Ajaita Shah & Frontier Markets: Building a Renewable Energy Distribution “Ecosystem”

Ajaita Shah is the Co-Founder and Chief Executive Officer of Frontier Markets and the President of Frontier Innovations Foundation. Frontier Markets is a rural marketing, sales, and service distribution company that provides access to affordable and quality consumer durables to low-income households in India. Frontier Markets is currently operating in rural India and working primarily with clean energy products like solar lighting and smokeless stoves. With five years of microfinance experience in India with organizations like SKS Microfinance, and Ujjivan Financial Services, Ajaita has also worked on numerous development projects in seven Indian states.

Arc Finance: Tell us a bit, if you would, about the background to Frontier Markets. How did it evolve, and what it is today?

AS: Frontier Markets evolved from my own experience in microfinance. I’d just spent a couple of years in India in the microfinance sector where I was exploring “credit plus” options to better service customers – particularly in health, water and energy. Microfinance, of course, has a vast distribution network, and the sector is targeting customers who need more than just financial services; it seemed to follow, then, that MFIs are best suited to work with other credit-plus service providers and link them to their customers.

The problem was that most of the prospective product partners that our MFI wanted to work with to distribute credit-plus products did not have people on the ground to reach out to the communities, or were too dependent on the MFI’s field staff to bring products to the local population.

In short, we in the MFI sector came to a conclusion: that while microfinance has great potential as a channel, it is not the actual distribution solution. So we set up a company solely focusing on non-financial services and after-sales service.

By 2009, we were testing the idea of creating a distribution company that would provide all types of products and services to rural households while also providing after-sales service. We wanted to work with product companies on the ground, so that regardless of their sector or status, they would have access to our customer base. The value proposition is that we would provide a value-added service – and this is where after-sales service is crucial.

Arc Finance: So, can you describe the model now?

AS: By 2010, we had launched Frontier Markets with a clear understanding of the actual model. We set up service centers covering areas of about 300 Indian villages each, with our staff engaging local entrepreneurs to do sales of solar energy products. For farmers who have some brick-and-mortar buildings, this was a great opportunity for them to add these products to their offerings: to sell them from their shop and be branded as a Frontier Markets retail location. So we have built a retail network through retail points – which are the fulfillment points for both sales and after-sales service.

Arc Finance: And what is Frontier’s role with these retail points?

AS: We’re helping them to become stronger solar shopkeepers. We are a local stocking company, data center, call center, and after-sales service center; we think of it as building an ecosystem around the distribution of these products and services. The after-sales service model has strengthened our brand in particular, especially in rural areas. So we are not doing direct sales, but instead leveraging the local entrepreneurs, managing them, and supporting them with a call center and direct contact.

Arc Finance: What differentiates Frontier’s model from other companies selling renewable technologies?

AS: At Frontier, we believe that Bottom of the Pyramid (BoP) households have a right to access goods and services that will positively impact their lives and the lives of their children. Our collective responsibility is to find innovative ways to overcome the barriers that prevent access, and, once access is gained, ensure the quality and integrity of products we offer to people with very limited means. Anything less would destroy the fragile trust that must exist if we are to realize the goal of an educated and empowered citizen. Leveraging and building networks of retail points and providing support to retail entrepreneurs – especially after-sales support – is what differentiates us, I believe.

Arc Finance: What do you think you must do to realize this goal of an educated and empowered citizen?

AS: Several things. We must carefully evaluate each and every product we sell in terms of relative social benefit. We must promote affordable products that are environmentally safe. We have to work with industry experts who provide independent research regarding product safety and positive outcomes. By doing this, we earn the endorsement of our local channel partners to ensure credibility with their members. We have to invest our own time and resources to learn more about rural households instead of relying on commonly held assumptions, inform BoP households about their options and the impact of the products we endorse, and we have to of course be sensitive to cultural norms and values. We are not trying to undermine local customs; we are dedicated to enriching daily life by alleviating common problems.

