eCooking Supply: Affordability and profitability need to work in harmony

By Dr Simon Batchelor, (OBE), Dr Anna Clements and Jane Spencer

For many people, the words affordability and profitability sound as though they pull in opposite directions. If a company is making a healthy profit, surely consumers must be paying too much? In clean cooking, that intuition is understandable but it is also misleading. A stove that is affordable for households but unprofitable for the businesses that import, finance and distribute it will eventually disappear from the market. Equally, a profitable supply chain that ignores affordability will never achieve the scale needed to improve lives. The challenge is not choosing between affordability and profitability; it is designing business models where they reinforce one another. This blog explores why fair profits are not the enemy of clean cooking they are one of the essential ingredients for getting millions of modern cooking appliances into homes and keeping them there.

In our research and innovation work we discuss most aspects of the system as a jigsaw; a complex interwoven intersection of enabling framework, consumer behaviour and supply chain. In the supply chain, we then focus on logistics and the ‘working capital’.  Do the suppliers have enough working capital to import a container of appliances; is there person power to get it out of customs; how do they ensure effective distribution; should the appliance be subsidised to make it affordable; do they have PAYGO or use SACCOs’ for credit; can carbon finance be used to offer the appliance at a low upfront cost; and how do they recover the full finance longer term through carbon offset payments?

For all these items you will find research and thinking on our website – but one of the areas we have rarely discussed is profitability.  Making a profit from serving the poor can sometimes be presented as a mismatch of the philanthropic hope of improving lives and the ‘apparent’ self-serving nature of ‘making money’…but we need to address this thought and discuss it openly.

First, I would note that the issue of ‘clean cooking’ is an issue in low- and middle-income countries but is not exclusive to the ‘bottom of the pyramid’ segment of these societies. Even in urban areas among the middle class, the widespread use of polluting fuels such as charcoal is harming the cooks health and contributing to climate emissions. So, in ‘philanthropic’ terms, assisting the middle class to avoid harmful smoke exposure, and reducing the climate emissions, is a good use of funds.

While ‘old school’ development aid focuses on the poorest of the poor, the issue of ‘clean cooking’ stretches across almost all wealth segments of society in low- and middle-income countries.   

Second, in any supply chain there has to be enough return from the end sale to replenish all the expenditure from factory to distribution, including all overheads of the suppliers, and a small profit for their shareholders. If there isn’t total cost recovery, the supplier will gradually run out of working capital, and any investors will not get a return.  Even angel investors who are looking at long term patient capital will want to know that the whole supply chain is a full cost recovery, including the interest on any loans.

In our work to date we have tended to offer grants for innovative business models and/or technology pilots, to explore and prove the value of eCooking in specific contexts.  We offer grants because the research has been the exploration of early stages of business and technology innovation. As we approach main streaming eCooking in national scale up strategies, the supply chain needs to mature beyond grants.

Third, I made an observation in a pair of blogs Upfront cost – Price reduction – what can be done and who holds the risk? – Modern Energy Cooking Services,  Upfront cost, credit and risk: who carries the risk when households borrow? – Modern Energy Cooking Services, that there is a strong difference between ‘paying less’ and ‘paying later’. Many Results Based programmes, and carbon finance, offer the customer an opportunity to pay less for the appliance. The supplier still gets full cost recovery because the results based payments, (whether that be RBF or carbon), ‘top up’ the purchase price back to its full retail cost. ‘Paying later’ includes the many Pay as you go (PAYG) or micro credit approaches that mitigate the upfront cost by deferring payments by the consumer, but unless those processes are part of an RBF or carbon finance approach (or are part of some reduced price sale) the customer, by the time they finish paying on credit, are paying the full price (plus finance costs).

Whichever system is in place, it remains important that the supplier ends up with enough money to cover their costs – ordering from the factory, transport, customs, taxes, registrations, communication costs, marketing, overhead, finance costs, etc… every expenditure on the journey of the appliance from being built to delivery to the customers home has to be in the sale price. If not, then gradually the supplier will run out of money, their investors will be upset and the firm will collapse.

So, how can we ensure that suppliers are operating with full cost recovery?

In the Sparking the Cooking Supply Chain Challenge Fund, we sought to invite suppliers to consider their full cost recoveries and ensure that cash flows will cope with delays in payments. When customers are ‘paying later’ it means that the supplier might have to wait 6 months to 2 years for the repayments. If a microfinance agency is handling it, then they may give the supplier the full amount on delivery, and the MFI has to work with the customer on the repayment schedule. But if the credit is offered by the supply/retail partnership on a PAYG basis, then the supplier themselves has to manage the repayment schedule. However, while this cash flow is important, the cash flow challenge is different from ‘profit’ or margins. The ‘pay later’ question stresses the supplier with the question do I have enough cash to keep buying stoves while I’m waiting to be paid back? They can have good full cost recovery but still lack working capital. Our colleagues at CLASP are partnering with some eCooking suppliers to help them finance their working capital.

Bottom line, a business must have a measure of profitability! One of our partners recently told me they had an operating loss for the last few years. This is not sustainable. If the margin on each is too low, then a month of low sales when you are still paying staff wages or if the rent of the warehouse increases, can lead to a failed business. There needs to be a sensible margin on each unit sold. A decent profit margin is not a nice to have, it is necessary for sustainability. Debts need to be repaid, loans need to be serviced, equity needs to result in a benefit for the investor. Don’t shy away from a decent margin, even though it may mean consumers have to pay more.  

We have seen in some of our partners that they don’t report on margins and profitability.  That may be due to commercial sensitivities, but I believe it is also a consequence of how MECS financing is perceived. Our grants as MECS, intended to help them grow a sustainable business have created a mind-set of ‘number of units sold’, not profitability.  Our funders, UK Aid, do indeed focus on the number of people benefiting from our research and innovation. We have a responsibility to report how our work has helped people transition from polluting fuels to modern energy cooking, and how our actions have mitigated climate emissions. But that is the reasoning and rationale of public funding, it shouldn’t necessarily be imposed on the private sector.  

Yes, too much ‘profit’ can be unreasonable, and the world is wrestling with companies and individuals who are making unreasonable gains, but to react against margins and reject the whole idea of profit undermines the sustainability of the private sector. A fair and reasonable total cost recovery, including some return for those who invested and offered finance, is a necessary element of the section of the jigsaw that includes suppliers and distributors. Indeed, since finance costs are in that statement, it is also reasonable for investors to see a reasonable return on their money.

To all our private sector partners, I would like to say – don’t shy away from margins and profit. That’s the only way you become sustainable.

*********************************************************************************************************

Featured Image: AI generated image for the blog.