This post is by Jake Rheude, the Director of Marketing for Red Stag Fulfillment.
This is Part II of a series dealing with the Future of Distribution.
Part I detailed the history of distribution and how the manufacturing, wholesale and retail segments developed, only to be supplanted with the integrated approach pioneered by online sales companies such as Amazon.
Part II applies the same analysis and forecasting to emerging markets.
How Emerging Markets are Different
The two salient characteristics that distinguish emerging markets from developed markets are a lack of uniformity and a lack of infrastructure. Where markets in developed countries take advantage of extensive road, air and water transportation networks, such networks are present in some developing country areas but not in others.
The same goes for the other functions required for an efficient distribution system. Financial and communication infrastructure, electrification, distributor networks, retail outlets and supply chains are present to varying degrees.
The future of distribution in the major and modern cities of developing countries is likely to be very similar to the outlook for developed markets, but in rural areas the same kind of distribution will likely not be possible for some time.
The key question is whether the development of distribution in such areas will be slow or whether it will jump some steps to arrive at a modern model quickly and efficiently. Such a jump is what occurred in communication, where many developing countries skipped the wired telephone line stage to move immediately to mobile systems.
There are distribution technologies that might lend themselves to such jumps but they still require a technological base somewhere close by. Such technological advances can no doubt be deployed in some emerging markets and they may well spread while the local population waits for traditional transportation and communication infrastructure to be built up.
Apart from the infrastructure issues, the role of distribution in emerging markets is the same as everywhere else. Distribution links the manufacturers of products to the end users. An effective and efficient distribution system allows customers to buy what they want when they want it, and without an unreasonable markup over the manufactured cost.
For emerging markets, the question is which technologies will be best able to fulfill the requirements of distribution given the differences in infrastructure.
Technological Distribution Issues
Emerging market distribution technologies fall into the categories of communication, payment and transportation. Companies wishing to sell products in an emerging market have to be able to communicate with potential customers. They have to be able to arrange payment quickly and reliably, and they have to be able to ship orders easily.
In developed, mature markets, these systems are taken for granted and are not issues for distribution systems. The question for these markets is what direction the evolution of these systems will take.
For emerging markets, large segments do not have modern distribution for a wide variety of products. The question then becomes which technology is most appropriate for rapidly developing modern distribution capabilities where they are not already present.
While communications are less developed than in mature markets, the present level of mobile communications and the levels soon to be achieved in less developed countries are adequate for modern distribution.
In the future, even in the least developed emerging markets, residents will be able to get product information on the mobile internet and will be able to order the products they want on their mobile phones.
Payment systems are more complicated. Many residents of emerging market countries, especially in rural areas, don’t have access to banks, have no bank account and don’t possess credit cards. This makes distribution over the internet via integrated sales operations such as Amazon difficult.
The whole purpose of a modern distribution network is rapid fulfillment of orders, and if payment can’t be made electronically, fulfillment will be slow. New technology solutions are required for adequate payment systems in these markets.
Transportation is another problem area for emerging markets, especially in rural areas. While large, modern cities in developing countries have transportation infrastructure equivalent to that of developed and mature markets, many rural areas have bad roads, few delivery trucks and no local wholesalers.
A modern distribution system will be a long way off if the residents of these communities have to wait for adequate roads, airports and delivery points. If a product ordered from a central city or abroad takes days to reach the purchaser, the distribution network is poor and the cost is likely to be high. Again, a new technological solution is required.
In developed countries with mature markets, the internet and modern distribution technologies are disrupting existing distribution networks. In emerging markets, new technologies will establish an efficient distribution network where none existed before.
If the new technologies prove to be workable, the new systems will grow and spread, not having to displace an existing network with legacy participants that resist innovation.
Communication and Marketing
While the communication function in emerging markets is already or will shortly be adequate for a modern distribution system, the marketing side of communications is almost non-existent.
Distributors who want to enter a mature market perform an analysis of the market potential and carry out studies to determine what approach is likely to be the most effective and reach the most people who are interested in the product. To do this, they rely on market data that is easily available in mature markets.
In emerging markets, basic information such as a population profile by age, earnings, education, work history and interests may not exist. In developing countries, statistical records are often incomplete and data from past marketing campaigns may not be accessible or has never been collected.
Companies wishing to access such a market have to develop a basis for entry and a strategy for sales and delivery. Without marketing information, such a task will be difficult.
Fortunately, social networks, browser tracking and search histories can help provide such marketing information. This is probably already true for many emerging market cities but such data will also be available once mobile devices with internet access become common even in the most rural areas.
Companies such as Facebook and Google (or their local equivalents) prepare marketing profiles of their users and members, and of website visitors. They then sell the data for marketing purposes. Separate marketing surveys will no longer be required and companies wanting to enter a market will have population profiles and data on individuals available to them.
It seems unlikely that under-banked areas in emerging markets will suddenly see a large influx of retail banking branches, opening accounts for residents of remote communities and issuing them credit cards.
Without the means to pay electronically via payment cards as in the developed world, it seems that a modern distribution system would be out of reach. Yet, while a lot of business in these regions is still cash-based, electronic payments without credit cards or traditional banks are growing in many areas.
Such payment systems are based on mobile phones and are operated by the telephone companies. As part of the mobile telephone account, the customers receive the ability to store money on their phones. They can then use an app on the phone to make payments to other mobile users.
