Understanding MSME Resilience to Climate Change: The Impact of Drought

In a new four-part article series, we share deep insights on the impacts of climate shocks on small businesses in two markets in Africa, and the tools needed to drive their resilience in the face of increasingly severe disruptions. This research lays the groundwork for innovators, investors, and funders to better understand the opportunity to positively impact 162 million small businesses globally with right-fit products and services.

This research series was conducted in partnership with Circle Innovation. Access the full methodology here. This article is written by Bethany Kanten, Director of Strategy at Mercy Corps Ventures.

Drought in Kenya. Image courtesy of Mercy Corps.

“The drought affected everyone ranging from the farmers who produce the goods down the way to the consumer.”

Festus, middle-aged male grocery shop retailer, urban area Kenya

Understanding the impact of climate change on small businesses is critical to the success of the startups and innovators serving them.

For micro-retailers in Nigeria and Kenya, flooding and drought are cited as the most significant and catastrophic weather events that impact their businesses.

However, as revealed in our new research, the ways in which these weather events impacted their businesses, incomes, and communities was different. In this article, we articulate the specific impacts of drought on the MSMEs we interviewed, laying the groundwork for innovative products and services that can improve their resilience (outlined in article 4 of this series).

“In most cases I get my goods 300 kilometers away in Taveta, where the area is hardly hit by drought. The farmers in Kilifi, my hometown, prepared their lands ready for the planting season but only a few grew. The remaining crops were invaded by locusts. They harvested very little crops and it was not sufficient. The demand was so high that it affected the prices and they started selling to us, shop owners, at higher prices.

Currently, most farmers have harvested the little maize left after the previous drought. They don’t even sell them to the merchants because they fear there could be another bad drought in the coming months.”
Festus, middle-aged male grocery shop retailer, urban area Kenya

Over one-third of micro-retailers interviewed in our research — 37% of MSMEs — were impacted by drought. Rural MSMEs were more impacted by drought than urban or peri-urban MSMEs, which reported flooding as the most impactful weather events on their businesses.

The Impacts of Drought

We found the primary impact of drought on MSMEs to be the reduced availability of goods, as farms aren’t able to produce or distribute as many fruits, vegetables, livestock, or dairy, as well as the knock-on effect of this on MSME customers’ income for those involved in agriculture.

Drought, or prolonged periods of dry and hot weather, brings a myriad of implications and challenges for micro-retailers and their customers. Across a number of crops, farmers and producers struggle to produce the same quantity and quality of outputs during periods of drought. Depending on the severity, this may lead to complete lack of availability of goods, or drive up prices due to scarcity — for micro-retailers and for customers in turn.

This reduction in the ability to grow and produce agricultural goods also impacts the customers of MSMEs in another way — in rural areas, many customers of micro-retailers depend directly on farming or natural resources for their livelihood and income. This means that during periods of drought, the lack of production of crops not only reduces availability of goods, but also reduces the income and spending power of these customers.

Peter Ndulu, 60, is impacted by drought in rural Kenya. Photo courtesy of Mercy Corps.

The reduced spending power of customers has a number of knock-on effects for MSMEs. Many of their customers will simply cut down on their spending and consumption during these periods, leading to a decline in income for MSMEs themselves. Other customers will request to buy goods on credit. This credit would often be informal credit offered directly by the micro-retailer, deferring any income weeks or months into the future, at a time when customers are able to repay.

Allowing customers to purchase goods on informal credit is critical for customer loyalty, but it leaves MSMEs without any immediate income to buy more stock or provide for their own consumption. Many micro-retailers described having to make tough decisions and tradeoffs like this one in order to keep their customers, as a result of stiff competition between MSMEs in their communities. This competition also created pressure from customers to keep their prices low, despite paying a greater price to suppliers, and often micro-retailers had to accept reduced margins to maintain customer loyalty.

The combination of reduced income for customers and lack of availability of goods, leads to a negative feedback loop that puts downward pressure on micro-retailers’ income. Without income, they are unable to purchase additional products to supply to their customers — reducing the availability of critical goods in the last mile.

In addition to the challenges of reduced availability of goods during periods of drought, many small businesses described the challenge of the spoilage of goods, particularly in areas where drought is associated with periods of high heat (a challenge we also found in the case of flooding). It wasn’t uncommon for goods to be destroyed in transit if there was a lack of cold chain logistics or if they were in transit for long periods of time. Goods could also be damaged or spoiled in the shop if the micro-retailer suffered power outages or didn’t have access to cooling solutions.

“Heat waves are common in my area, but they haven’t affected my business as much. The smaller shops out there in the open markets are the ones who were affected. They don’t have air conditioning like me. So their groceries will go bad very quickly and they can’t sell them, and they report higher losses.”
Sebit, a middle-aged female mini-mart owner, urban area, Nigeria

Similar to the case of flooding, when goods were damaged in transit, micro-retailers were often still required to purchase them at full price. They then had to sell these goods at a discount, alongside other goods spoiled in the shop, or discard those that were damaged beyond use, further reducing the income of micro-retailers and the availability of critical goods in last mile communities.

“We normally get most commodities such as tomatoes, potatoes, onions, and cabbages from Taveta and the Tanzanian border. And most of these commodities are perishable. When you buy one box of tomatoes at $37 and by the time they reach your shop nearly a quarter of it is spoiled, you have to sort them out and sell them at a price where you can recover your money. You use the spoiled ones as animal feed to the farmers who rear pigs so you can at least get something to recover your incurred loss.”
Charles, a middle-aged male grocery store owner, urban area, Kenya

Kheira Osman Yusuf, 47, is impacted by drought in rural Kenya. Photo courtesy of Mercy Corps.

