Entrepreneurship Zone: 07 March 2023 :: South African subscription-based retailer believes access is the new ownership

Tue Mar 7 07:22:56 CAT 2023

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Entrepreneurship Zone: 07 March 2023 ::   South African subscription-based
retailer believes access is the new ownership

*          

Rentoza is a South African online retailer of electronics, appliances, baby
goods and fitness equipment with a twist. It doesn’t outright sell these
products. Instead, it gives customers access to the items on a subscription
basis, similar to services like Netflix and Spotify. Customers can use the
products for as little as one month and return it at any time they please.

Some customers shop through Rentoza to have access to products without
having to pay the full price, while others only need to use an item for a
short time. Another reason customers purchase from Rentoza is to stay
up-to-date with the latest technology. For example, parents who want to keep
their children entertained during school holidays can subscribe to a gaming
console and return it once the school term starts again. Tech enthusiasts
can subscribe to the latest iPhone model for a year and upgrade to the
newest one when it becomes available. Additionally, those with babies can
access a variety of parenting equipment, such as car seats and strollers,
and return them once their child has outgrown them.

Mishaan Ratan, the company’s co-founder and chief marketing officer, states
that mobile phones, fridges and microwaves are among the most popular
products on the platform.

Rentoza buys the products directly from their manufacturers and maintains
ownership of the items throughout the subscription period.

When a customer cancels their subscription or it expires, Rentoza takes
back the product, repairs it if necessary, and provides it to the next
customer. This business model allows the company to extract a significant
amount of value from each item over an extended period of time.

Ratan observes that the iPhone 6, released in 2014, had been its
best-selling model until recently. Apple is viewed as an aspirational
product among many South Africans. However, due to their limited income,
many are content to choose less expensive, older iPhones instead of the
newest models.

Rentoza employs a verification process to confirm a customer’s identity
before extending a subscription, which involves various methods such as
facial recognition technology. Additionally, it analyses the customer’s
spending habits by scanning bank statements to assess their ability and
willingness to make monthly payments. This includes identifying patterns
such as excessive gambling. Ratan considers this verification process to be
the company’s “secret sauce”. In the event that a customer fails to pay,
Rentoza can remotely lock the product. Thanks to this system, Rentoza
successfully collects 97% of its monthly subscriptions. It is typically able
to retrieve the product from half of those who fail to pay.

Starting out

Rentoza was founded in 2018 by childhood friends Ratan, Chris Govender,
Avinesh Reddy and Aviraag Ramdhani, all with diverse professional
backgrounds. The idea for the business originated from the founders’
personal frustration with carrying around baby gear while visiting family
across the country. They believed it should be possible to just rent the
goods at the destination.

Initially, the company was an online rental marketplace for third-party
businesses to lease their stock to customers for a few days. The business
saw some modest traction with this model, recording about R5,000 ($276 at
the current exchange rate) in monthly revenues. But due to struggles dealing
with third-party suppliers and customers’ desire to have access to goods for
a longer period of time, the founders pivoted to a rent-to-own concept,
resulting in revenue increasing to approximately R12,000 ($662) per month.
However, they soon realised that this model put them in direct competition
with other credit retailers in South Africa. After operating the rent-to-own
model for nine months, the founders decided to re-evaluate the entire
business.

Towards the end of 2019, they scrapped everything and switched to
subscription-based model, which allows customers to avoid the burden of
owning a product permanently. They were partly inspired by the growing
popularity of subscription-based music and streaming platforms in the
country.

Covid boom

In March 2020, Rentoza rolled out its new subscription model just as the
Covid-19 pandemic hit South Africa. With the announcement of lockdown,
people scrambled for work-from-home essentials like laptops and home
appliances, causing a surge in demand. “It was absolute pandemonium,” Ratan
says. Rentoza’s flexible subscription model proved to be a hit as people,
unsure of how long the lockdown would last, turned to the service. This
resulted in a surge in demand, propelling the business from generating
R12,000 a month to R80,000 within a short time.

The business was initially run by just the four founders, who juggled their
regular jobs with Rentoza. “I would do my day job, come home, eat, spend
time with my family, and sit from like nine o’clock until maybe four in
morning, working with the other founder to really finesse the model,” Ratan
explains.

However, with the Covid-related surge in demand, the company had to quickly
hire new employees. The founders did job interviews on Saturday mornings and
asked successful candidates if they could start on the Monday. The company
operated from 30m2 office in Sandton, cramming people into makeshift desks
and relying on coffee to power through.

