Tuesday, June 12, 2012

Kiva Innovations: The last mile distribution challenge

Not too long ago, there were places in the U.S. where you couldn’t get mail. That all changed in 1916 when President Woodrow Wilson signed the “Rural Post Roads Act” into law, mandating the construction of roads in rural areas just to deliver the mail.

The project had a budget of $85 million -- about $1.6 billion today -- to subsidize states to pave roads connecting remote villages to cities across the country. Today, there are over 151 million individual postal delivery points in the United States.

It’s one of history’s most impressive examples of what’s called “last mile distribution.”

Life in the last mile

The “last mile,” or “last kilometer,” are terms created by the telecommunications industry to describe the very outer reaches of their networks. They’ve since been generalized to talk about all remote communities that are barely covered by health care, electricity, or other infrastructure networks.

It goes without saying that millions of people around the world still live beyond the last mile -- their lives characterized by unmet basic needs like piped water, sanitation, financial tools and more. About 1 billion of these people live on less than $1 a day and depend on aid to survive. But the more than 4 billion people who live on $2 a day live even more financially complex lives at the bottom of the pyramid.

Without access to markets and resources, these mostly rural consumers are forced to either pay higher prices for goods or accept low-quality alternatives. Their purchasing power is limited less by their income and more by where they live. Most companies are unwilling to cover the costs of traveling on bad or non-existent roads to deliver goods to sparse populations. Risk-reward analysis often makes last-mile distribution seem untenable.

Innovations in distribution

Opportunities exist for motivated companies to access huge untapped markets by finding innovative ways to distribute their products.

So far, five models for distribution have proven most successful at reaching the rural poor: hub + spoke, piggybacking, local entrepreneurs, market linkage and local centers. The flexibility of these solutions allows businesses to tailor their distribution systems to the unique circumstances of last-mile markets all over the globe.

Kiva has always helped its partners expand their distribution channels to reach last-mile consumers with the products and services they have typically lacked. To date, much of this work has focused on supporting microfinance institutions (MFIs) in their search for new clients in underserved areas. Using the hub + spoke model, MFIs send field officers into rural villages or urban slums to sell financial products and collect payments. Kiva’s low-cost capital allows MFIs to create new hubs and longer spokes, bringing formal financial mechanisms to villages often for the first time.

What’s new at Kiva?

Recently, Kiva started working with partners other than microfinance institutions that use different models to distribtue their products. For example, one potential Kiva partner in East Africa piggybacks on the networks of existing cooperatives to distribute clean cookstoves and solar lanterns to farmers in remote rural areas. These products are offered on credit with unique loan terms that take farmers’ uneven cash flows into account.

Another current Kiva partner, Zoona in Zambia, hires local entrepreneurs offering training and start-up financing to build mobile money transfer kiosks in remote villages. Zoona's agents are located all over Zambia, virtually connecting communities through mobile technology.

In Tanzania, Kiva partner Barefoot Power distributes solar technology through local charitable social enterprises like Watu Na Nuru. Watu Na Nuru trains village entrepreneurs to become micro-retailers of solar lanterns and batteries in remote rural areas where almost all households rely on kerosene for lighting.

Kerosene is a low-quality, expensive and potentially harmful solution to energy poverty. Barefoot Power is effectively piggybacking on existing social networks to hire local entrepreneurs who have a developed understanding of their specific markets and unfettered access to low-income consumers. As a result, Barefoot Power is able to sell more reliable, cheaper technology to thousands of households who previously lacked alternatives to kerosene. (If you’re interested in learning more about clean energy alternatives to kerosene please refer to my previous blog post on the subject.)

Kiva’s approach

Many of Kiva’s partners, microfinance and otherwise, are searching for better distribution channels to reach households in rural areas. It just makes good financial sense. Yet, last-mile consumers live in radically different circumstances, and one-size-fits-all distribution models are wholly inadequate to account for this diversity. As a result, big businesses continue to drag their collective heels. And vast untapped markets of consumers hunger for cheaper and better products to meet their basic needs.

In the meantime, it helps to remember that you must first build roads to deliver the mail.

Ian Matthews is an intern on Kiva’s Strategic Initiatives team, looking for new partners and loan products to extend opportunities and access to even more people around the world. Ian has an MSc in Global Politics from the London School of Economics and Political Science and has previously done field work in Honduras. Send him your feedback on this blog series at blog@kiva.org.

This is part of a larger series on Kiva’s strategic initiatives and innovative loan products, which are designed to expand opportunities for more borrowers. Kiva is excited to partner with companies and organizations that use innovative distribution models to reach last mile consumers all over the world.

photos courtesy of Linda Dougherty, jypsygen, Environmentblog, CGAP