Battle Of The Titans - Traditional Vs. Modern Trade – In The Eyes Of The Consumer

A few months ago we wanted to find out what people really think about their different grocery shopping options and what drives them to shop at one or the other. We assembled different groups of mid to low income consumers in Nairobi to discuss exactly this in detail. We deliberately started the discussion very broad asking participants to tell us about as many channels as possible. We touched on online shopping, wholesale, street vendors etc. However, very quickly the discussion narrowed down to the core decision mid to low income shoppers in Nairobi face on a daily basis – Small kiosk (duka) vs. Supermarket. Here is what we learned.

Dukas still the preferred and most frequented channel.

To our surprise when asked for their favourite shopping channel, the vast majority had a clear answer: the duka. So why is the duka still so popular? 

1. Convenience - proximity and quick service

For many there is a duka just steps away from their home or work. Service is quick with no long queues like in the supermarket.

2. Buying small quantities

Dukas store goods in small quantities and/or are able to break down bigger packs depending on the customer needs (e.g. sugar, oil, soap). This caters perfectly to those who are cash restrained often earning their wages on a daily basis to just buy what is required each day.

3. Familiarity and Relationships

Most consumers have developed a strong relationship with their local shopkeeper and going to the duka gives a strong sense of familiarity and belonging

4. Credit 

Linked to this, due to their close relationships, customers are able to receive short term credits if they don't have cash at hand to be repaid at a later time.

Four strong reasons that drive a high level of loyalty towards dukas. But don't they get a better experience at a supermarket?

Supermarkets are mostly used for occasional bulk shopping

A lot of our consumers stated to go to the supermarket mostly once or a few times a month to do bulk shopping. Key drivers are

1. Cheaper bulk prices, discounts & promotions

Most customers perceive it as cheaper to buy larger pack sizes in the supermarket that last the whole month. Also, consumers get access to discounts and promotions which are not offered in dukas.

2. Earning points

Earning points via loyalty cards is another attraction of supermarkets as it gives customers a certain level of security to be able to buy 'on points' at a time when cash is short. This is quite an interesting dynamic given that it is a prominent bonus in the mind of consumers despite bonus points often not amounting to more than 1% of the purchase price.

3. Variety of goods

It speaks for itself. Often it does not actually lead to purchases but consumers simply enjoy browsing through the aisles, looking at the range of products and informing themselves.

4. Prestige

Particularly in our lower income discussion groups, going to the supermarket was linked significantly with prestige. It was often mentioned how 'walking with a Nakumatt bag' signals to others that 'you have money' even if one only bought a pack of flour. On the flip side, the same can also serve as a hindrance for supermarket purchases as many consumers told us how they often feel out of place when going to the supermarket especially when they only have a small amount to spend. 'You are looked down upon by the customers pushing their full shopping carts.'


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What Keeps Shopkeepers Up At Night?

Over the last months, we had the honor to have many in depth discussions with shopkeepers including a series of focus groups with shopkeepers in different areas. We also ran a series of experiments with different tech products in dukas(more about this in a later post) to see how these challenges pan out in practice and what can potentially be done to help. In this and the following articles we want to share some key insights on what we have learned. Today’s edition focuses on the challenges shopkeepers face or – What keeps shopkeepers up at night?

1. Tough competition

Not only has the number of supermarkets increased in recent years but also the number of dukas itself increased exponentially. Today you see many places where there are several shops just next to each other offering a similar if not the exact same set of products. Shopkeepers view on how to compete? Mainly through building personal relationships with their customers, offering a quick and friendly service as well as having a wide range of products available consistently.

Further, supermarkets offer tough competition for the dukas. In search of new growth and based on the premise of a growing middle class they have moved into areas that were previously exclusively served by dukas. Supermarkets offer a wide product offering as well as allow customers to browse through the aisles unhindered. Dukas on the other hand are severely limited by space and even if they offer a wide range of products, those are often not visible easily to the customers. Finally, supermarkets enjoy significant discounts from manufacturers making it tough to compete on price for dukas on a number of product categories. Overall supermarkets are a much bigger concern for dukas in middle income areas (e.g. an Umoja in Nairobi) vs. lower income areas (e.g. a Kayole in Nairobi) but this might also change over time. Key to compete is still the often much more convenient location of the duka right next to where customers live or work as well as the ability to receive credit.

