The principles of “Demand and Supply” that underpin a free market are also the driving forces behind any supply chain network. The business-to-business (B2B) supply chain is a vast sector with several essential components, including logistics, warehousing, last-mile deliveries, and inventory management.
There are several African B2B supply chain startups that are addressing various issues in each vertical. These startups are guided by the fundamental principles of demand and supply. With a significant portion of the retail sector being disorganized, there is immense potential for sustainable growth for B2B e-commerce startups.
B2B e-commerce startups in Africa serve as a connection between producers and retailers, enabling informal street vendors and small-business proprietors to replenish their supplies through mobile apps, WhatsApp, and text messages. These emerging companies offer discounted products and provide logistical support to merchants through their own delivery truck fleets or by engaging third-party businesses for order fulfilment.
Although African demand and supply are influenced by global markets, the consumption of daily essentials subsists even during difficult times like covid or war. This is evident from the functioning of the global supply chain during such challenging periods.
It’s been a tough year for the startup scene, especially in Africa, as venture capital injection has slowed down. African startup funding has dropped by over 50 percent when compared to the same period last year, and it appears that the B2B e-commerce sector is among the worst hit.
What could be the real reason? Is it because it is a non-performing sector? Or because the sector demands higher tranches of investments, more than USD 10-20 M, to make a dent?
Globally, such companies have taken years to build reliable supply networks to meet the end consumer demands and vendor margin requirements.
For any African startup enthusiast or investor, it’s important to evaluate factors that go into building a B2B supply chain company in Africa. To understand the nuts and bolts of a B2B e-commerce startup, I had a conversation with Deepankar Rustagi, the Founder/CEO of Nigeria-based B2B e-commerce startup Omnibiz.
Omnibiz (aka Omniretail) has raised USD 18 M in venture capital to date, attracting marquee investors, including Timon Capital, Musha Ventures, Chapel Hill Denham, Lofty Inc, Ventures Platform, Launch Africa and Sunu Capital. It is currently active in Nigeria, Ghana, and Kenya. Deepankar has been in Nigeria for over 27 years and founded Omnibiz in 2019 after parting with his first company VConnect.
In this exclusive conversation, he takes me through the intricate details of building a robust African B2B e-commerce startup.
Why is there noise around B2B Supply chain funding distress?
There is a chatter in the African tech that B2B e-commerce startups are no longer attractive to investors or face significant challenges. This year, African startups have been particularly affected by the “funding winter,” and other sectors have also seen a decline. However, it’s important to question why B2B e-commerce startups are being singled out in this discussion.
Deepankar explains the scenario quite simply: “I think the decline in the funding is more an external cycle, more a function of the global economics rather than an output of performance of the startups.”
He continues, “So like, in 2021, a large amount of money started flowing in; it was an outcome of an external factor, not because suddenly, in 2021, startups started performing really efficiently. Similarly, in 2023 or late 2022. This decline cannot be attributed to the performance of the startups.”
The key features of the B2B e-commerce sector are that it is a low-margin and long-term play. And investors typically look for low-risk, high-margin, fast-growth sectors/startups. Apart from being a low-margin category, B2B e-commerce also takes time to scale. Therefore, naturally, during the funding crunch, there is a decline in interest in this sector.
B2B e-commerce is a long-term sustainable business which builds the platform for the growth of the entire economy, not just for the business itself. So, the investors who are trying to build sustainable and long-lasting businesses are attracted to this space.
To this, Deepankar adds, “There is still enough amount of funding available from investors who see this as a long-term space. I’m more concerned about the negativity that is evolving with low-margin, time-taking businesses, which are, in reality, strong categories.”
Companies and founders that are trying to create sustainable B2B commerce space are slammed with some cliched questions about burning investors’ money to acquire customers. Now, this is something that any entrepreneur in today’s date is well equipped to answer.
“Obviously, customer acquisition requires significant investment, requires money. It’s not easy to build a large customer base. But acquiring customers with investors’ money should be backed by a great retention strategy for those customers. It cannot be done blindly,” the Omnibiz founder adds.
