Potential for innovation, but pricing and marketing need to be improved

Last month, three members of the Connect to Grow implementation team met with close to 150 enterprises working in the agricultural and health sectors in six countries in Africa. The purpose of the trip was to understand better the needs of the enterprises that have joined, or are interested in joining, the Connect marketplace. Through its online marketplace, Connect to Grow facilitates partnerships and innovation transfer between enterprises in sub Saharan Africa and South Asia that are seeking to grow and Indian enterprises that are looking to enter new markets. 

David Irwin, programme team leader, has decades of experience supporting small businesses, in both the UK and overseas. What did he find these East African SMEs needed? And what commercial potential do they have? We interviewed David to find out.

Q. Can you give us an overview of the types of enterprises you met and the models they are implementing?

Yes, I met about 30 businesses across Tanzania and some in Kenya. In Tanzania the majority of businesses were in agriculture or agri-processing of some sort; in Kenya we had one or two businesses in health, but most of them were in agriculture or agri-processing as well.

Q. Can you tell us a bit more about what you mean by agri-processing? What types of businesses you were looking at?

We met a broad range of businesses specialising in different products; everything from one person to 100+ employee enterprises. This included businesses that were making jams, wines, honey, processing moringa, one or two that were doing or wanted to do organic produce, as well as businesses that were looking at probiotic foods. A number of businesses were doing nutritional supplements for people of all ages, not just for babies but for adults as well. One was selling peanuts and passing them on to someone else to do further processing, as well as several businesses that were working in poultry. In one case they were buying eggs from farmers and selling them to outlets, essentially becoming the intermediary, getting the eggs from the farmer into the supply chain. In another case a business, which is currently making incubators, wants to start breeding chickens and selling chicks.

In Kenya we met a broader range of businesses, mainly because our outreach had gone through a broader range of contacts. One is currently making briquettes and wants to import cook stoves; one wants to provide solar pumps for irrigation and another wants to offer drip irrigation.

Q. What were the main challenges to growth for the enterprises that you met?

The challenges for most of the businesses were getting to market. Some of them had a really good understanding of their market, whereas some had a fairly poor understanding and didn’t really know what they were doing or how they were getting there, or were simply selling in the market in downtown Dar.

A lot of challenges come down to both understanding the market and also how you go about marketing your product. There is no doubt that most businesses would benefit from more working capital, but the businesses that knew how to market their products found it easier.

One honey producer in Tanzania was able to raise a loan when they started and had repaid it back within a year. The problem when I met them was that they hadn’t become big enough for the banks, but had become too big for the MFIs. But, in a lot of cases, I think that if you can demonstrate you have the market, then you can usually find the finance from somewhere to be able to tackle it.

The honey business I met was selling their product at a decent price. They had gone from nothing, to a turnover of 5m shillings in the first year and were ploughing their profit back into working capital. They were growing organically, but much slower than they could otherwise grow. Others I met were simply selling their product too cheaply.

Bearing in mind pricing is a part of marketing, I draw a distinction between price and cost: cost is a function of arithmetic, price is one of the 4Ps. If you set your price too low you will sell more but you will make less profit. If you make less profit then inevitably, you end up with less working capital. There is an element here of people buying turnover by sacrificing profit. I did not have the time to discuss that in detail with many of the businesses that I met, but it showed up as a problem.

With most of the food processing businesses, I was impressed with their compliance with health and hygiene requirements. Most of those I met had some sort of certification, possibly not what would be required to export to Europe, but certainly to be selling locally, and many of them brought copies of their certificates with them which was great.

Q. One of the biggest challenges is getting to market, but quite a few businesses you met said they could sell everything they produced. In these cases, what were their constraints?

It’s difficult to generalise. For some it is working capital; if they had more working capital they would be able to sell much more because they would be able to buy a lot more. They would also be able to weather unexpected situations or invest in new product lines. For example, one company had some bad luck with the land on which their new processing plant sits being contaminated by a government project to build a new road, but now they now don’t have the capital to build another.

Q. You commented that many businesses had various ideas but not a very clear strategy for how to grow. What is your perception of how innovation can contribute to growth strategies?

Some of them had a pretty clear idea of how they wanted to grow and what they thought the next opportunity was, but I think many were just grasping at straws. They thought they ought to be trying to grow and they thought that our programme might be able to help them, but without spending the time and effort in advance to decide whether it was for them.