2. Giving customers credit

Talking about credit, while this is major tool of competition for dukas, it is also a major source of headache for shopkeepers. The typical “I will bring the money tomorrow” can lead to weeks of outstanding credit, many small amounts add up and are hard to track in the midst of the busy day of a shopkeeper. Some shopkeepers tell us of more than $1,000 of outstanding funds. Large outstanding funds lead to capital shortages which lead to fewer products on the shelves which is detrimental to the duka business. But often the shopkeepers are in a tough situation – being flexible and forthcoming to their customers to keep them loyal – while setting clear boundaries and not putting their business at risk. It’s a fine balance they have to walk every day.

3. Lack of expansion capital

You see many shops in the market that have not changed a bit in many years, sometimes for decades. Why is that? Why can Nakumatt expand and dukas can’t? Access to capital is often one of the key drivers. While shopkeepers often run very stable predictable businesses, none of those transaction move through the formal banking system and thus it is hard to produce statements that are required by many institutions to acquire affordable loans. On top, trade credit from manufacturers is rarely given in Kenya (like it is in many other countries) putting the shopkeeper in a negative cash position given he or she lends some money to customers. How do some shops still expand? Often putting every penny or shilling earned back into the business while funding personal expenses via the job of a spouse – a lucky situation not many find themselves in.

4. Lack of track records and accounting

As said above, 99% of transactions from shopkeeper to customer are performed in cash. On top there is a constant activity of buying new products from the various suppliers of goods. Hence at the end of the day, it is not only difficult to get a loan, it is also quite challenging to keep proper track of revenues and profitability of a shop. How much can I take out at the end of the day to finance my personal expenses? How much more do I need to sell to afford the electricity to power a fridge? Can I afford City Council fees for painting my shop in Safaricom green? Which product is most profitable?

All questions that seem simple, but are actually not in the reality of many shopkeepers. We found some very interesting solutions to tackle this challenge. For example, one shopkeepers would have over 15 different money boxes in her shop for different product categories and she would only take money to purchase and put money from purchases in that specific category in the specific box. This way she would track on whether the money grows with time and how fast to assess the attractiveness of the product category.

Most shopkeepers keep books where they record purchases, sales, credits etc. but as you can imagine things get very messy, particularly in the busy morning and evening hours.

5. It’s a tough job at the end of the day

From the outside, a shopkeeper job seems pretty simple – buy goods, sell goods, make a margin. True in some ways but not in many others. First of all, most shopkeepers work insanely long hours. Most open their shops around 6 am to catch the early morning commuters coming for their milk and bread and the like while not closing before 10 pm (sometimes even later) to cater to those coming back from work and taking advantage of the fact that many supermarkets are closed at this time.

During the less busy hours they now take care of purchases, cleaning up their shops, sorting goods, taking stock. The vast majority of this time is spent standing. Finally, especially those running mobile money outlets on the side, face a significant risk of being robbed – both at bright daylight and at night and hence constantly have to be on the lookout.

Sounds like quite a challenging job overall.

So what makes people WANT to own shops?

The key drivers seem to be as follows:

1. The premise of being your own boss

A major attraction for many, owning your own business is considered a sign of status and having made it in life.

2. Decent profits if run well

Shopkeepers are able to make a decent living for themselves and their families if their shops achieve a reasonable scale.

3. Relatively low barriers to entry – licenses, capital and skills

Many people have at least somebody within their extended family who owns a retail business and thus are able to acquire the required skills relatively easily. In terms of capital about $500 is often enough to get started and grow from here (we have heard of shopkeepers of starting with less than $100) which is in an attainable range for many. The biggest barrier to entry today is actually securing a good location. In well populated areas, for example shop areas that open up at the bottom of new apartment blocks are gone in no time. It takes persistence to secure those spots, but it’s certainly doable.

The next edition will follow next week – stay tuned. We would be thrilled to hear any feedback/thoughts/comments from you!