringing his examples closer to home Ludwe spoke about a liquor sales business in Kwazakhele with a simple business model. This business leverages off their 14 day credit with the large liquor suppliers by offering tavern owners 2 days of credit on smaller quantities – done correctly they can turn over money and product 6-7 times before having to pay for incoming stock.

Lest you think that the above business deals in low end product only Ludwe pointed out that this business manages to turn over several bottles of R1 800.00 Johnny Walker Blue Label whiskey per month – this in a business that reacts to demand from clients.

The primary challenge in servicing BoP lies in having to address the customer needs of affordability and accessibility whilst still being able to meet the arduous return on capital requirements of an established supplier. It requires the development, implementation and distribution of new products through new channels, held together by innovative business processes.

Essentially business needs to study the market and talk to the spaza shops and clients whilst taking an extremely long term view on achieving market penetration.

As Sityoshwana says; “The critical element is to ensure that the entire business is aligned to the strategy. Make sure that your processes, your people and everything else fits in with your direction.” In a final summation Ludwe urged local business to engage with Motherwell residents (as the 3rd largest township in the 2nd largest province) as a first step towards developing a strategy to unlock the value at the “Bottom of the Pyramid” in the “Old Markets” using “New Mindsets”.

Kishan Singh – National Chairman of IPSA, Ludwe Sityoshwana and Kevin Hustler – CEO of the Nelson Mandela Bay Business Chamber

Editors Notes: It was great to get to chat to Ludwe whose father, Lurie, I used to do work for many years ago. Lurie owned a successful laundry based in Kwazakhele and I remember servicing his electric fence one morning at 1:30 am. After being shocked whilst doing the repair, Lurie graciously invited me for a whiskey and some laughs at his home!

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