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DFS Lab

Announcing: The DFS Lab Retail Digitization Tracker

By Jake Kendall and Chernay Johnson

As one of the first VC investors to specialize in digital commerce in Africa, and as a very research driven investor, we at DFS Lab have bemoaned the lack of data around the MSME digitization opportunity in Africa. So, we decided to launch our own survey of over 2,500 micro, small and medium enterprises (MSMEs) in Nigeria and Kenya documenting the digital adoption and readiness of the MSME population in the retail value chain — (to our knowledge) the first dataset of its kind! We consider this version a proof of concept but hope to keep collecting this data to inform founders, investors, donors and everyone else in the ecosystem.

Why do we think digitizing small businesses is such a big deal?

Informal enterprise at face value is massive, typically accounting for more than 90% of Africa’s $1.4 trillion retail market. Traditional retail outlets such as dukas and kiosks (mom-and-pop shops) and open market traders play a large role in serving the African consumer given the proximity of their physical footprint. And it looks like the revenue pool of these micro retailers could be a lot larger than the corresponding profit pool of low-income consumers (90% of the population in sub-Saharan Africa spend less than $5 per day which makes them a challenging customer segment to serve). Add to this, the post-pandemic tailwind of accelerated digitization, and an attractive proposition has emerged for digital commerce startups to penetrate the market of more than 50 million¹ MSMEs in Africa.

A new breed of players are building an MSME solution stack across the retail value chain, and large-scale investments are flowing into the B2B play. The stack is broadly being built around key retailer functions such as supplier sourcing, distribution and payments. Popular restock marketplaces such as TradeDepot, Wasoko and MarketForce joined the list of African startups that have raised US$ 100 million or more in 2021, alongside Fintech heavyweights such as MFS Africa and Wave. But the margins of restock models are tight given the strong pricing power of FMCG suppliers, and players are increasingly moving toward end-to-end models that go beyond distribution, including offering embedded finance products to small businesses. On the tech side, we’re also seeing the emergence of supplier/wholesaler SaaS, logistics-as-a-service software, back-office software platforms and other trust and discovery engines.

However, building an ever-expanding solution stack won’t guarantee product-market fit; understanding the nature and needs of MSMEs is critical. With that in mind, we decided to create a dataset that would shine a light on the retail MSME population. Between 20 July and 6 August 2022, in partnership with Brand Fusion Africa, we hit the ground and surveyed just over 2,500 businesses in Kenya and Nigeria, the largest African markets in terms of number of MSMEs. Though we attempted to be nationally representative in our sampling of retail outlets, this first iteration of the survey was limited to the main metro areas² and may not fully reflect the characteristics of businesses operating in outlying rural areas. That said, we captured over 100 variables during the data collection exercise, and our preliminary exploration of the demand-side data revealed five key insights worth sharing with the ecosystem.

1. Digital enablement and financial inclusion rates are high amongst small business owners. The majority of MSMEs in the locations we surveyed are digitally enabled. Four out of five surveyed businesses are making use of a basic feature phone or smartphone, and the mobile penetration rate is higher in Kenya when compared to Nigeria. Traditional retailer channels such as dukas and kiosks, as well as open market traders, seem to have just as high levels of mobile ownership as the rest, however some are using basic feature phones rather than smartphones which limits their ability to use modern Android and iOS apps. In addition to a high degree of digital enablement, we found high rates of financial inclusion: the bulk (86%) of survey respondents report having a financial account, however only a third are using a business bank account.

Digitally-enabled duka in Mombasa

2. Social commerce is more ubiquitous than traditional e-Commerce. High rates of mobile penetration are enabling businesses to reach a wider customer base through online marketing, especially through social media channels. Around ~25% of small businesses are using social media applications such as WhatsApp, Facebook and Instagram to boost discovery of their products and services. This is massive when compared to traditional e-Commerce marketplace engagement: only 4% of retailers report using e-Commerce platforms such as Jumia and Konga. Business owners engaged in social commerce generally tend to be men in the younger demographic range, while a vast amount of digitally enabled women-led enterprises have not yet tapped into the opportunity for social commerce.

