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Celtel uses micro-franchises to boost rural business in Nigeria

01 February 2008

After success in winning urban business in one of Africa's richest countries, Zain's Celtel has turned to an innovative market strategy to find customers in poor and under-served areas of Nigeria's countryside. Within months of starting, the programme has had remarkable results, report Jamie Anderson and Ronan Moaligou

Read more: Celtel Nigeria Zain Lars Stork Unilever Sierra Leone Gabon Malawi Africa

Celtel, the second largest mobile operator in Nigeria, has franchised 100 base stations across the most rural and poorest parts of the country — and the returns are already exceeding expectations after just a few months.
The company, part of the Zain group, plans 650 rural base stations by the end of 2008, creating 6,000 jobs in an initiative where franchisees themselves recruit local representatives to sell services and protect their local base station at the centre of their area.
Celtel is the second largest mobile telecommunications company in Nigeria, with a 28% market share in mid-2007 and eight million subscribers.
The company is successful in serving cities and larger towns, but has now shifted its attention to serving poorer consumers in rural areas — a massive but still under-tapped market.
This shift from urban to rural has not been easy, and although half of Nigeria's population live in rural regions the challenges of reaching them sometimes seems overwhelming.
To address the opportunities and challenges of serving low-income rural consumers, in mid 2007 the company launched its rural acquisition initiative — or RAI.
Lars Stork, chief operating officer, is the executive behind the project. "We set out to develop a unique new route to the rural market, an initiative that will help us to profitably reach the 50% of Nigerians who live and work in rural communities," he says.
"Beyond commercial success for Celtel, our broader objectives are to empower rural communities through sustainable job creation, local wealth generation, and improved availability of our products and services."
The RAI centres on an innovative micro-franchising plan for its base stations. This is the first use of such an approach to serve rural consumers in Africa. The initiative provides a new route to market with the aim of rapidly and profitably scaling the provision of mobile services to rural communities.

Potential revenues

According to the GSM Association, in a study in 2006, the potential annual revenues from the rural population of all developing countries will be worth around $95 billion a year by 2012, with Nigeria identified as Africa's largest rural growth opportunity.
Norman Moyo, marketing director with Celtel Nigeria, gives his figures: "The total potential value of the Nigerian rural market is estimated at some 158 billion naira ($1.2 billion), but rural areas generated just 3 billion naira ($23 million) in revenues in 2006."
According to Moyo, analysts forecast that 80% of new net subscriptions in the Nigerian market over the period 2008-12 will come from rural areas, with a potential rural subscriber base of some 40 million people spread across some 35,000 rural villages.
"The total value share of the rural market is expected to grow to at least 20% of total industry revenues over the same period, up from just 2% in 2007," he says.
While the underserved rural regions of Nigeria are seen to offer huge potential for the mobile telecommunications industry, the issues in serving them are very different to those of urban areas.
Stork has spent more than 30 years working outside his home country of Denmark, including many years with Unilever spearheading major restructuring programmes. He joined Celtel International, which has since become part of the Zain group, in 2005 as vice president of operations responsible for Zambia, Sierra Leone, Gabon and Malawi.
"None of these experiences compared to the complexities faced in Nigeria's rural regions," he says. "Success in serving the country's rural poor requires a radical new approach."
The Nigerian Communications Commission showed in a study in 2006 that there was very high demand for telecommunications services in rural areas, but 40% of the rural population identified themselves as non-telecom users.
The other 60% of the rural poor used their own phone, "umbrella-man" outlets, public call offices or shared family or village phones.
The same study found that, on average, users in rural Nigeria allocated approximately 14% of their total income to telecoms spending, roughly double the share of consumers in more developed markets.
According to Stork, the rural poor in Nigeria typically earn about 4000 naira ($32) a month, with the majority of income generated through the sale of agricultural commodities. "Although rural families typically earn low incomes, they also have lower living expenses than urban residents, and fewer opportunities for consumer spending on entertainment and 'non-essential' items," he says.

