Reaching Lower-Income Consumers with Nutritious Foods - Cross-Subsidisation and Segmenting by Quality

Geneva, 26 September 2023 - 

Last year on this blog, I announced the GAIN Business Model Research (BMR) Project: funded by the Netherlands Ministry of Foreign Affairs, this project aims to identify promising business models to reach consumers on lower incomes with nutritious foods. Such approaches could help to improve the quality of diets - which currently are often lacking in food diversity and quality - if they can provide food that meets customers’ needs at an affordable price. But they must do so in ways that are profitable and sustainable for the company. How can they do this? 

To find out, the BMR project undertook a systematic review of existing research and evidence. We screened about 8,000 documents before selecting 74 documents, and 99 case-study companies, that were eligible for inclusion. We included companies producing highly nutritious foods as well as those producing less nutritious alternatives - with the understanding that they might offer insights that could be applied to nutritious foods. We then analysed these documents to extract and synthesise 13 specific approaches used by firms to reach lower-income consumers with food and beverage products. Here, we discuss two of these approaches – cross subsidisation and segmentation.

Cross-subsidisation of one product (or market) with another 

In a cross-subsidisation model, one product is sold with a larger margin, with the excess profit used to subsidise another product sold at a smaller margin (e.g., by covering all or most company fixed costs with the higher-margin channel). BMR’s systematic review found several examples of companies using this strategy with the same product sold in different forms or settings to different groups of consumers. For example, Coopérative de Transformation d’Approvisionnement et d’Écoulement de Soja (CTAE) in Benin targets two different customer segments with its soybean-based product: very-low-income consumers and lower-middle-income consumers; the latter group are reached in main cities, with better-quality packaging that includes more marketing. The multinational Danone used a similar approach in Indonesia, marketing a fortified milk-based beverage, Milkuat, in a premium range (a Tiger-shaped bottle) and using those margins to profitably make a basic version available at about half the price (and with a 15% smaller margin). One Rwandan flour processor has a particularly interesting take on the cross-subsidisation approach, sourcing from smallholder farmers and agreeing to sell 15-20% of the production back to them at a discount, with the remainder going to institutional markets (e.g., schools, health centres) at a higher margin. 

Cross-subsidisation can also be used across product lines or across parts of supply chains. For example, Protein Kissèe-La, a processor of fortified porridge flours in Côte d’Ivoire, cross-subsidised its porridge by supplying maize grit (a byproduct of making porridge flour) to breweries. MMD Kheir Zaman, a food retailer in Egypt shared costs for transport and supply chain management with a high-end supermarket to subsidise low-income-consumer facing retail outlets. Mozambican and Kenyan fish farmers sold high-end tilapia filets and whole large fish with a large margin to more affluent urban markets and used the profits to subsidise smaller fish sold to lower-income consumers; a Nigerian cassava processor, Promise Point Limited, sold high-quality ingredients to multinational food processors and used the proceeds to subsidise a biofortified porridge flour for the local market; and Cargill India, the major multinational, introduced its fortified oil in India at a low cost by subsidising it through profits from other products in its portfolio. 

Smiling woman holding ground millet

Producing a lower-price product can result in negative effects on the higher-price product so some companies produce a new brand specifically for lower-income markets, even if the formulation of the product is basically the same. © GAIN

Similarly, a common strategy is selling to an institutional market (e.g., a school meal programme or NGO) at a higher margin or with the aim of covering most of the fixed costs, with the savings passed on to the normal retail market, as done by fortified complementary porridge producers in Madagascar and Burkina Faso, Nutri’zaza and Nutrifaso. When leveraging institutional orders in this way, it is important to consider the use of alternative branding/packaging or focusing in areas where the product is not sold by retail, to avoid undermining the paid market.

Producing a lower-price product can result in negative effects on the higher-price product (e.g., if it becomes seen as a lower 'status' product), so some companies produce a new brand specifically for lower-income markets, even if the formulation of the product is basically the same. For example, in India, when GSK aimed to expand reach to lower-income consumers with its Horlicks drink, it released a more affordable version marketed specifically to them and branded 'Asha' (meaning 'hope'). The viability of cross-subsidisation strategies that segregate products across wealth groups can also be limited in cases where there are few affluent or middle-income consumers to balance out the large number of lower-income consumers.

Segmentation of products by quality to capture different customer populations

Under quality segmentation, a product that exists in forms of different qualities is graded by quality, with lower-quality versions sold at cheaper prices (possibly with cross-subsidisation from the high-quality version to further lower prices, as discussed above). In the absence of this approach, either the product would be produced in a way where there was less difference in quality, it would be sold undifferentiated, or the low-quality products would be diverted to other streams (e.g., waste, animal feed, or food processing with lower quality requirements). This approach can also be used for aspects of quality other than the product itself — for example, packaging the same product in a cheaper packaging format with limited branding for a low-income market versus 'premium' packaging, with branding, for a higher-income market at different price points. 

Three firms covered in the BMR review used this approach for eggs, selling eggs with less-than-perfect quality (cracked, discoloured, unclean, or misshapen) at a lower a price (often through informal retail or on-farm outlets). For example, one Rwandan firm provides some of its low-quality eggs to employees for free, for their own consumption, and sells the remainder of these type of eggs to members of the low-income community in which the farm is based at half the price of normal eggs; it sold about 45,000 eggs this way in 2020.

Two firms (R&D Green Mart in Nepal and SPAR supermarkets in South Africa) used a similar approach with fresh produce: selling the low-grade produce at discount prices through local markets in lower-income areas, including to their farmer-suppliers, while the higher-grade produce is sent to higher-income urban markets. Two firms also use the approach for fish, selling smaller-size fish to lower-income consumers in the area of their fish farm while selling the larger, more lucrative fish to the high-income, urban market. One fish-farming company in Kenya was reported to be particularly successful in introducing smaller fish sizes because these aligned with consumers’ desires for each person to have their own fish during a meal, which lower-income consumers could not afford.

Both of these business models hinge on recognising diversity - in the product and in the clients - and leveraging it to create a tighter match between what the customer values and the product provided at a given price point. In so doing, they can help unlock hidden value for both the food producer and the consumer.