Building a robust B2B commerce startups
The African market is highly fragmented, making it challenging to determine a universal parameter to evaluate consumer demand across different regions. However, in rapidly developing African nations, B2B commerce is becoming increasingly necessary due to the high demand for essential goods and the costly and non-uniform nature of trade. To improve accessibility for consumers, strong B2B platforms are required to streamline operations. Meanwhile, in other African countries, traditional supply chains are already established to meet consumer needs.
As Deepankar acknowledges, the one thing that is critical for the success of B2B commerce would be the focus on value creation for the retailers. And this one focus should push and streamline the B2B commerce companies to optimise the entire process of moving goods. Many times, founders are lost in the web of price wars and GMV, whereas, the real focus has to be on optimising costs at every step.
Many startups opt to own fleets or assets in order to ensure on-time deliveries, but this can ultimately drain margins and time. A cost-effective approach to transporting goods from point A to point B should be a priority, allowing startups to pass on the benefits to their retailers without relying on deep discounts. In short, maintaining an asset-light approach is critical for building a sustainable B2B commerce company.
Having visibility of the supply chain, end-to-end, is another critical factor in building a robust company, per the Omnibiz chief. And rightly so, as various regions in Africa are great at manufacturing, whereas other parts are still dependent on imports. There’s a lot of wastage throughout the value chain when the data is viewed. According to a report by BCG, Sub-Saharan Africa leads in fruit and vegetable wastage globally. And a lot of wastage can be avoided if the supply chain has visibility of demand.
“Our thesis is that there is a need to create and operate a fully digitised distribution infrastructure in Africa. We also believe that technology will play a very strong role in solving this problem intelligently with scale and profitability since the physical infrastructure exists while the digital and financial ecosystems are catching up, “ adds Adesuwa Rhodes, Founder and Managing Partner of Aruwa Capital Management, an investor in Omnibiz.
‘Efficiency’ is the only key to profitability
B2B commerce business is an operations-heavy business that requires an on-ground strategy for scale. “It is not a pure-play technology business,” emphasises Deepankar. It is a continuous endeavour to decrease costs and increase volumes.
To achieve sustainability, the growth in technology has to be complemented by improving processes. Additionally, it requires volumes for the path to profitability. The reason for having great volumes is quite straightforward. Large volumes ensure lower logistics costs and competitive pricing from distributors or manufacturers.
According to Deepankar, numerous B2B e-commerce startups believe that market expansion is the key to achieving significant volumes. However, this approach can often lead to unexpected costs and inaccurate calculations. Unlike pure-play tech companies such as gaming and fintech businesses, expanding into multiple geographies is not as straightforward for B2B e-commerce companies.
Deepankar specifies that B2B businesses should be seen as regional cluster businesses with an independent P&L for each region rather than as an overall business. That means if a business cannot be profitable within a market, adding more markets will not make it profitable. Expanding geographies makes sense for a startup only when it is able to get the unit economics right for an existing market in which it operates. Once the startup is profitable at the unit economics level, it can use its learnings to align its services and partners in another geography.
Another key component of efficiency is cost benchmarking. Especially for existing categories, it becomes imperative to know the existing costs and a great plan to bring in disruption. Verticals like warehousing and logistics have been operating for decades in Africa, so setting up a warehouse that is five times the existing cost is not viable. What is viable is integrating the existing resources in the system with digitisation. With more visibility and efficiency, the warehousing cost of a distributor can go down. Similarly, limiting the inefficiencies of other key verticals can generate a healthy margin for the business. But, the above is possible only when the cost benchmarking is done correctly.
In a nutshell, it is not feasible for a B2B e-commerce company to replace a distributor, logistics provider or retailer. So if any startup is looking to disrupt this segment, it will have to work with all these components with a focus towards increased efficiency. And efficiency at every stage will keep adding to the margins, thereby increasing the net margin. Mostly, the net margin for B2B e-commerce companies is a single-digit figure.
