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  • Writer's pictureAnzetse Were

Informal markets still rule in Africa- why?

This article first appeared in Inc.Africa on May 11, 2022.

Africa has been one of the fastest-growing consumer markets in the world and regardless of income, the vast majority of consumer spending takes place through informal channels. This means selling to Africans consistently at scale, means understanding and/or leveraging informal channels.

As background, consumer spending in Africa grew at a rate of 3.9% between 2010-15, reached $1.4 trillion in 2015 and is expected to reach $2.1 trillion by 2025, and $2.5 trillion by 2030. By 2030, the largest consumer markets will include Nigeria, Egypt, and South Africa with substantial opportunities in Algeria, Angola, Ethiopia, Ghana, Kenya, Morocco, Sudan, Tunisia, and Tanzania.

Informal purchases can be defined as those made from vendors which typically operate on roadside, as table-top vendors, hawkers, shopkeepers, open air markets, informal shops/kiosks etc, are not regulated, and are often unlicensed/ unregistered. Formal purchases are through formally registered and licensed vendors such as supermarkets and online sources. We are also seeing the growth of hybrid vendors---those who sell a portion of their goods through formal channels (perhaps through an e-commerce platform) but still have a small informal shop/business where a bulk of sales occur.

As mentioned, the vast majority of consumer spending in Africa (particularly private consumption) is informal, even in those countries with the most well-developed retail and distribution markets. And while getting updated data is tricky, by 2015 formal retail accounted for just 39% of shopping visits in South Africa; in Ghana, Cameroon, Ethiopia, and Egypt, informal stalls and markets accounted for more than 95% of consumer spending.

Regardless of income levels, most consumers still buy most items through informal channels particularly food items and groceries. And for lower income households that typically earn less than USD2,500 annually (20% of sub-Saharan Africa’s population in 2021), informal channels are even more dominant for purchases. And while COVID-19 has engendered deepened uptake of digital solutions for purchases, it is unclear that extent to which that pivot is informed by informal vendors building out their digital capabilities, as opposed to consumers pivoting to fully digital points of sale.

The next question is why. Why do informal points of sale remain so popular, despite improvements in formal distribution, deepening e-commerce capabilities and growing incomes? There are 5 answers to that:

  • Proximity: Informal vendors are located closer to consumers, along transport routes and hubs, or within local communities. Customers do not have to inconvenience themselves and travel to an outlet--they can buy what they want from the comfort of their car or literally walk to the small kiosk for bread and milk in the morning. This proximity also makes customers feel like they are getting the freshest produce of the day.

  • Customisation: Due to proximity, informal vendors know and stock customers’ preferred brands and products. In the case of larger items such as furniture, it is possible to customise the exact features, proportions and style of the item required. For example, one can take a picture of a sofa set or bed from a magazine and the carpenter, often on the roadside, will make it to the customer’s specifications.

  • Affordability: Informal vendors are aware that keeping the costs of their products and/or service low is key to attracting and retaining customers. They deploy different strategies to achieve this objective, mainly by limiting their fixed costs. Many hire friends/relatives they do not have to pay as employees; others will stick to a certain portion of a roadside as they have no fixed rent to pay there. In Kenya, during COVID times, many informal vendors went to the extent of absorbing the increased costs of supplies and did not pass the full increase on to the customer. While this affected their bottom line, they did do so to retain customers so that they have someone to sell to when things get better.

  • Repackaging: Informal vendors often repackage larger items found in supermarkets into smaller portions which they then sell in smaller and more affordable unit prices. In some countries, you can buy just a spoon of cooking fat or a dab of toothpaste—the immediate amount needed for a single use. The combination of this and the general affordability of informal vendors is crucial to many consumers who have limited and unpredictable sources of income, and who are always under pressure to meet multiple needs.

  • Cash and Goods on credit: Informal vendors offer credit to regular customers in the form of goods, services and cash. In Kenya this became a lifeline from many at the height of COVID when 43% of those surveyed stated they relied on some form of shopkeeper credit. As of December 2021, almost 30% of Kenyans rely on cash, good and services on loan by a shopkeeper.

This is not to say that informal points of purchase are perfect, they are not. Key areas of concern include the sale of counterfeit products, challenges with non-standardised goods and services, and limited stock variety and depth. However, the bottom line is that as long as informal vendors continue to offer this bouquet of features, African consumers will continue to value and prefer them. Given the difficulty or lack of appetite formal vendors have in adopting or integrating some of these features into their own offer, informal markets will continue to rule in Africa.

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