Meet Festus, a middle-aged male grocery shop retailer, urban area Kenya

“I usually rely on brokers who buy the goods from the farms and transport it here, where I and other shopkeepers buy from them. The brokers hike their prices when the drought hits and food production goes down. This makes it too expensive for me. I travel to the farms to buy the goods at a cheaper price. I would lease land and grow the crops myself if I could afford it.”

Festus runs a grocery shop in Kilifi, Kenya. He says he has barely recovered from the drought he experienced because as a small retail shop, the sales he makes are not nearly enough to cover expenses and allow him to recover.

The low crop harvest this year was too insufficient for him to make money. The increase in prices of goods due to low supply and high demand also makes it hard for him to sustain his business.

In an attempt to recover from the drought, he reviews his stocking patterns and supply chain. He travels to the farms where his goods are sourced in a bid to cut out the middleman. He feels that fetching the produce himself is much cheaper, and allows him to have a little more cash at hand.

He has also limited his expenses to the most basic necessities, like food, rent, and school fees.

Recovery from Drought

Drought seemed to be very difficult for MSMEs to recover from in comparison to other types of shocks. Only 33% of those impacted by drought in our interviews said they have fully recovered from the event.

“The road to recovery is very slow. I remember it took me a year to fully recover. I was not able to get external support from an organization, but my local savings group allowed me to take out a loan which I used to buy stock. My customers weren’t buying as much because prices had gone up, so I also relied on my brothers’ help.”
Carol, middle-aged female retailer selling consumer goods, rural Kenya

This is in contrast to the same question for those impacted by flooding, where 63% said they had fully recovered. Similarly, the recovery time frame seems to be much longer for drought compared to flooding. More than half of those that have recovered from drought said it took them over a year.

Micro-retailers’ primary concerns during and after times of drought were providing for their basic needs, and accessing stock.

Similar to the case of flooding, many micro-retailers use savings to provide for themselves and their families during drought and times of reduced income. Most would primarily turn to credit in order to restock, however in many cases the stock simply wasn’t available or supply was so limited that the price was out of reach for a micro-retailer — even with a credit product. In cases where stock became available after a drought, micro-retailers lacked appropriate capital in order to restock to pre-drought levels. Particularly true in the case of drought, where communities have had reduced income and consumption over a period of many months, micro-retailers were very wary of the interest rates and payback periods for loan products on the market.

There is a stark mismatch between payback periods for loans measured in days and weeks, and the fact that it took MSMEs over a year to fully recover from a drought.

MSME Recovery from Drought

In addition to right-fit financial products, the micro-retailers we interviewed expressed interest in adapting their business models and shops to be able to better manage drought or high heat conditions in the future. Some mentioned that they would consider the acquisition of assets, such as cooling solutions, for their shop or for storage of goods. They see these assets as being valuable for many reasons:

  • To reduce their losses on perishable goods.
  • To enable them to store perishable goods for longer periods.
  • To gain a competitive advantage over other shops by having a more comfortable environment (through cooling) or having products that are valuable during periods of drought or high heat, such as cold drinks.

Meet Sebit, middle-aged female mini-mart owner in urban area, Nigeria

“I used my savings and took out an additional loan to get air conditioning for my shop. My stock doesn’t go bad, and more customers come to my shop because it is cooler. After that I had to get a solar system because the condition costs a lot when running on electricity.”

Sebit is readying her shop to be able to withstand heat waves, which are common in her locale in Oyo State, Nigeria. She invested in air conditioning because it helps preserve her temperature-controlled goods, and encourages more customers to visit her shop. She has also set up a solar power system since running the air conditioning on electricity is quite expensive. She financed her purchase with her savings and supplemented it by taking out a loan.

Some small businesses mentioned that they were already using adapted stocking patterns as a way to prepare for future droughts. These adjustments in stocking patterns work in a number of different ways:

  • Some micro-retailers are diversifying their businesses into more non-perishable household necessities, such as fast moving consumer goods (FMCG) products, so when the supply of fresh goods is reduced in future drought cycles they still have goods to offer to their communities and maintain their income.
  • A few micro-retailers are increasing their purchases of grains and cereals in times when they are abundant and cheap, and then storing them until there is a reduced supply, so they can maintain their income through these periods.

Many micro-retailers said they would be interested in these adaptation products and strategies alongside information services, because they were unaware of what products and services existed to help them adapt that are right-fit to their context.

As droughts often take many weeks or months to set in, there is also an opportunity for early-warning systems to enable micro-retailers to better stock and prepare for droughts in advance of periods where impacts on the community are most extreme.

Eleanor Muli, 53, is impacted by drought in rural Kenya. Photo courtesy of Mercy Corps.

Opportunities for Resilience

Droughts have significant long-term impact on MSMEs and their communities. The reduced availability of goods and reduced income of customers and community members that work in farming-related industries impacts small business income and the ability to purchase stock when it becomes available. We heard from many micro-retailers that this cycle can have deep, negative consequences on the ability of micro-retailers and their customers to afford or obtain basic necessities. The result of this, as established by other research, links droughts to greater societal challenges such as increased rural-urban migration and conflict, as life in rural areas becomes more difficult.

Based on this research, providing micro-retailers with information and tools before the deep impacts of drought are felt is likely the most effective way to increase the resilience of MSMEs and their communities. Providing micro-retailers with actionable, relevant, and right-sized information alongside financial products to enable them to capture those opportunities is a promising combination. These could be in the form of information for adjusting stocking patterns with long-term supplier credit, or specific assets that could improve their ability to operate in times of drought or high heat along with an asset-financing product.

In the next and final article in the series, we expand on these insights and outline next steps in developing right-fit products and services to enable MSMEs to improve their resilience to climate shocks.

Stay tuned for the full series ‘Understanding MSME Resilience to Climate Change’ launching over November:

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