Some of them had identified a further opportunity to grow, but they didn’t have the knowledge or sufficient resource and time to be able to explore that in enough detail.

Q. Can you give us examples of the types of innovations that could help these companies to grow?

There is an enormous need for packaging, most businesses were buying packaging (which was not very good quality) from China. In some cases directly, in one case via a business in Nairobi, in another case via a business in Germany. A lot of it is adequate, but it’s not going to look attractive in the store. Given that most of these businesses are too small to have a brand reputation, customers are buying on something else. It seemed to be that the ones that looked more attractive to me were the ones that were selling better. I can’t say there is a causal connection, maybe the person who thinks more about what they look like is also a better person at doing the marketing.

Businesses were also paying a lot for packaging, in some cases as much as 30 per cent of the selling price, when it should not be more than 3-4 per cent. And so there is an enormous opportunity for someone who can do low cost packaging in east Africa. It may be that some of these businesses, instead of pushing the price up, need to push the costs down, and packaging is one way they could do that.

There is definitely scope for innovation in processing. One business we met was doing all their processing by hand, and even though they were successful compared to their competitors, automation could make a big difference to their throughput. Some of them also need to tackle more than one step in the value chain simultaneously, which will be tough.

There may be scope for innovation in getting the product to the market, for example, in the water filter industry. There is nothing innovative about water filters, but getting them to the market is hard work, as they are mostly fresh air, so you spend a lot of money getting fresh air to market. There is almost certainly scope for innovation in distribution there.

The final area for innovation would be the actual product itself. There is no doubt that there are customers there for products that are not being delivered. We met businesses that are looking at anything from selling fruit juice to solar pumps and drip irrigation.

Q. Were many of the enterprises already thinking about partnership for growth?
No. I would say a small percentage was thinking about partnership but they weren’t thinking about it as a strategy for growth, but rather to fill a need. This could be to expand into a new product line or sector, that wasn’t their core business, and a partner would be needed to fill that knowledge gap.

Q. What did they think about working with Indian enterprises?

The majority said they were open to partnership and were keen to understand what that might look like and what it would entail. Developing that concept is one of the challenges for us, as well as for them. The key for us is that they have an idea and a drive of what they want to achieve, we can’t make the suggestions for them. We can then facilitate the connections to make this a success.

Q. How helpful do you think Connect to Grow can be to these enterprises?

I came away from Kenya and Tanzania very optimistic about how many businesses I’d met where we could see an opportunity and for which the opportunity looks like it could be suitable for some type of partnership, assuming we could find an Indian partner as well. Of course, there were some that we cannot help, either because they are at the wrong stage, some need BDS, microfinance, or any combination. In some cases, I can see they may be a bit small for an Indian partner. So, it may not be straightforward, but there is a lot of potential where Connect to Grow can help with innovation and partners.

Q. In terms of the enterprises that were most receptive to the programme, and perhaps most suitable for Connect support, were there any common characteristics?

They were more established. We met businesses who were everything from almost new, to having been in business 20 years. There were some businesses that had been operating for under a year and felt really well established, some had been in business a long time and were not. It’s about having a business that runs itself and can free you up to start looking for new opportunities to grow.

Q. Did anything surprise you?

The biggest surprise was how many I thought had potential to both innovate and benefit from partnership. We were also really pleased at the number of businesses who were willing to travel and meet with us.

The other thing that struck me was how much better it was to have a conversation face to face. Seeing someone in front of you, being able to see their body language, when they smile and when they frown, makes a difference to the way you build rapport, the way you can begin to take them through the possible steps. It gives you a better idea if they are really serious about the programme.

Q. If there was one headline piece of advice for businesses in East Africa, what would it be?

Go back to the market, be clear who your customers are and sell your customers what they want, not what you think they need. Also, remember that pricing is a part of marketing, so make sure you are selling your product at a price that allows you to reinvest in the business.

Visit Connect to Grow to find out more about how you can benefit from the programme and meet other businesses in Africa, South Asia and India by joining the online marketplace.

This blog is part of the July 2016 series from the Practitioner Hub and Seas of Change on Inclusive Agribusiness. Download the PDF for more insight, updates and opinion.