(Illustration by Robert Nuebecker) 

Scaling up rural supply chains to last-mile markets in developing countries is essential to solving the problem of extreme poverty. Distribution channels are the arteries of commerce; they enable emerging economies to grow and thrive.

For more than a decade, I held leadership roles at rural supply-chain companies in India, and I continue to keep a close eye on this field. And I have yet to see a distribution model that has achieved real commercial scale. Nor have I seen one that matches the utopian rhetoric that I hear on the social sector conference circuit or in the boardrooms of investors and donors. (Here, and throughout the article, I am referring to small and medium-size distributors.) What I have seen are companies that claim to have an exclusive route to market by virtue of their supposedly unique intellectual property (IP). In my quest to raise capital for companies that I helped lead, I too have made such claims. I understand that they are a means to an end.

But in my view, it’s time to get real about developing scalable models for rural distribution. Those of us who work in this industry—entrepreneurs, donors, investors—need to admit that it includes more than a few snake-oil salesmen who offer promises about their distribution models that border on the absurd. We need to acknowledge that there is no simple solution, technology driven or otherwise, to the challenge of strengthening rural supply chains.

The first step is to recognize a simple truth: Rural distribution companies do not have IP. Theoretically, of course, a founding team might include a programming wiz who has created (say) an algorithm-based logistics system that will determine the perfect product configuration for every segment of every market. But otherwise, if you hear a claim of IP in a rural distribution pitch, it’s nonsense.

The second step is to note that most companies in this field are competing not against each other, but rather against the vast scale of the rural distribution market. After all, about 3.2 billion people—46 percent of the world’s population—live in rural areas. Too often, though, investors and donors create unnecessary competition for limited venture and grant dollars by pitting companies against each other. In response to that pressure, distribution company founders present grand IP claims and lofty visions of creating exclusive and highly profitable channels.

Similarly, entrepreneurs who start out with a mission to bring products to lastmile villages often fall into a vicious cycle of continually compromising their business model in an effort to serve the narrow goals of donors and investors. No sensible commercial entrepreneur, for example, would build a distribution company with a business model that involves hiring only women and selling products only to female customers and only in rural villages. It’s a nice idea for a nonprofit organization, but it’s not remotely venture-worthy. Yet it’s common for issue-driven funders that dictate this kind of operational focus to rural distribution entrepreneurs. The irony, of course, is that scaling up a model that meets such objectives—that creates jobs for rural women and brings life-changing products to women in rural villages—would require an entrepreneur to focus on following sound venture principles and on attracting commercial investment. In other words, by dictating the use of capital in such specific ways, funders perpetuate the misuse of that capital. They also reinforce bad business behavior in entrepreneurs.

But we now have an opportunity to break out of this cycle. If we can eliminate the wasted effort and misguided thinking that pervade the rural distribution ecosystem, and if we can bring our work back to its roots, we can salvage and scale up an industry that has the potential to solve one of the world’s toughest social and economic problems.

Local Knowledge

What enables a rural distribution company to succeed is its particular strategy—its model for getting specific products to specific regions and for making money by doing so. Effective rural distribution entrepreneurs employ different approaches in different markets, and they sell different types of products to different customers in those markets. One company’s model isn’t really comparable to another: For all practical purposes, the rural market changes every 200 kilometers.

The truth about last-mile distribution is that viable commercial models are ubiquitous. The rural market is filled with small local traders—middlemen (and -women) who have been brokering the flow of goods between last-mile villages and urban hubs for decades. These traders do not, and probably never will, have access to venture or grant dollars. They do not attend social impact conferences at five-star hotels. And they do not claim to be solving the problem of global poverty. Yet many of them run businesses with a deep reach into rural villages that would impress anyone at the annual meeting of the Clinton Global Initiative or the Skoll World Forum.

Years ago, when I was managing distribution for a partner company in the Indian state of Rajasthan, I worked with a man who sold irrigation equipment to customers in last-mile villages. His monthly revenue ranged from Rs 20 million to 40 million (roughly $400,000 to $800,000). He extended informal credit lines to farmers and had a reputation for promoting social equity that he had built over his 30 years in business. I often wondered what he could do with an infusion of funding from Western investors and donors.

The traders I have known over the years started their business either with an informal loan from a family member or local moneylender, or with a formal loan that used asset collateral such as a family farm. They developed a selection of products that rural customers already understood and that were in high demand. These traders eagerly expand their businesses in response to new opportunities, and they take certain risks—but not in a way that is potentially reckless. In that regard, they differ from many of the high-risk, venture-backed companies that have tried to enter rural markets in recent years.

Local traders understand that the successful pursuit of rural distribution depends on abiding by basic principles: Optimize the flow of goods to retailers. Maintain solid profit margins. Sell known products that bring in consistent, predictable revenue. They develop the business acumen that they need to ensure that their family will have rice and bread each day, because they have nothing else to fall back on. The local trader model, though small in scale, is effective at distributing goods to last-mile markets. For that reason, these traders remain by far the dominant player in those markets.

The model of the local trader is one that I advise entrepreneurs and investors to consider as they seek to build distribution channels for next-generation products such as energy devices, clean cook stoves, and water filters. Local traders follow a no-frills, methodical process. They build reliable channels for supplying goods that are already in high demand among rural customers, and only later do they begin to offer new products alongside established products.

More broadly, I advise rural distribution entrepreneurs to base their business on the core principles that rural traders follow—and, at the same time, to harness venture and grant funding in order to scale up their operations. Such funding, for example, can enable them to form strategic partnerships or to invest in advanced logistics, inventory software, and the like.

Smart Money

For investors and donors, there are two significant opportunities to increase the commercial viability of rural distribution models.

First, they can fund the acquisition of assets (warehouse facilities and other property, for example). The biggest problem that distribution companies face is a lack of asset collateral. Without such collateral, it’s nearly impossible to spur local banks to lend working capital, which arguably provides the financial backbone for any successful distribution company. Yet investors are typically unwilling to fund the purchase of hard assets, preferring instead to invest in top-tier executive talent and expensive IT systems. The latter resources are no doubt valuable to a growing company. But a distribution company that has no assets on its balance sheet will never be able to pivot from using expensive venture capital to using debt as a means to procure goods for sale. The best people and the best IT systems in the world cannot prevent the slow death that is venture- backed procurement—the practice of buying inventory at a ridiculous cost of capital. (Ironically enough, that practice has led some investors to conclude that rural distribution companies are, as a class, not venture-worthy.)

Second, donors can begin to deploy grants more wisely. They need to stop using grants to subsidize sales staff salaries, inventory purchases, and other operational expenses. It’s just bad business. Sure, a company that has a large sales staff and high sales figures looks impressive. But people will wonder: How did the company afford that sales staff, and how did it procure its inventory? In effect, the company is caught in a grant bubble. And in time the bubble will burst and leave the company without assets. That practice needs to stop if these companies want to have any hope of attracting commercial capital. Grants are suitable for funding an experimental marketing effort or for making a critical early-stage hire. And they provide an ideal tool for triggering commercial lending or investing that otherwise would not take place. But under no circumstances should grant money subsidize core supply-chain operations.

Getting real about rural distribution means reckoning with how the current ecosystem often works against companies’ potential for success. We need to change the array of incentives that lead entrepreneurs to make empty claims and to pursue unproven business models. We need to draw on the time-tested model of local traders and to apply that model to the right kinds of venture and grant funding. If we do, we can enable the growth of companies that will provide billions of rural customers in developing markets with products that consumers elsewhere take for granted.

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