When it comes to discussing margins within the sector, Deepankar clarifies that B2B is a very large part of the entire business, and there are multiple stakeholders who understand the margins better. You have to understand the stakeholders that you are servicing. B2B between a manufacturer and a wholesaler is treated differently from B2B between a manufacturer and a retailer, and the margins are different. In Nigeria, for instance, a typical retailer places an order of roughly USD 500.00 to USD 700.00 worth of goods from their distributor on a weekly basis. Deepankar emphasizes that this is a rapidly-moving market, and startups must be quick to adjust to the demand-supply equation. While the order value may indicate narrow margins, it can also lead to double-digit margins by combining volume and efficiency.
Another investor in Omnibiz, Idris Bello, Managing Partner at LoftyInc Capital, shares a similar viewpoint here, “We believe that with the right strategies and investments, B2B retail e-commerce platforms will help revolutionise the value chain and drive economic growth across the continent. With the right tools for digitisation and access to working capital, we see a future where these existing retailers will create an ecosystem that offers a seamless experience for every service that reaches the end customer.”
The tipping point
Consumerism is recovering in Sub-Saharan Africa after the income crunch during and post-pandemic. The macroeconomic figures may not be very exciting, but they remain encouraging for retail brands. Africa remains an attractive market for consumer products that are ready to experiment and customise to African buyer habits. But, another challenge that remains to be solved is how to make these products available at convenient locations.
Deepakar tells me, “Consumerism is an output of various factors. It is often associated with just the disposable income, but I would say it’s also how structured the supply is.”
He recollects the supply challenge from his growing-up days in Lagos. He adds, “ We used to travel 25 kilometres every week for our groceries while growing up, and it is because we could not find a variety of essential goods in the local stores”.
If an average consumer has to invest four to six hours on a weekly basis just to secure household supplies, naturally, it does not encourage consumerism. Similarly, if a retailer has to procure a variety of supplies, they might have to shut their shop for a day or half a day, go to markets and procure the goods.
“B2B commerce is precisely building the missing link of convenience for retailers to provide access to the nooks and corners of the country,” says Deepankar.
Consumerism will eventually be led by the African middle class, which is still coming together on the continent. The last figures, as per a 2011 AfDB report, cites the African middle class to be 330 million scattered across the entire region. The rise in consumption is also backed by Africa’s rising population, which is estimated to cross 2 billion by 2050.
Now, look at these figures in the light of the B2B commerce space. The supply chain sector is a fundamental category that takes years to build. This is why it is important to start building this sector now. While the governments are committed to setting the blueprint for sustainable and inclusive growth of the citizens, the private sector (and startups) will be required to step up and solve many other fundamental challenges.
Deepankar adds here, “I would say the markets we are operating in, we’re still not there for consumerism to start scaling. But we are building the stepping stones for consumerism to have the platform for growth.”
So, is it a moonshot sector in the African ecosystem?
B2B e-commerce startups amassed over USD 250 M in 2022, only second to Africa’s real ‘darling’ sector – fintech. The sudden influx of capital in this sector pushed startups to vie for the same market segment. Armed with substantial capital, the companies sought to woo retailers with the ‘cheapest’ category promise, something we have seen in the form of ‘discount wars’ globally between consumer-facing e-commerce platforms.
There are of late sentiments that the budding business-facing e-commerce sector may have become too crowded. So, should it stop startups from building in this segment? Or does this mean investors should cool off on funding this sector further?
Like many other sectors, B2B e-commerce needs to build its learning base. During the journey, there will be failures, but there will be learnings too. So, perhaps startups trying to be everything in the B2B space must reflect on redefining their niche. Nevertheless, there is no shortage of believers in spite of the challenges that the B2B e-commerce space is facing in Africa.
“The future of B2B retail e-commerce in Africa looks great, with funding and competition driving innovation and growth. No doubt there are challenges, such as market fragmentation and the need for more value addition other than procurement and delivery of products. This will be a win-win situation for not only manufacturers and the supply chain but the consumers purchasing from the retailers,“ LoftyInc Capital’s Bello says.
