Source/author : Shell Foundation
Read article : https://bit.ly/2tLM2au
Twenty years ago, the notion that enterprises could provide essential services to low-income1 communities in Africa and Asia – in ways that could attract private capital to scale and materially contribute to sustainable development – was totally unproven.
Today several businesses have emerged with the potential to materially contribute towards the SDGs2, driving improvements in health, quality of life, education, productivity and earning power for millions of people in rural areas. Social enterprises offering products ranging from durables such as solar lights, cleaner cookstoves or water purifiers, to financial services like microfinance and health insurance, to improved productive assets including fertilisers, sewing machines, water pumps or irrigation systems, are now serving some of the world’s poorest customers.
By way of example, the market for off-grid household energy, one of the fastest growing sectors, has grown from less than 10 certified players a decade ago to over 100 certified providers that serve 200m people today, having attracted over $1bn in investment.
There is, however, a counter-weight to this progress. Market penetration for impact products remains low (sub-5% for off-grid solar) – mainly because the cost to serve rural customers has proved overwhelmingly high. Social enterprises struggle to serve people in remote locations and frontier markets and to reach the very poorest consumers. With the majority of demand coming from these areas, and scale essential to attract investment into low-margin businesses, this presents an unresolved conundrum.
This report, therefore, focuses on a new question: can we improve the economics of social enterprises serving last mile customers to the point where they can secure sufficient investment to serve billions, not millions, of people living on $2 to $10 a day.
Meeting the needs of last mile customers
Traditional businesses who wish to operate in rural areas of Africa and Asia face high distribution, marketing and sales costs, which means their customers pay a hefty premium on a very limited range of products.
High costs and low margins are accepted as the inevitable consequence of serving consumers with low and unpredictable earning patterns, spread across vast geographies, mostly without good access by road or rail. Poor communication channels, lengthy payment cycles and limited internet connectivity complicate logistics and stock management. Bespoke distribution models are needed to cater for huge variations in population density, infrastructure, culture and local talent.
The cost for a social enterprise to overcome these challenges is even higher, given there is limited existing knowledge of their products among retailers and customers, and few distribution partners have the skills to build demand for unknown products. Building value chains from scratch, and servicing them, requires major investment – yet most investors, conscious of the magnitude of this task and the level of scale necessary for returns, mark such opportunities as ‘high risk’.