Bloemfontein – Townships are profitable gold mines, but enterprises must not think they can dispose of their reject products there.
In their new book New Markets, New Mindsets Drs Tashmia Ismail and Nicola Kleyn, senior lecturers at the Gordon Institute of Business Science (Gibs), are investigating the challenges and opportunities that low-income markets hold for South African businesses.
The book provides an overview of research into this market segment and gives a number of South African case studies to explain the mental shifts needed by enterprises to achieve success.
Ismail says the ordinary business model of delivering goods and services to a community for profit is not sustainable in lower-income markets.
According to research undertaken by Credit Suisse last year, 67.6% of the global population owns only 3.3% of the world’s wealth.
“If that is how the majority of the population lives, we cannot continue doing business as we always have.”
Ismail says one of the biggest misperceptions about low-income markets is that they are prepared to buy cheap, shoddy products.
“Of all people, these consumers are looking for the best value for their money, because they can't afford a single wastage.”
Research is essential for achieving success in a low-income market. Consumers with little disposable income will buy only those products that really meet their specific needs.
One of the case studies in the book is Massmart’s [JSE:MSM] entry into food retailing in townships. In 2007 Massmart bought four shops close to taxi stands and bus stops and in 2008 acquired a 51% stake in food retailer Cambridge Food.
Jay Currie, managing director of Cambridge Food, says Massmart learnt a lot from Cambridge, which already had business experience among lower income groups.
Currie says lower LSM groups represent about half of what is spent on food in South Africa.
Massmart also realised the importance of the fact that more than 80% of South Africans do not have their own cars.
“Up to 60% of expenditure on food is done by this income group. If you want to open a food retail store, it should therefore be near a transport point or in a well-populated residential area.”
He says Massmart also realised that the big national retailers supply lower income groups with groceries, but not really with fresh meat, inter alia.
“If you walk through a taxi stand or business nucleus, you see many independent meat sellers and butcheries. At Park Station (in the Johannesburg central business district) there is a butchery with a turnover of R10m a month.”
Currie says Massmart realised that the consumers who buy here have a different approach to fresh meat.
“Many don’t have fridges and fresh meat is therefore an important aspirational product. They don’t automatically assume that the meat presented to them is fresh. They want visual proof.”
According to Currie, Massmart says it realises that a relationship of trust exists between consumers and where they buy.
“The people are poor, but not stupid. They are very, very, selective about what they buy. If you have only R10 to buy tomatoes, every single tomato has to be good.”
Ismail says consumers’ particular needs mean that in low-income markets it's not always possible to do business on a larger scale. A strategy that works in Alexandra may be a disaster a couple of kilometres away in Diepsloot.
These markets do however allow for businesses to expand by adapting products or services to local requirements and then applying the new idea in other markets.
Soft drink manufacturer and distributor ABI [JSE:ABI], for instance, recognised an opportunity to work with hawkers and strengthen its brand, says Laurenti Mothibi, ABI’s operations manager for field services.
“We provided them with ice coolers. This meant they could sell our product. So this was a growth opportunity we’d never had before.”
ABI also upgraded smaller spaza shops to sell its products. At Alfred’s Tuck Shop, ABI put in a larger fridge and painted the whole house red. “Where he previously sold nine crates of soft drinks a week, he now sells 50.”
Mothibi says the upgrading of a building means a lot for communities in which services and infrastructure are neglected.
Ismail says a relationship with local communities must form an important part of the strategy of any enterprise wanting to do business in townships.
This relationship can go further than simply winning the trust of the community. Enterprises can also help uplift communities and thus cultivate more mature markets for their products.
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