Guest Articles

Monday
November 28
2022

Camilla Nestor / Maria Raurell / Carolyn Han

Leaning into Resilience: Three Ways Small and Growing Agriculture Businesses Have Navigated Global Crises – And How Investors Can Support Them

The past few years have presented challenges to small and growing businesses (SGBs), especially in emerging markets. These businesses have struggled with pandemic-driven logistics and supply chain issues, large fluctuations in supply and demand, and policy shifts — for example, export bans on certain crops — that have upended their business models. With minimal visibility into what the results of these global disruptions will be, SGBs have been forced to move forward amid uncertainty.

When COVID hit in early 2020, many investors paused disbursements due to the increased risk. MCE Social Capital did the opposite. We adopted a “lean in” philosophy with our portfolio companies and continued to provide capital to entrepreneurs navigating the pandemic’s challenges. This puts us in a distinct position to reflect on how COVID’s global disruption has affected businesses in our portfolio — and what has allowed some to thrive despite these challenges.

MCE Social Capital has been providing flexible debt capital to small and growing businesses in emerging markets for nearly a decade. We support agriculture businesses that are building sustainable livelihoods and strengthening local economies, often in rural regions where extreme poverty is most prevalent. Over the last two years our portfolio businesses have seen a range of outcomes. These companies were not immune to the global supply chain issues and the general uncertainty that has surged since the start of the pandemic. However, due to other dynamics — including regulations that categorized agricultural SGBs as essential businesses that could operate during COVID lockdowns, increased demand for certain agricultural products, and strong leadership — many of the companies we work with were not only able to adapt, but were able to grow their businesses over the past 24 months.

As an investor, our decision to lean into these markets paid off — both in terms of impact and returns. Across our portfolio, revenues increased by an average of 28%, businesses increased the number of smallholder farmers they source product from by 11%, and jobs created increased by approximately 20% across the board.

MCE attributes these successes to several smart adaptations that have been central to our investees’ ability to navigate recent challenges. We’ve seen three approaches that successful SGBs had in common: 1) they developed adaptable supply chains, 2) they built out domestic sales channels, and 3) they digitized aspects of their businesses. Below, we’ll share examples of how each of these efforts played out, and discuss how these approaches are likely to be incorporated into agricultural SGB business models in the long term.

 

Developing Adaptable Supply Chains

Adaptable supply chains have been critical in helping the SGBs in our portfolio to de-risk, as it is much less likely for a business to thrive if it is dependent on just one supplier, buyer, trade route or method of transportation.

One example of this adaptability is an MCE portfolio company that buys organically grown grain in Moldova and ships it to Europe where organic products are in high demand. When their main shipping trade route to the Netherlands — through the Black Sea to Istanbul, then through the Mediterranean to the Atlantic — was disrupted, they were able to shift operations and transport containers overland by truck. While they shipped smaller quantities, they could also ship more frequently, as this route proved more reliable.

Businesses that sell non-perishable items like cocoa, vanilla extract or spices are also adapting by holding more inventory and placing larger orders: This benefits their suppliers — smallholder farmers — because farmers can sell larger amounts at one time without necessarily compromising on their unit price, increasing their income overall. This represents a departure from previous trends, in which companies reduced warehouse space and attempted to maintain a “just-in-time” model using data predictions to keep stocks low but always available. Because of disruptions to supply chains and supply-and-demand predictions, just-in-time models worldwide have been experiencing stockouts and other shortages. We’ve seen businesses adapt to these challenges by expanding warehouse space domestically – and even sometimes setting up additional warehouse space closer to their buyers, often in the U.S. and Europe. Increasing warehouse space also makes proper packaging and cold storage a key element in business success: If businesses are going to store more product, they must ensure that it keeps for longer.

 

Building domestic sales channels

We are also seeing businesses find success by selling more of their product domestically to make up for shipping and other supply chain difficulties in getting these products to international buyers. While this means companies often cannot charge a premium on these products — especially organic products for which there is often not high domestic demand — having a wider number of domestic market sales channels can increase SGBs’ resilience.

To take one example, MCE portfolio company East Africa Fruits is a social enterprise that improves market access for smallholders in Tanzania, providing their network of 5,000+ farmers with a stable income. They collect fresh fruits, rice and vegetables from farmers across the country and then transport them to Dar Es Salaam, where they sell them to restaurants, catering companies and vendors. Given that their value chain is exclusively in Tanzania, they actually saw no dip in revenue during COVID-19. In fact, with a widely diversified domestic sales base (including more formal sales channels like hotels, as well as informal channels such as informal vendors), they even saw an increase in revenue during the pandemic.