Currently, the company generates over R4 million ($221,000) in monthly
recurring revenue and has more than 80 employees. Ratan and Govender have
quit their day jobs and are now working on Rentoza full-time.

Financing headaches

Ratan says financing has been one of the company’s biggest challenges.

It is a capital-intensive business as the company must purchase all
products upfront before earning any revenue from them. To start the venture,
the co-founders bootstrapped it with their personal funds and contributions
from friends and family. Commercial banks were initially reluctant to lend
to the company, and as a result, they had to turn to various small business
lending institutions, often at interest rates as high as 30%.

Late last year Rentoza received a R20 million ($1.1 million) investment
from Khulisani Ventures, the venture capital arm of South Africa’s
Mineworkers Investment Company. On the back of this investment, Rentoza has
been able to secure debt financing from a large South African investment
bank, which has allowed it to clear its short term loan book.

Leveraging off-the-shelf technologies

Although Rentoza has a software development team, its platform was mostly
built using existing technologies, which has allowed it to quickly scale its
business. Instead of building all technical components from scratch, the
company has integrated off-the-shelf solutions such as GetID for customer
verification, Stitch for risk evaluation, and Paradox for document upload
and validation. The website itself is built on the Shopify platform. Ratan
says the company did however had to develop its own subscription management
platform as there wasn’t an existing solution that met its needs.

Testing physical retail

Rentoza recently opened a pop-up store at the Mall of Africa in
Johannesburg. By establishing a physical presence, Rentoza seeks to attract
new customers, foster trust and provide a tangible experience with the
brand. South Africa’s total shopping mall space is among the largest in the
world. E-commerce is estimated to account for a mere 5% of total retail
sales.

According to Ratan, Rentoza is closely monitoring the performance of the
pop-up store and will make a decision after six months of trading on whether
to pursue a brick-and-mortar model or discontinue it.

Nigeria a major rice consumer

According to the Food and Agriculture Organisation (FAO), Nigeria is
Africa’s primary consumers of rice, one of the biggest producers and,
simultaneously, of the largest rice importers globally. The nation consumes
about seven million tonnes of rice per year and as of 2018, the country
imported more than three million tonnes, equivalent to $480 million. A
report by PWC states rice accounts for up to 10% of household food spending.
With a population exceeding 200 million people, the market is vast and
demand far outstrips supply.

“We love to eat rice. In most homes, especially in the south-east, rice is
eaten at least once a day. Imported rice is our main competitor. It has
caused many local factories to shut down,” Falalu notes but adds that
Nigerians appreciate local rice for its quality and better taste. “Our rice
takes approximately four to six months from farm to plate, compared to
imported rice which has been in silos and shipping containers for up to a
year or more. As a result, it loses its taste.”

The government’s policies to boost local farming of rice are bearing fruit
as production went up from 3.7 million metric tonnes in 2017 to 4 million
metric tonnes in 2018. Rice generates more income for Nigeria’s small-scale
farmers than any other cash crop.

Expansion plans

Initially, FaLGates bought paddy from third-party farmers. Kaduna borders
several rice-producing states, making it a good location. Today, the company
has 200 hectares under contract farming. It supplies farmers with inputs
then buys back paddy at market value less cost of inputs.

According to Falalu, opportunities in Nigeria’s rice market are attracting
big global companies that have significant capital. Local entrepreneurs and
farmers will need to think strategically to survive. FaLGates has
diversified into rice seedling farming and is acquiring farmland to grow its
own paddy as part of a backward integration strategy. By improving on seed
varieties, it runs a profitable venture of selling rice seedlings to farmers
who are guaranteed higher yields. A 4,600-hectare commercial farm in the
pipeline will, in the next five years, help meet up to 50% of the factory’s
annual paddy requirement.

FaLGates processes up to 50,000 metric tonnes of rice per year, with a
turnover of $3.4 million.

Falalu has also begun maize trading and is looking into beef farming to use
the rice bran from his mill as feed. The company’s goal is to grow
organically by boosting acreage under cultivation as well as expanding into
south-east Nigeria, which consumes more rice than the rest of the country.
“I believe in organic growth. We have grown from eight employees to 60.”

Going forward, Falalu sees Africa’s population as a significant asset
rather than a liability and is planning an African tour next year to scout
for export opportunities, particularly in nations that do not have an
established rice industry. 

Mishaan Ratan, co-founder of Rentoza

- Howwemadeitinafrica

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