ImpactAlpha, May 27 – To meet the Sustainable Development Goals, remote and low-income populations need access to beneficial products that address basic needs, such as solar lights, improved cooking solutions, water filters and agricultural inputs – and financing to acquire them. Distributors who are serving these “last mile” populations therefore play a crucial role in sustainable development by driving demand for beneficial products and delivering them to hard-to-reach consumers.
While the importance of last-mile distribution is increasingly recognised, funding is still not flowing into this space.
The Global Distributors Collective, or GDC, exists to support last-mile distributors to reach millions of underserved customers with beneficial products. The GDC’s membership of 206 last-mile distributors has reached more than 35 million last-mile consumers.
At the GDC, we have been grappling with how to bridge the financing gap. Investors and donors are asking us questions about this too. What does growth and impact look like in the last-mile distribution sector? What kinds of companies are achieving meaningful impact? What type of capital is needed to support those companies? What barriers do last-mile distributors face in accessing that capital?
To answer some of these questions, we have undertaken in-depth interviews with 21 of the largest last-mile distributors within GDC’s membership over the past six months. This is not a representative sample of GDC’s membership or the last-mile distribution sector, since we focused on companies with annual sales revenue above $500,000 that have more experience with fundraising than their smaller counterparts. But our findings are compelling, and highly relevant to those interested in working with this unique and important segment of the sustainable development ecosystem.
The GDC defines last-mile distributors as organizations engaged in distribution and sales of beneficial products to low-income and/or remote households. An analysis of GDC membership reveals that last-mile distributors:
- Sell a diverse range of products, with over half of those in the GDC membership selling more than one product category
- Also often provide consumer financing (69% of members) and offer warranties (65%)
- Are mostly young and small: 57% have been in operation for less than five years and 81% have an annual sales turnover of less than $500,000
- Are majority (70% of members) locally-led, which is defined as having at least one co-founder from the country or region in which the business operates
GDC research highlights the diverse impacts of last-mile distributors in terms of closing product access gaps, particularly for the hardest-to-reach customers; building sustainable markets by creating trust and building demand where none has previously existed; and creating jobs in retail and sales, with positive knock-on effects across the value chain.
Our latest research, supported by UK aid and GET.invest, helps quantify this impact. The 21 last-mile distributors we interviewed have reached a total of 2.6 million customers to date, 900,000 of those in 2020 alone. This translates into 42,000 new customers per company in 2020. They achieved total sales of $62 million in 2020, representing $3 million in average annual sales revenue per company.
The research also uncovered several key insights into the growth and fundraising journeys of last-mile distributors.
Fast-growth and equity-dependent
We mapped the 2020 revenue of last-mile distributors in our sample against the number of years they have been in operation. On average, our sample’s revenue grew by $440,000 per year of operation. We then categorised last-mile distributors in our sample as either faster-growth (above $440,000 per year) or slower-growth (below $440,000 per year). (From a broader sector perspective, all of these 21 distributors classify as fast-growth.)
Our analysis shows that faster-growth distributors—those whose revenue grew by more than $400,000 per year—have funded growth primarily with equity at all stages, from start-up to regional and international expansion. (For graphic representations, check out the full research piece.)
But such faster-growth distributors have often had to raise more equity than they would have liked. That’s because they have struggled to access working capital of appropriate tenor and terms, partially because of the debt-to-equity requirements of investors, and so have had to use equity to finance inventory and operations.
Zimbabwe-based Zonful Energy, for example, had 300,000 outstanding orders for solar products that it could not fulfil because of insufficient working capital. The company could not raise a working capital loan until it raised more equity.
Raising equity is becoming increasingly difficult for last-mile distributors as they grow. To quote one distributor we spoke to: “Equity investors have already placed their bets on some of the first players in this space (especially pay-as-you-go), often with unrealistic growth expectations. As they have not seen profitability with scale, they are either unable to exit or reluctant to support others with large amounts.”
Slow-growth and debt-dependent
In contrast to their faster-growth peers, slower-growth distributors have funded company development with grants and growth with debt, albeit in with substantially smaller amounts. Raising working capital loans has been a challenge for these companies, given the need to demonstrate substantial track record and turnover – something companies do not have until they’ve been able to buy inventory, which requires funding. Kenya’s Bidhaa Sasa, for example, was only able to raise its first loan of more than $200,000 after four years of operation. This allowed the company to significantly expand its network and double annual revenue within a year.
Slower-growth distributors have raised a limited amount of equity, primarily from family, friends and angel investors. Some have looked to raise equity for growth and have been unable to. A third of the last-mile distributors interviewed, however, made a deliberate choice not to raise equity, for reasons including the growth and return expectations of VCs, a desire to retain business ownership, and the cost and complexity of the process.
Slower, but more efficient
We tried to understand how efficiently last-mile distributors had used funding to generate sales. Our findings: Faster-growth distributors have sold 2.7x more products than slower-growth distributors, but have needed to raise 3.5x more capital to do so. Also: International distributors have sold 1.3x more products than local distributors, but have needed to raise 3.6x more capital to do so.
We arrived at our findings by calculating the ratio between total sales revenue to date for these companies, and the total capital they had raised of all types. (This analysis excluded funds raised within the past year, with the assumption that it was too soon for these funds to have translated into increased turnover.)
The findings suggest that while faster-growth and international distributors sell more products faster, local and slower-growth distributors might offer a more efficient channel to translate investment into impact. This could be because, without an equity cushion, local and slower-growth distributors prioritise achieving profitability over rapid scaling.
In addition, local distributors are likely to have lower overheads because of their more localized teams, resulting in slower cash burn for similar sales levels. This is an important finding for the sector, considering most last-mile distributors are local, slower-growth companies.
Fundraising challenges are similar for all early-stage last-mile distributors. They vary later on, based on whether companies choose a faster or slower-growth trajectory.
There are three key forms of financing that last-mile distributors need.
- Grant or equity financing in their first two to three years of operations to build their distribution network – as well as support to raise the capital.
- Equity for faster-growth distributors to expand rapidly, or as a way to access more debt.
- For all last-mile distributors, rapid, continuous and growing access to working capital debt, with reduced collateral requirements and improved terms.
In conclusion, our research demonstrates that last-mile distributors are reaching significant numbers of consumers. Faster-growth and international distributors backed by large equity investments are capable of achieving fairly rapid scale, while local and slower-growth distributors might offer a more efficient channel to translate investment into impact.
That said, even the most successful last-mile distributors face significant barriers to accessing capital. This research helps to provide clarity on these challenges and the impact opportunity that solving them would represent.
More funding of all kinds is needed to grow the last-mile distribution sector, to help both faster-growth and slower-growth distributors achieve profitability, whether or not that happens at scale, and to attract new companies into the sector.
Emma Colenbrander is head of the Global Distributors Collective, and manages the last mile distribution portfolio at Practical Action. Federico Hinrichs is Practical Action’s strategic advisor to the GDC. Lucie Klarsfeld is a partner and expert on marketing for low-income clients and last-mile distribution at Hystra Consulting.