M-Pesa, operated by Vodafone in Kenya and Tanzania, is one of the largest such networks and can be used to make payments for goods and services via encrypted text messages. In the future, websites may be able to accept such payments as well, and the bottleneck that holds back the establishment of a modern distribution system in many emerging markets will be resolved.
Outside metropolitan areas, emerging market transportation infrastructure is often not suitable for rapid, reliable and safe deliveries. While roads are slowly being paved, regional airports are planned and warehouses are being built, progress is slow.
Either it will take decades for a modern distribution system to be able to use adequate transportation infrastructure or new technologies have to make the leap over existing hurdles to bring quick deliveries to remote areas.
One such technology is long distance drones. In the absence of good roads and distributed warehouses, drones can deliver packages over long distance reliably and rapidly. With cities enjoying the benefits of modern distribution, drones can leverage the systems available in the cities and deliver products picked up there to customers in the countryside.
This technology is new but is already being used to deliver medical supplies in Rwanda. The challenges are different than for the kind of drones Amazon is proposing to use for short distance deliveries. These drones must fly up to 100 miles per round trip and navigate independently without an operator in view.
The trials as of spring 2017 have been successful and, developed further, drones could deliver packages to customers who are barely accessible by road.
Drone technology used by the military is also a possibility. Military drones can operate over long distances but they require a pilot who guides the drone remotely. It is conceivable that distributors may in the future have operators sitting in a central location in the emerging market cities and monitoring flocks of drones as they deliver their packages and return to base.
Putting it Together for Emerging Markets
The new technologies that make it possible for modern distribution to serve remote rural areas of developing countries, differ in many ways from what the future of distribution looks like in the developed world. The same leapfrog approach that has occurred in mobile phones will likely happen in distribution. But sometimes this kind of development not only leaps to parallel the developed world, but actually leaps ahead of what is being done there.
Developing countries often have modern cities that enjoy levels of communications, financial systems and transportation that equal those of developed countries. The distribution systems there can be equivalent to those in the cities of developed countries.
But, in rural and remote regions, these systems are not equivalent to those of rural regions in developed countries. The communication, financial and transportation infrastructure can’t support a modern distribution network in emerging market countries.
But when new technologies come into play, a high-performance distribution network becomes possible even without traditional marketing data, without traditional banking, and without good roads.
The future of distribution in emerging market cities then looks a lot like future distribution in developed countries, as far as the cities are concerned.
Products come in by air to modern airports and are brought to local warehouses by trucks. Local deliveries may be with short distance drones, and trucks may be fully automated and operate without drivers. The warehouses hold goods encoded with radio frequency ID tags (RFID), and keep track of stock by monitoring goods as they go in and out.
But then, there is potential for cutting-edge technology beyond what is used in developed countries. Rural customers order products and pay securely, with a low cost of transaction via encrypted text messages from their mobile devices. Long distance drones carry one or more parcels out of the warehouse on hundred-mile trips, rivaling the delivery times of distribution systems in developed countries.
Eventually these advanced technologies may penetrate the distribution systems of developed countries, but initially there is no need. Their advanced distribution system works with existing infrastructure. Without this infrastructure, in rural areas of developing countries, the new technologies are needed and implemented.
How the Future Distribution System Could Work
The setting is a developing country with an emerging market, possibly based on oil. Residents across the country are becoming more wealthy, and there are several cities on the coast that have the most modern buildings and infrastructure. The rest of the country is still neglected with poor roads, little air traffic and no modern financial or distribution facilities.
A large shipment of mobile smartphones comes into one of the modern ports and is trucked to a distributor warehouse. The distributor tags all incoming devices with RFID tags and places them in stock. The distributor website is updated with the new models available with colors, features and details reflecting the warehouse stock.
Fifty miles inland in a small village, a doctor looks at his old mobile phone and realizes he needs a new one. He goes to the distributor website and examines the various models. He decides on a sedate black model, but with the highest amount of memory, and places his order.
A window opens with instructions for an encrypted text message transferring the money for the purchase. Immediately after he sends the text, he receives a confirmation text message. The website confirms the order, and schedules delivery for the next day at 2:00pm by drone.
In the warehouse, the order is received and converted to a specific black phone with the required memory. The corresponding phone RFID tag is assigned to the order and an automated process picks the correct phone from the shelves and brings it to the loading dock. A drone arrives back from a delivery, loads the phone and several other items and leaves.
At the scheduled time, the doctor is at the hospital but on the way home he drops by the local store to pick up his package which the drone dropped off there. He is pleased with his purchase and visits the distributor website to give a good rating and a positive review.
Despite being in a developing country, he has received his delivery more quickly than his rural counterpart in a developed country and he has paid lower transaction fees than the 3% to 5% common for online purchases with credit cards.
Drone technology and smartphone payments could be used effectively in developed countries as well, but there are legacy suppliers and existing infrastructure that makes it difficult to advance.
Developing countries can leap over such barriers and implement distribution systems that are superior to those in developed countries, if the new technologies operate as expected.
This post was by Jake Rheude, the Director of Marketing for Red Stag Fulfillment, an ecommerce fulfillment warehouse that was born out of the founders’ own ecommerce business challenges.
This post was originally published on the RSF blog as The Future of Distribution Part II.
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The Future of Distribution Part II: Product Distribution in Emerging Markets