Why Entrepreneurs Are Missing Out On Africa’s ‘Hidden’ Informal Markets
Africa’s informal markets represent an enormous part of the continent’s trade and employment, but the fact that they are essentially hidden means the region is not tapping into the huge opportunities they offer.
According to the International Labour Organisation, 41 percent of sub-Saharan Africa’s GDP is from the informal sector. None of this is taxed. In addition, 72 percent of total employment is in informal markets.
Though informal markets have their detractors, the sheer size of them across the continent means they cannot be ignored.
“Whilst many international bodies and some African leaders are vocally opposed to the existence of the informal market, the reality is that it is a huge community-based value chain with enormous potential for investment,” says Jean-Claude Bastos de Morais, founder of the African Innovation Foundation, who has launched an incubator in Angola’s biggest slum.
He believes key areas that need exploring are agribusiness, textiles, timber and forestry, as there are huge opportunities to disrupt smallholder enterprise systems and introduce innovative concepts that can be sustainable and profitable.
Yet not enough companies see the informal sector as a potential “partner” for their business operations.
“For example, in their supply chain, companies could increase their procurement from the informal sector, which could in turn bring these smallholders into the formal mix, thus narrowing the gap,” De Morais said.
“We should be exploring ways to create mechanisms and ecosystems that enable local and international retailers to buy legally from suppliers in the informal sector as there is so much potential for innovative SMEs and creative industries to emerge more constructively along the value chain if the market is open to them.”
One company that is exploring these opportunities is South African startup Nomanini, which provides point of sale and enterprise management devices to informal merchants across Africa, allowing them to sell virtual good such as airtime.
Chief executive officer Vahid Monadjem says informal markets are still “incredibly under-served”, as common logic suggests that serving them is not profitable, or at least not as profitable as serving formal markets.
“This is based on the notion that people in informal markets do not have a high disposable income. However, the relationship between the informal market and earnings is not simple due to the sheer size and reach of informal market,” he said.
There are challenges, however.
“Informality, but it’s very nature, is unpredictable and fragmented. This extends to business environments, where you need to be agile to be successful and find ways to aggregate users,” Monadjem said.
Lack of information masks potential of informal markets
Frederico Silva is co-founder and chief executive officer of UX, the Mozambican company behind Biscate, an on-demand app that connects informal handymen with customers. He says a major issue is that a large amount of investment is required to reach critical mass in informal markets.
“It is a volumes-based business with low profit margins that takes significant investment until it breaks even,” Silva said.
“The other critical issue is related to the lack of information regarding informal markets, which makes it very hard to address. Decision-making is often compromised by poor market intelligence.”
Yet the fact that many entrepreneurs have been put off by these potential issues has left a large, unaddressed market for those willing to tackle them. Silva said entrepreneurs would be amazed to hear how, once there has been fair adoption of a product or service, word-of-mouth takes off in the informal realm.
“All we had to do was to reach out to 50 friends on Facebook and ask them to recommend their favourite workers so they’d register on the app. Three months later and we had over 4,000 workers registered, with barely any advertising,” he said. “The need for work opportunities is so great for the solution to be neglected, and the key is deliver on a sound product, despite the lack of alternative solutions.”
These views are shared by Lelemba Phiri, chief marketing officer at Zoona, which provides digital financial services to informal markets. She says companies looking to work in such markets must have a “single-minded and constant focus on being customer-centric”.
“The important thing to remember, however, is that just because markets are informal, does not mean they are not sophisticated,” Phiri said.
“Nobody knows the problem better than the people that deal with it on a daily basis – so it makes business sense that they lead the solution development. All our products are co-developed with customers and repeatedly tested in market at a very early stage in development,” said Phiri.
Quite a lot of effort to, but it is worth it in the end. Informal markets are a huge opportunity. In Zambia, Zoona’s first market, for example, the informal sector accounts for 90 percent of employment, and represents well over one million informal businesses.
This, then, is the size of the opportunity. As yet, only a few companies are taking the time to seize it. For them will be left the spoils.
Tom Jackson is the co-founder of tech news and research platform Disrupt Africa and a journalist covering innovation on the continent from the Cape to Cairo.