Why small tech companies are struggling during COVID-19 digital economy boom

July 17, 2020

The effects of the COVID-19 pandemic in Kenya have presented a critical opportunity to accelerate digital business in the country.

Since the first positive case was reported in mid-March, the Kenyan government issued several directives to curb its spread, including an international travel ban, an evening curfew, cessation of movement into and out of several areas and a mandate for workers to stay at home when possible. These containment measures have affected most small businesses, significantly disrupting supply chains and reducing foot traffic in brick-and-mortar stores.

These challenges have also driven rapid adoption of technology among businesses and consumers, as businesses rush to move to online platforms and consumers have turned to phones and laptops to purchase essential goods and services.

Technology provides fragile lifeline to businesses impacted by pandemic

The country has witnessed a frenzy of online business activity since the start of the pandemic, including new partnerships between large retail chains and online platforms, and leveraging tech to support home delivery of goods and enhance food distribution.

Digital platforms, including e-commerce and e-logistics solutions, are playing a key role in Kenya’s response to the pandemic and have given the retail industry a lifeline. Farmers left with thousands of goats and chickens due to reduced demand from restaurants can sell their products online through platforms such as Herdy Fresh. Pharmacies experiencing reduced demand can deliver medicine directly to customers through logistics solutions such as GetBoda. And thousands of micro-traders affected by reduced foot traffic can create shops on e-commerce platforms such as Sky.Garden.

But while digital solutions have played a vital role in mitigating economic losses and maintaining the connection between suppliers and consumers, the rapid increase in demand and shift in purchasing habits has exposed the capacity challenges within Kenya’s digital economy.

At the onset of the pandemic, consumers resorted to bulk buying of essential goods, as they feared containment measures would result in shortages. The contents of shopping baskets also changed, as consumers turned to online shopping for things like groceries, office furniture and laptops to set up home offices. And new strategic partnerships, such as digital platforms pairing with restaurants, supermarkets, pharmacies, farmers and other suppliers to shift operations online, also heightened demand and required businesses to quickly adapt.

These sudden changes revealed the technical, financial and human capacity limitations in the digital economy, as various platforms now grapple to substantially expand their capability to serve a larger client base.

Identifying the gaps in Kenya’s digital economy

The effects of the COVID-19 pandemic have exposed weaknesses in supply chains, and highlighted the need to invest in robust procurement and quality assurance capabilities among digital platforms.

For example, some merchants on major e-commerce platforms rely heavily on imports from China. The shutdown of global travel and air transportation consequently disrupted supply chains for many small businesses and e-commerce platforms and resulted in product shortages.

The restriction of movement into and out of the Nairobi area also impeded the transport of farm products sourced from rural areas and forced providers to swiftly engage new suppliers to keep up with the increased demand. Herdy Fresh, an e-commerce platform that sources and delivers fresh meat, previously relied on supplies from farms outside Nairobi. In the wake of the movement restrictions, the platform quickly pivoted by finding new suppliers within the metropolitan area to ensure that they could continue providing fresh meat on demand.

For affected e-commerce platforms, these challenges have translated to structuring new partnerships and devising new engagement protocols to be followed by new suppliers.

Overall, the pressure to engage new, local suppliers has tested the effectiveness of platforms’ supply policies and has become a determining factor in their ability to compete in this digital transformation. While having a robust tech infrastructure is key, the ability to quickly source a diverse range of goods , while ensuring quality and safety standards, demonstrates the vital need for platforms to further invest in their procurement and quality assurance capacity.

Integration with new partners has stretched digital platforms’ technical capacity

Numerous brick-and-mortar stores have knocked on the doors of digital platforms seeking to forge strategic partnerships. Local partnerships such as Tuskys and Sendy, Mydawa and Getboda, and Twiga Foods and Jumia have contributed to increased traffic on digital platforms, but with every new partnership the platform has to dedicate resources to facilitate seamless tech integration. While some platforms have local tech teams that have been able to ensure rapid integration, some platforms reported delays and bugs as they sought to rapidly integrate with partners.

Diversifying services to respond to demand has strained platforms’ human resources

Like most technology businesses, digital platforms operate lean teams to ensure cost efficiency. However, the sudden increase in demand for online products and services has strained existing personnel capacity and, in some cases, driven firms to hire consultants to support their existing staff and abilities.

To effectively pivot, platforms have had to adopt new operation protocols or hire specialists to help them navigate the process of diversifying their services. For instance, moving into food delivery requires special permits and government approvals, and logistics platforms have had to hire hygiene officers to help them comply with government directives for food transportation. But a lack of diversification of skills and readiness among some platform teams has resulted in the platforms missing these crucial opportunities to expand and diversify.

Lack of consistent cash flow challenges success

The majority of businesses surveyed during the COVID-19 crisis have reported having only enough cash to support operations for two to four months, due to dwindling revenues. In May the Central Bank of Kenya reported 75 percent of small businesses in Kenya risked collapse if they didn’t get fresh funding by the end of June.

Additionally, firms that were in the middle of fundraising reported that investors halted all processes at the onset of COVID-19 crisis. But the demand surge necessitated a huge investment in inventory, technology, human resources and safety measures, which further strained digital platforms’ cash flows.

Supporting tech businesses to address vulnerabilities and thrive

The COVID-19 crisis has highlighted a great opportunity to accelerate the digital transformation of Kenyan businesses. However, constraints in technology, human resources and funding threaten to rob the sector of the opportunity to leverage this moment and thrive. These capacity constraints have highlighted the need for ecosystem support to bolster the growth of digital platforms in Kenya.

Mercy Corps’ Youth Impact Labs program (YIL) has been working closely with several local digital platforms to provide working capital grants. The grants are aimed at helping the platforms increase human resources and technical capacity to expand their services, as well as purchase inventory required to meet demand. While working capital grants are important stop-gap measures, additional investment from commercial sources is required for digital platforms to grow rapidly and realize the digitization dream.

About Mercy Corps’ Youth Impact Labs

Catalyzed by funding from Google.org, YIL identifies and tests creative, technology-enabled solutions to tackle global youth unemployment, accelerating job creation so every young person has the opportunity for dignified, purposeful work. In Kenya, YIL focuses on digital marketplaces and platforms that offer services to micro and small businesses, agricultural supply chain management, and digital work.

The program supports these enterprises through financial and technical services, issued in the form of milestone-based grants. On-boarded business partners also get access to advisory services to support the development of technology solutions and tailored business support to expand.