Smallholder dairy farmers account for 56% of the 5 billion liters of milk produced in Kenya. Despite heavy investments by milk processors, a significant portion of this milk (over half) is still handled by the informal dairy value chain. Graham Benton, who founded and ran Zaidi Technologies, believes that for this value chain to thrive despite the onslaught from formal trade, “it must be doing something right. Something that works for everybody in that value chain which the formal market can’t or is unwilling to serve.”
What makes the informal sector thrive, according to Benton, is its value proposition for the farmer. Unlike formal trade where smallholder farmers deliver milk only to be paid in a 30 to 45 days cycle, in the informal trade, payment for milk delivered is prompt, often on a daily or weekly basis. The farmgate price in the informal sector is also often higher (up to half of the final price) when compared to the formal where it can go as low as 25%. Benton says this makes informal trade immensely popular among farmers that if they were asked to choose between a cooperative or a formal business or a guy with a motorcycle, the guy on a motorcycle is preferred almost every time.
A HIGHLY INEFFICIENT SYSTEM
Despite its immense popularity, inefficiencies within the system mean that farmers do not always get a fair value for their milk. To avoid complex maths associated with recording the true quantity of milk each farmer delivers, Benton says that most middlemen often round off the quantities to the nearest liter. The loss in uncaptured quantities (which ends up not being paid) can be as high as 20% per delivery, which is significant given that the average milk delivery per farmer is 4 liters.
Transparency in the informal dairy value chain is also mostly non-existent. Most middlemen in the value chain keep their records manually on books, and in the event the famous “black book” is unavailable, a piece of paper is used in the hope that information will be transferred to the main records book.
ENHANCING FAIRNESS THROUGH TECHNOLOGY
With technology, however, Zaidi helped transform the informal dairy value chain in Kenya to make it more lucrative, inclusive, and fair to farmers and all other players in the sector. The startup developed an app that solved two of the biggest pain points for farmers, accurate measurement and proper record keeping. “If the little digital scale says 2.37 Kgs, then it’s 2.37Kgs that will be recorded in the app which then does all the math,” Benton says.
Digitizing the entire milk purchasing process has brought a level of transparency to the value chain that never existed before. Benton notes that with the app, “the farmer knows that they’re not just giving milk to this guy who’s taking records on the back of a piece of paper,” but rather his milk is going into a system that is doing meticulous calculations and keeping records. Farmer incomes have also improved as the amount previously lost to rounding off is captured fully and paid for.
Even with digitalization, Zaidi does not veer off from the value chain’s main selling point: prompt payment. “We did a seven-day cycle,” Benton reveals, adding that “with some very affordable tricks,” the company could bring the payment cycle down to daily. Like other aspects of the system, payment is digitalized. Farmers receive their payment through the mobile money transfer platform M-Pesa which creates “bankable records” that farmers could use to improve their credit scores. Although weekly is the preferred payment cycle, Benton reveals that with digital, farmers are allowed to choose whichever cycle fits them, be it twice a week or twice a month.
THE ROLE OF MILK ATMS IN INFORMAL TRADE
Milk ATMs played a critical role in realizing Zaidi’s goal to modernize the informal milk value chain in Kenya. According to Benton, ATMs allow companies to sell milk at a much more affordable price. If you go to a supermarket, a 500ml packet of pasteurized milk retails for KES50 while UHT milk sells for KES60 or KES70, depending on location, Benton observes. In comparison, 500 ml of milk from an ATM retail at between KES35 and KES45. Moreover, at the ATM, consumers are not restricted to buying milk in particular quantities, they can always buy whichever amount they need for as low as KES10. This makes the milk sold through informal trade channels immensely popular among low-income areas where consumer purchasing power is limited. Benton adds that consumers prefer the taste of ATM milk when compared to packaged milk, as it closely resembles the original taste of raw milk.
Before Milk is delivered to them, it is ensured that the product meets the minimum quality standards. The process of delivery is also optimized to ensure that ATMs only receive the amount of milk that they are likely to sell based on their historic performance. This reduces waste, which is a key problem in most fresh food value chains in Kenya.
Despite its critical role in the informal milk trade, Benton admits that the current milk ATMs are not optimized for the function of dispensing milk to customers. “Nothing is built for each other,” Benton reckons. He notes that the “containers are not built for the refrigeration unit, which is not built for the dispenser,” and this greatly diminishes the effectiveness of the machine. Another big challenge, according to Benton, is that the machines are very inaccurate, which at times leads to them either under-dispensing or over-dispensing milk. This, he reckons, was Zaidi’s biggest obstacle to scaling up its technology despite it having a direct impact on more than 700 farmers in Kenya’s central highlands and having the potential to onboard even more. “What really needs to happen is that somebody needs to come in and develop from the ground up, a fully functional and working milk ATM.”
Today, Benton is continuing his work of improving the dairy value chain and is looking at developing new ways to ensure that quality milk reaches customers at a fair price while ensuring an equitable value chain for farmers.
Editor’s Note: This article was originally published in Issue 55 of Food Business Africa magazine. You can read this and the entire magazine HERE