Can Local Context Build A Giant?
The power of local context is often overlooked in fragmented markets, but it may present one of the biggest opportunities.
The rhetoric of building “X for Africa” implies one has to capture the entire continent in order to build a valuable business. Africa is home to 400 companies earning revenues of $1 billion or more, and nearly 700 companies with revenue greater than $500 million. None of them are in all 55 countries. While the opportunity in Africa is evaluated as the sum of her countries, each country represents a different market with its own local context. Most business models will need to adapt in some form when they enter a new market. This could mean looking at a different set of primary customers, adapting to different cultural norms or pivoting the product entirely to adhere to local regulations.
Local context creates friction for companies looking to expand beyond one primary market. But it also serves as a moat for companies based in that market. The high friction expansion process is creating a ripe environment for market consolidation. This is further catalyzed by increased competition, and the proliferation of similar models in different markets.
But just how powerful is local context?
Can you build a billion dollar business by focusing on one African country?
A quick look at the top GDPs in Africa will suggest that it’s possible:
GDP in 2020 (In billions, U.S. Dollars)
Source: Statista
Assuming on average about 40% of a country’s GDP is in services, you theoretically could build a billion-dollar business outside resource extraction, agriculture or manufacturing in a single market. Even in an emerging industry.
It’s been done before.
Safaricom is one of the most profitable companies in East Africa. It generates more than $2 Billion in revenue annually while operating in one primary market, Kenya. The Company started as a mobile network provider, expanded into internet services, and built the most successful mobile money network in the world with M-Pesa. Safaricom now has 63% market share and a market cap of $14 Billion, approximately 14% of Kenya’s GDP. The Company’s success with M-Pesa is largely attributed to understanding local consumer behavior, and building with a specific population in mind, Kenya’s.
So how did they do it?
Developing an in-depth understanding of their user base is something Safaricom did exceptionally well. M-Pesa started out as a product to help facilitate the disbursement and payment of microloans. However, early users were using it to transfer money to each other. When the Company noticed this, they created one of the most sophisticated agent networks in the world to facilitate bill payments, money transfers, withdrawals and deposits. M-Pesa helped Safaricom meaningfully grow its customer base and create extraordinary customer loyalty. In 2019, M-Pesa made up approximately 30% of Safaricom’s revenue ($681M), and the Company still believes the Kenyan market is underpenetrated. The adoption of M-Pesa has unsurprisingly increased significantly during the pandemic.
Safaricom now owns one of the most valuable distribution networks in Kenya, allowing them to deploy new products in a fairly inexpensive manner, and making it difficult for their competitors to compete.
Safaricom’s Financial Product Suite
Source: Safaricom FY 2020 Annual Report
Safaricom’s success illustrates the power of local first solutions, i.e. solutions focused on meaningfully serving one market. It doesn’t mean these solutions can’t or shouldn’t expand, but prioritizing one market allows them to create incredible value for their customer base while increasing their average revenue per user (ARPU). It’s also worth noting that lessons learned from focusing on one market may be transferable when navigating expansion. The success of M-Pesa is in many ways dictating Safaricom’s expansion strategy. Last year, Safaricom entered into a joint venture with South Africa’s Vodacom to grow M-Pesa’s footprint in other African countries.
Access to capital was another big advantage for Safaricom. The Company received investment and partnership from Vodafone, which enabled them to invest significantly in mobile connectivity, and play a critical role in catalyzing mobile adoption in Kenya. Their M-Pesa agent network also required significant investment to set up. Infrastructure defining companies like Safaricom are best placed to become local giants. However, they tend to be incredibly capital intensive, and while there has been an increase in access to capital on the continent, there is still a shortage of capital available to entrepreneurs. This creates a bias towards funding more capital efficient models, making it difficult for local entrepreneurs to build high potential but capital intensive businesses. This is exacerbated by the narrative of Africa as a single market, which undermines the value of local context, and the role local first solutions will play in creating value on the continent.
Safaricom also benefited from an aligned regulatory environment. The Kenyan government owns 35% of the Company, and benefits from the Company’s significant tax revenues. This incentive alignment allowed them to take meaningful risks with their M-Pesa product when the regulatory environment hadn’t evolved enough to govern it. Regulation is a growing pain for any fast growing startup, and incentive alignment is critical. Expansion to multiple markets has been hailed as a way to diversify regulation and policy risk, and there is some merit to this. We’ve already seen how swift regulation changes like Nigeria’s motorcycle taxi ban and crypto crackdown has hindered many business models. However, expanding to other markets doesn’t solve the need to create alignment with regulatory bodies as companies scale.
Source: Safaricom FY 2020 Annual Report
Safaricom also had the advantage of Kenya’s relatively large market size. Kenya is the 7th most populous country in Africa with a population of 52 Million, and has the 6th highest GDP at $101 Billion. Approximately 43% of which is accounted for by the services sector. This singular market strategy may be more difficult to execute in smaller markets. However, this could be mitigated by effectively building a more extensive product offering to increase ARPU. It’s also worth noting smaller markets will likely have less competition in the race to build locally. Sectors that are ripe for disruption by local first solutions include the informal labor market, e-commerce, logistics, among others.
Africa needs more people to build and invest in local first solutions. They are well positioned to create meaningful impact and value for the continent in the long run by facilitating development in individual countries. Building with one market in mind is risky but if well executed, can create an incredibly valuable business, without the immediate need to navigate friction associated with expansion.
P.S. We’ll be hosting a conversation on expansion on Clubhouse with African entrepreneurs who have successfully expanded out of their home markets, so please join us for that.
You can also leave your comments here, or reach out to us on twitter at @Africa_Playbook to get your questions in!
Onwards, Africa!