Rural opportunity

"Rural Nigerian families save an average 18% of their annual incomes, and an important source of additional income is remittances — both within Nigeria from urban-based family members, and from relatives living abroad. Given these income and savings levels we see a real opportunity in rural areas."
A Celtel-sponsored market study conducted in early 2007 by strategy consultancy Globalpraxis revealed that price was a barrier to frequent use of telecoms services for 65% of rural consumers.
Poor network quality was a barrier for almost 30% of consumers, and tariff complexity was an inhibitor of usage for more than 20% of consumers.
According to Tayo Emden, Celtel project manager for the rural acquisition initiative, underdeveloped rural distribution networks mean that a consumer can be forced to pay up to 320 naira ($2.50) for a recharge card with a face value of 200 naira ($1.60), and urban dealers have not shown themselves to be particularly entrepreneurial in pushing into underserved rural markets.
"In reality, the urban dealer knows very little about the rural markets," says Emden. "He sees the rural poor as a small opportunity, and why should he chase this hard-to-reach market when he has more than enough business coming to his door in the city? We have had a hard enough time encouraging dealers to activate their own urban markets, let alone push into rural."
Handset ownership remains at less than 1% among the rural poor, and almost 20% of rural poor indicate lack of access to a phone as a barrier to using communication services.
While more than 80% of mobile users in urban areas of Nigeria are within convenient access of an umbrella man or other telecommunications outlet, this figure is less than 14% for rural areas. On average, there are 2,500 people per shared-phone outlet in rural areas, compared to just 850 per outlet in Nigerian cities.
Says Stork: "If rural people want to make a call, they typically have to travel to an umbrella man vendor at the roadside or in the village centre. This distance is significant in some areas — and can be over 100 kilometres in some parts of the North East — although these distances are shrinking rapidly as operators roll out network infrastructure."
Growing the rate of handset ownership and ensuring the availability of affordable recharge cards are just two of the challenges facing Celtel in reaching the rural poor.

Challenging market

Many areas of Nigeria are in media "black spots" which are not reached by television or radio signals. This makes communicating about products and services particularly challenging.
"Some of the traditional approaches of marketing are very difficult in many parts of Nigeria," says Moyo. "Billboards are quickly stolen and recycled for building materials or fencing, and it is dangerous in some regions for Celtel staff to travel for direct marketing activities at markets or other rural gatherings."
Celtel believes that a GSM base station site can be viable if there is a population of at least 5,000 people within a radius of the site's five to seven kilometre range. Nigeria is one of the most densely populated countries in Africa, so this density is generally not too difficult to achieve, with the exception of the sparsely populated North East region.
But rolling out and maintaining a mobile network in Nigeria poses challenges very different to those found in more developed markets.
"Village-level chiefs and religious leaders hold significant power in many regions of Nigeria, and Celtel needs to ensure that it respects this influence when investing in local areas," says Emden.
"Even if approval is given by national authorities, the company needs to negotiate with tribal leaders before rolling out network infrastructure. Permission is also sometimes sought for the safe passage of Celtel staff through tribal areas to maintain the network, or for the entry of fuel trucks to deliver diesel for the company's onsite generators."
The Nigerian electricity grid is unreliable and does not reach all areas of the country, so generators are a necessity for virtually all of Celtel's rural base station sites.

Vandalism and theft

Site security is a major concern and expense in many parts of the countryside. "Vandalism and theft of base-station equipment is common, requiring Celtel to install guards on rural sites," says Stork. "Even though Celtel typically recruits these guards from the local community, this has not always reduced the incidence of theft of expensive equipment."
In the past year or so highly organized gangs of thieves have emerged, moving from rural site to rural site stealing diesel generators, even using heavy cranes and trucks to pick the generators up from their installations and ship them out of the location.
"In some instances guards have been held at gunpoint, but we also suspect collusion by guards and the local community in some instances," says Stork. "With low levels of mobile usage in some rural areas, downtime of telecommunications does not seem to weigh heavily against the pay-off from stealing and selling Celtel equipment."
Rather than trying to overcome the unique challenges of operating in rural areas, the rural acquisition initiative aims to partner with local communities to dramatically increase the affordability, availability, awareness and acceptability of Celtel's services.
Key to the RAI is the identification and recruitment of local entrepreneurs, so called associate distributors, or ADs, to act as franchisee trade partners. These franchisees market and distribute a relevant portfolio of Celtel products and services, and are also responsible for base-station site security and basic maintenance.
Once recruited the AD acts as the exclusive representative of Celtel in his or her community, says Emden.