Robust domestic markets benefit their countries economically, and SGBs can also see benefits: They face fewer regulatory and transportation risks and costs, are less subject to fluctuations in global demand, and can help improve local food security. However, on the flip side, domestic-only markets also present their own risks. For the businesses we support, all of which operate in emerging markets, these risks include a lack of critical infrastructure, such as price and quality regulations, which can present challenges to SGB growth.

 

Embracing Digitization

While digitization was on the rise even before COVID, it’s been well documented in NextBillion and other outlets that the pandemic served as an accelerator to these efforts. Not surprisingly, businesses that were already digitizing — e.g., selling products online, developing resources for agronomic data, communicating with smallholder farmers via WhatsApp groups rather than relying on in-person visits — were able to respond much better when other offline or analog sourcing, sales and communication became more difficult due to social distancing restrictions. We’ve seen this trend most noticeably on the African continent, where the advanced mobile money infrastructure has enabled more innovation in financial services and technology.

For example, our portfolio company Good Nature Agro in Zambia is an agribusiness that supports the efforts of smallholder farmers to generate a lasting income, by providing technical assistance, inputs and access to a ready-made market. Since initiating operations in 2014, they’ve scaled to work with over 11,000 smallholder farmers, focusing on high-income generating crops, such as legumes. This year they announced that they’re building a digital fintech platform that will allow them to move beyond their current products to also provide credit services. Good Nature Agro’s evolution toward offering digital credit to smallholders demonstrates the trend of leaning into fintech–with a long-term vision of digital finance becoming a viable tool to lift farmers out of extreme poverty.

The trend toward digitization is a boon to businesses, with benefits that go beyond allowing them to function during the recent crises — and this trend is likely to continue and accelerate. One of the biggest challenges the past few years have highlighted is a lack of visibility, as SGBs lost their regular means of predicting demand and understanding their markets. Digital systems provide data that businesses can analyze to predict trends or recognize challenges before more detrimental effects are realized. Digital systems also support efficiency — which is critical when running a lean organization looking to scale for impact.

Additionally, digitization puts many organizations on the map in terms of attracting investments. Investors want to see robust numbers, to check in on investees’ progress without needing to make monthly site visits, and to gain visibility into their portfolio’s processes and outlook. This real-time visibility and transparency inspire confidence in investors and help unlock capital.

 

Resilience is critical—and investors should help foster it

SGBs in our portfolio have proven to be resilient during these challenging times: For the most part, they’ve been able to adapt their business models and supply chains to maintain profitability, support more smallholder farmers, and keep or increase employees in volatile markets.

Though this resilience is encouraging, it’s worth asking a key question: How resilient should these companies have to be? Impact investors and lenders like MCE can go a long way in supporting and fostering resilience, so that it doesn’t fall to SGBs alone to navigate these issues. We can stay with our portfolio companies through challenges, ensuring that they have access to affordable, flexible capital to shift operations as needed. And we can be willing to restructure our investments when existing structures no longer support these businesses’ needs. Investors can also increase funds for capital expenditures that prepare for shocks, such as building more and better storage facilities for businesses that are strategically moving away from just-in-time models and need to increase warehouse capacity.

While increasing flexibility can increase investors’ risk, businesses in the current climate face a tremendous amount of risk in operating through crises. They should not be forced to shoulder that alone. MCE remains committed to our longtime partners, and we subscribe to the philosophy that, as a recent ImpactAlpha brief notes, “managing, rather than fleeing such risks is key to enduring impact in places where civil society and social and environmental progress are needed most.”

There is truly no greater justified risk in impact-first investing than the opportunity to ensure that communities in emerging markets – and the businesses that serve them – can thrive through crises.

 

NOTE: This article featured insights from Christina Lukeman.

 

Camilla Nestor is CEO, Maria Raurell is Director of Investments and Risk, and Carolyn Han is Associate Portfolio Manager at MCE Social Capital.

Photo courtesy of East Africa Fruits.

 


 

 

Categories
Agriculture, Entrepreneurship, Investing
Tags
business development, impact investing, smallholder farmers