Arc Finance: But what is the need that you’ve identified here, that you believe you can meet?

AS: It is too expensive for companies to build infrastructure in rural India and to have the feet on the ground to push products. The terrain is rough and the supply chain fragmented. The only way to make it worthwhile is to have strong margins across a wide product portfolio, which no single company has.

Moreover, rural consumers have a low level of brand affinity and low exposure to products. The rural market is new, and both the market and energy products are difficult to understand. Energy products use technology that is very different from what the customer is used to, requiring a lot of education and handholding for the end user.

Rural consumers have unstable cash flows from their seasonal, agricultural-based economies – so they are price- and value-conscious. Building brand affinity in this market requires high-quality products that hold up over a long period of time. Product companies must know what kind of product to introduce, at what quality and at what price. This is exactly where Frontier Markets adds value.

Arc Finance: Can you describe a bit more about the market you’re targeting and reaching, besides its being rural? And how do your products match this market?

AS: Our end customers sit on an energy spectrum. As you go beyond the 30km radius of our centers, there is less and less grid connectivity. So our market varies from partial electrification to totally off-grid.

Our product basket is so diverse for this reason: ranging from 1W PICO systems, to 100W/200W systems, used for utilities. Once you move into this space, financing does become an issue. We have partnered with a Rajasthan partner, where we are linking sales to a local rural bank. Reserve Bank of India (RBI) regulations don’t allow leasing or rental, and distribution and after-sales service is already hard enough without providing consumer financing – so we’re not into providing that ourselves.

We do, however, provide lines of credit to our entrepreneurs. We connect the wholesaler to the retailer, negotiate margins, and control risk.

On the subject of financing partnerships, though, the rural bank model works very well in India because of the extensive Grameen model. For example, the customer puts in 30% of the cost of a product which is already subsidized due to regulations from the Ministry of New and Renewable Energy (MNRE). So let’s say a product is normally 50,000 Rupees. The subsidy reduces that to 35,000 Rupees. The customer puts down 10,000 as a down payment, and there is a 25,000 Rupees credit provided over 1-3 years – plus interest, which is about 5%.

Arc Finance: So, where are you at now in terms of figures and reach?

AS: Our product basket ranges from USD $5-1000. So far we have sold 10,000 solutions – a mix of products. We’re just about to enter the kilowatt range in Rajasthan, providing solutions to health care centers, schools and the like.

We’re now in 5 districts in Rajasthan, and 4 in Andhra Pradesh. Each district has a service center, with each covering about 300 villages. We have supported 82 entrepreneurs to date, we’ve just closed a bridge financing round, and we’ve set up a 501(3)c called Frontier Innovations. This will help us develop our technology-driven Customer Relationship Management (CRM) platform so that sales, customer information, training, and data collection through cell phones are all integrated. This is crucial for scale.

Next year is about scale and breakeven for the service centers. It takes three months to break even after setting up the center, as there is a lead-in time in building the market beforehand. Not all 9 centers will be breaking even, but enough so that the company as a whole is.

Arc Finance: Finally, what are the lessons you’ve learned so far, or mistakes made?

AS: Product selection has been very challenging. There are so many options, and every manufacturer claims to be the be-all-and-end-all solution. So selection is about balancing durability, specifications, quality, relevance and price.

We’ve made some good decisions and some really bad ones. We haven’t co-branded products, which has been a blessing in disguise, as this has helped us build our own brand. In retrospect, we should’ve started with this model from the start, without direct or doorstep sales, which are inefficient. The current model makes a lot more sense. It has its challenges too, but technology has to compensate as you decentralize.

Our organizational status has its consequences too. Being a social business as a private limited company, we aren’t able to access certain benefits or exceptions for NGOs and others – so there is the issue of being pulled in two directions. Had we set up as a foundation from the beginning, we could have run impact studies, training, etc., through the foundation. A conventional, non-social distributor would have a much larger margin to play with than we do. But overall, it has been a very exciting stage for us, and we look forward to expanding our reach further in the near future.