3. Payments is the most popular use case for digital app usage and could serve as a hook for other products. Just over 70% of all survey respondents report using some type of app which enables digital payments, and this trend stands out massively in Kenya where we have seen the proliferation of mobile money. For businesses who already manage payments digitally and have a transactional history, the opportunity space for credit extension is massive: over 40% of survey respondents cited a lack of finance as a pressing problem their business currently faces, yet only 5% have access to a lending product. Moreover, the POS-as-a-business model is something that Fintechs could tap into to expand revenue generation. Point-of-sale (POS) devices enable MSMEs to offer customers VaaS such as airtime top ups, bill payments and cash-in-cash-out services, yet we find that only a small portion (16%) of survey respondents own a POS device.

4. Surprisingly, dukas and kiosks have the highest penetration of restock marketplace app usage. Restock apps are marginally more popular compared to apps related to bookkeeping, inventory and/or payroll management. Surprisingly, traditional rather than modern retail channels are driving digital app penetration in the restock category and 1 in 5 mom-and-pop shops report using these types of apps. As order aggregators, restock app providers can negotiate better pricing with FMCG companies alongside optimizing delivery logistics, providing retailers with a clear value proposition. In line with this, survey respondents ranked convenience, free delivery and discounts as the top three reasons they are using restock apps.

5. Direct outreach is a critical acquisition channel for B2B players. Direct marketing and onboarding are the most pervasive methods of merchant acquisition: 9 out of 10 digital app users surveyed report learning about the app through a sales agent, whereas online discovery (by app stores or the internet) is a very minor part of reaching MSMEs. Moreover, survey respondents expressed apprehension in using digital apps due to perceived risks around fraud and data privacy which further emphasizes the role that trust — arguably better established in person — plays in merchant acquisition.

And now you are probably asking yourself, is Twiga Foods or Wasoko winning restock in Kenya? Which invoicing and accounting platform has the most market share with mom-and-pop shops? Who is winning on the payments side in Nigeria? To find out, sign up for our webinar where all will be revealed!

Join us in live conversation as we release the full survey results!

Sign up for the webinar here.

On 24 August, we hosted a webinar to present deeper findings from the DFS Lab Retail Digitization Tracker and highlight tech companies which have made the leaderboard for digital app usage. We’ll also moderate a panel discussion with leading disruptors in Africa including Catlog, Omnibiz Africa, TeamApt and Twiga Foods, to get the industry’s perspective on the MSME digitization opportunity and barriers to scaling various business models.

Explore the next generation of use cases for payments digitization…

Our DFS Lab Retail Digitization Tracker pilot was sponsored by funding from the Gates Foundation and is part of a broader program around payments digitization in Africa. Next, we’ll be hosting a virtual event from 27–29 September, for Fintech enthusiasts exploring frontier payments use cases with Mojaloop. Mojaloop is an open-source payment system created by Gates, Google, Coil and other partners to create a fast, efficient payment infrastructure in Africa. Companies such as Paystack, Carbon, JUMO, Flutterwave and TeamApt have previously participated. At the next bootcamp, each team will receive $1000 for participation, gain access to the DFS Lab Retail Digitization Tracker data and have a chance to win $5000 for the best demo designs. Apply here by 2 September, or reach out to joseph@dfslab.net to learn more.

Beyond investing in founders who are building the future of digital commerce in Africa, DFS Lab supports the ecosystem through our deep research and industry intelligence. Our goal is to continue to collect primary data across multiple African markets and track digitization trends over time. For more information and to partner with us, get in touch with Jake Kendall (jake@dfslab.net). If you’d like to receive our next series of thought-leadership content directly to your inbox, join our mailing list here.

Footnotes

¹ Based on the latest official data from national surveys conducted in Egypt, Kenya, Nigeria and South Africa, we estimate ~53 million MSMEs are operational across these four major markets. This compares to a figure of 44 million MSMEs in sub-Saharan Africa, which was published by the International Finance Corporation in 2017.

² Geographic coverage of the survey includes the following cities: Mombasa, Nairobi, Lagos, Abuja, Kano and Port Harcourt.

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