FMCG in BOP Markets – Opportunities, Organizations and Supply Chains

Fast Moving Consumer Goods (FMCG) are a big part of daily life in much of the developed world. Each household is adorned with a list of seemingly endless goods of these types. It is hard to imagine there are parts of the world where FMCG are not as integral to daily life. These areas, so to speak FMCG vacuums, are where the biggest growth is expected to materialize. Multiple recent reports have emphasized the huge importance of emerging economies in these consumption categories (see KPMG, 2014; ADL, 2014 [not longer available]). A more recent study by McKinsey Global Institute estimates that only in Africa, FMCG household consumption is expected to grow at the rate of 3.8% a year reaching $2.1 trillion in 2025. Food and beverage categories are expected to grow the most. Astonishingly, only 75 African cities will account for 49% of the consumption in the continent by 2025. Experts in the same report believe that in order to capitalize from the increased growth in these markets, companies will have to fundamentally rethink their prioritization of products and services as well as the design of their business model and supply chains. However, we see that in numerous industries in the BOP markets worldwide, the rethinking and the redesigning of business models and supply chains are happening already. By learning from the cases of successes and failures in the BOP markets, FMCG business can easily avoid the expensive process of “reinventing the wheel”.

Typologies of organizations for FMCG at the BOP

Within the BOP markets and inclusive businesses landscape, the FMCG sector frequently offers the value proposition of ‘satisfying basic needs in affordable manner’. In addition, business models are designed to target consumers directly. Last mile product's distribution is often coupled with awareness and education campaigns on the benefits of products. A classic example of such a case is distribution and marketing of hygiene products. NGOs’ collaboration is crucial for this typology of BOP enterprises which target consumers directly.

One can distinguish between two typologies of private sector organizations selling FMCG to BOP markets:

• Multinational companies (MNC) typically want to bring their existing products to BOP markets. For example, Colgate-Palmolive’s distribution of oral hygiene products in rural India; P&G ’s sales of shaving cream and diapers, and Ariel detergent marketing in rural India.
• Small and medium sized enterprises (SME), either locally or foreign driven, rather than build on existing products, they design and (re)develop solutions customized to local problems. For example, Nutri’zaza in Madagascar selling fortified porridge for infants; Valid Nutrition in Malawi selling highly fortified Ready-to-Use Foods (RUFs).

At a closer look, comparing and contrasting the starting points and approaches employed by different types of organizations, one can observe an important distinction. Frequently, MNCs start with their existing product range and the challenge is how to ‘market’ it to BOP.  While, SMEs and social enterprises come up with a customized product which addresses a local problem in given communities, e.g. iron deficiency or malnutrition. I suspect that these different starting points have critical implications for economic and social performance of the enterprise, but this still needs further in-depth investigation and solid empirical evidence.

Operational Aspects: Bringing FMCG to the BOP

A key element in bringing the products to the market is understanding the behavior of BOP consumers. Designing the supply chain from sourcing raw materials to last-mile delivery starts with a deep understanding of consumer behavior in terms of needs, preferences, and purchasing and consumption patterns. Yet, numerous local barriers, constraints and institutional voids related to regulatory framework, infrastructure, capital and labor markets pose severe challenges despite solid understanding of consumer needs and preferences. Therefore, operational approaches to bring FMCG to BOP markets need to consider these constraints. A study at Jacobs University analyzed supply chains at the BOP and found some effective supply chain practices that can by key success factors. These findings (see Table 1) can be of great relevance to FMCG success in BOP markets. 

Table 1: Supply chain approaches as coping mechanisms with barriers and constraints in BOP markets

Some important findings of the same study include:

• Traditional versus BOP supply chains: Existing models of supply chains in industrialized settings cannot be employed to describe BOP supply chains because of several important distinctions. Firstly, traditional supply chain distribution activities focus on rapid customer response and modes of transport. The focus at the BOP is on education and awareness campaigns and effective last mile distribution channels that can reach remote locations. Secondly, in the local partnerships and collaboration approaches, local actors act as intermediaries between MNCs and BOP customers. This is one of the biggest key differences between traditional and BOP supply chains (Hahn and Gold, 2014). These differences imply that organizations, especially established companies exploring BOP markets, need to develop new sets of skills, work with non-traditional partners and develop a deeper understanding of local settings.
• Locally-embedded multi-channel distribution models as key success factors: Companies targeting the BOP do not only need to ensure the physical reach to remote rural locations or urban slums, but also provide education and awareness campaign in order to raise awareness and train local actors on how to use and maintain certain products themselves. Several companies understand the needs of the BOP markets and have managed to develop a large customer base by organizing national awareness campaigns, education, training and demonstration camps in rural areas. Distribution concepts in which the final delivery is outsourced to local shops or local entrepreneurs are frequently employed. Moreover, they allow not only the reach to remote locations, but also the reduction of delivery costs and increased prospects of jobs to the local population.
• Highly inclusive distribution approaches: The distribution part of the supply chain was found to be the most inclusive from a BOP perspective. The local actors are largely involved in distribution activities of most products that we investigated. However, involving impoverished communities into the upstream value chain activities can incur high investment costs in training and education.

Issues and Open Questions

Since FMCG includes not only food, soft beverages, hygiene and sanitation products, but also other less-useful products such as alcoholic beverages and tobacco, the issue of exploiting vulnerabilities of BOP consumers becomes important. BOP consumers often represent cognitive and social vulnerabilities (Arnold and Valentin, 2013) and therefore intensive marketing and awareness campaigns can take advantage of such vulnerabilities. The ethical dilemma: how ethical is it to sell them such products? But also how ethical is it to deprive them of the choice to buy such products (Davidson, 2009)?

Additionally, it is still not clear to what extent including BOP actors in last-mile distribution (as it is mostly the case for FMCG supply chains) creates significant local capacity, empowerment and capabilities enhancement in the long-run. Since one of the main objectives of the inclusive business narrative is to support local BOP actors escape the vicious cycle of poverty through capabilities development (Sen, 1999), education and training, capacity building, knowledge exchange, and long-term orientation are vital for BOP projects. Therefore, when designing inclusive business models and supply chains for BOP markets, it is important to keep in mind that the primary goal should be on education, while selling products and services is rather the means to an end. In order to achieve this, inclusive business models and supply chains should primarily be knowledge-driven initiatives, rather than production, distribution or procurement (Munir et al., 2014).

This blog is a part of the March 2017 series on how businesses in the FMCG sector are including the BoP in their value chain. Read more here.