Motivated franchisees

"As is the case with any franchising model, the selection of highly motivated and entrepreneurial franchisees has been identified as critical to the success of the rural acquisition initiative."
Franchisees are selected in close cooperation with village chiefs or other heads of the community, and once recruited they attend a three-day welcome workshop hosted by the Celtel regional office.
"The workshop covers aspects such as route to market, products and services, basic financial management, retail execution and an overview of the AD opportunity, sales and marketing, distribution, site maintenance and basic business skills," says Emden.
The main activities of the AD are village-level distribution of SIM packs and low denomination recharge vouchers. The AD also operates a fixed GSM payphone from a Celtel branded kiosk in a central location in the village, and carries out site security and surveillance and basic base station maintenance and cleaning.
"Each AD typically recruits four or five commission-driven hawkers who travel in the local community and surrounding villages within the base station coverage zone," says Stork.

Branded motorcycles

These hawkers are recruited from the local community and promote Celtel's brand via word-of-mouth, explain tariffs and special offers, travelling from village to village on Celtel-branded motorcycles to sell SIM packs and recharge vouchers, and to act as roving call agents by providing access to mobile phones for consumers to make calls.
The AD is supported by a strategic distribution partner or SDP, based within 30-50 kilometres of the AD site.
"The SDPs have been identified as large official Celtel distributors with distinct territories," says Emden. "They buy directly from Celtel and supply retailers, rural associate distributors and any sub-dealers within their territory."
The Celtel/Globalpraxis research revealed that more than half of rural consumers would like to be able to recharge for values of 150 naira ($1.20) or less. Some operators in developing markets have already introduced over-the-air recharging to replace card distribution and introduce low-denomination recharge amounts, and Celtel Nigeria hopes to introduce OTA recharging through its rural franchisees in the near future.
The initiative has been highly successful for Celtel Nigeria, says Stork: "Average weekly base station site revenues and minutes of use have increased substantially at virtually all of our Celtel franchised sites." Recharge voucher sales by ADs has exceeded the initial business case forecasts by over 100%, he adds, that rural ARPU will be higher than initially assumed.
"Payphone usage has been more than twice as high as forecast. And with such close involvement of the local community, incidence of vandalism and theft of Celtel's base station equipment in franchised areas has fallen dramatically."

Government welcome

The RAI has been welcomed by the Nigerian government, and is viewed as a positive development at a time when the Nigerian Communications Commission has been critical of the quality of service offered by the major network operators.
"We have invested heavily in local communities by deploying our infrastructure such as base stations and thus stimulating economic development and growth through the provision of communication services, and our new route-to-market approach for rural areas is accelerating uptake of these services," says Stork. "It is a well-documented fact that every naira or dollar invested in telecoms business leads to at least a five-fold growth in the local economy. This is clearly in line with the federal government's drive for job creation and rural development."
But the initiative has not just delivered results for Celtel and the Nigerian government: it has also impacted the lives of individual franchisees and their communities. On average each franchisee employs five local people, generating local employment and improving the livelihoods of local families.
"This partnership has resulted in the creation of many job opportunities," says Stork. "I dare say that under this new initiative, our partnership with the rural communities will extend beyond business to the actual ownership of and responsibility for our network facilities. We view the initiative as win-win for Celtel and local communities."
Celtel Nigeria's CEO Bayo Ligali believes that the innovation could propel Celtel to market leadership in rural areas, and provide an important pillar underpinning the long-term success of the company.

Real profitability

"The rural acquisition initiative is a first for Nigeria, and overturns the widely held industry perception that rural areas cannot deliver real profitability," says Ligali. "The rural poor represent a significant market in Nigeria, and Celtel is the first operator to develop a scalable model to serve them profitably while at the same time delivering real value to local communities. And we should not forget that universal access to communication is an important driver of Nigeria's future prosperity."
As of early 2008 Celtel Nigeria has almost 100 franchised base station sites in rural Nigeria, and is rapidly expanding the initiative. "With a target of 650 sites by the end of 2008, Celtel will generate more than 6,000 jobs in some of the country's poorest regions," says Ligali.
Despite its initial success with the rural acquisition initiative, Celtel Nigeria is not standing still. The company is now exploring new approaches to increase handset penetration in rural areas, and preparing to launch value-added services specifically developed for the rural poor. GTB

Jamie Anderson is fellow of the Centre for Management Development at London Business School; Ronan Moaligou is manager within the telecommunications practice of Globalpraxis. and