Inside Safaricom’s Sh38.1b profit: Power of branding, market positioning and strategy

A Safaricom Customer Care Shop at I&M Kenyatta Avenue taken PHOTO: WILBERFORCE OKWIRI

NAIROBI: Safaricom stunned markets in the region when it posted historic full-year results two weeks ago.

It broke records for listed and unlisted firms in East and Central Africa region, with revenues at Sh197 billion, and profits at Sh38.1 billion for the year to March 2016.

This came on the back of a difficult operating year in the local and global economic landscape.

Safaricom was the region’s most valuable and profitable firm even before this, but it is its defiance of market fundamentals that calls for an analysis of the firm’s business model and strategy to glean the factors driving its growth.

By drawing parallels between the ascendancy of Google on one hand, and Yahoo’s tanking fortunes on the other, Safaricom’s emergence over its local rivals, Airtel, Orange and yuMobile, can be chalked up to three key factors.

These are brand mission and purpose, strategy execution, and marketing.

RELEVANT PRODUCTS

These three factors have ensured Google’s dominance (with its holding company Alphabet being the most valuable company in the world today).

The same factors will ensure Safaricom’s growth and profits are sustainable in the medium to long-term. Convergence between telecommunications, media, technology and financial services is escalating, and the telco’s business model is replicable and scalable.

Safaricom, like Google, has mastered and remained faithful to its brand identity and promise, priding itself in being ‘the better option’.

Its corporate objective is to transform the lives of Kenyans through three strategic pillars — putting customers first, offering relevant products and services, and enhancing operational excellence.

The firm, incorporated in 1997, has used its tagline throughout its corporate life in branding, merchandising, promotions and marketing. It has rejigged it, embedding local nuances and experiential campaigns for its expanding portfolio of products and value-added services.

Google’s brand mission and purpose is well-known and well-established — “to organise the world’s information and make it universally accessible and useful”. Google has retained this in its corporate identity, and is the most important reason the firm exists.

On the other hand, Safaricom’s competitors Airtel, Orange and yuMobile (which was bought out by Safaricom and Airtel), much like Yahoo, have an identity crisis of sorts, and largely lack a consistent, compelling brand strategy, mission or purpose.

Airtel’s brand history is chequered. It started out as Kencell, a joint venture owned and operated by Naushad Merali’s Sameer Group and French firm Vivendi Universal in 2000.

The firm then had a head-start over Safaricom, with a great network and well-capitalised marketing. Safaricom struggled with legacy issues from its parent ministry of Communications and Broadcasting, the unbundled Telkom Kenya and Government bureaucracy.

Vivendi Universal then sold its shareholding in Kencell in 2004 to Celtel International BV, which led to a rebrand to Celtel.

BRANDING POLICY

Hardly a year later, in 2005, Mobile Telecommunications Company (MTC) of Kuwait bought Celtel International’s African network assets and licences. MTC retained the brand name Celtel until 2008 when, in line with its international branding policy, it named the operations Zain, an Arabic word meaning beautiful, good, wonderful.

In March 2010, MTC sold all 15 African operations to India’s Bharti Airtel. Bharti Airtel, then India’s largest integrated mobile operator — and now the third-largest mobile operator globally by subscriber base after China Mobile and China Unicom — rebranded the operator from Zain to Airtel.

These management changes impacted the operator’s brand, growth, commercial strategy and profitability. Some of its advertising campaigns have failed to connect, reducing its brand stickiness. Safaricom, meanwhile, was airing targeted, locally relevant commercials.

Budget cuts in marketing, branding and promotions due to a highly centralised business model hindered the mass distribution network needed to drive penetration in early and mid-stages in the telecommunications business.

With dealers unhappy with some of the arrangements, uptake of new customers, and therefore revenues in this highly competitive space, lagged behind targets.

PRICE WAR

In the early days, Kencell picked on Safaricom’s line, using the tag ‘The best option’, and fought battles on billing charges per minute and per second, as well as surcharges on topping up.

By the time Airtel came in, Safaricom had already turned the corner and was racing ahead. Airtel then fought the price war by lowering prices to basement-price charges based on its very successful ‘minute-factory’ Indian model.

However, it did not have the critical consumer numbers on its network, and had a smaller war chest to burn on growing its reach.

And what about its ‘brand warrior’? Safaricom CEOs Michael Joseph (who held the position for 11 years) and Bob Collymore are icons on the Kenyan and global telco scene.

Essar Telkom Kenya Ltd, trading as yuMobile, entered Kenya in the 2007-08 financial year. At the time, the then Communications Commission of Kenya had for several years gone through a number of bids for a third mobile operator. The bids included Strive Masiyiwa’s Econet Wireless, whose local partners failed to raise the necessary finances to clinch the licence and rollout.

yuMobile closed shop in 2014, and its licences, assets and resources were last year bought by both Airtel and Safaricom. yuMobile lacked a clear brand purpose and mission, having entered Kenya in the middle of the price war waged by Airtel against Safaricom.

The firm adopted the same low-pricing model as Airtel, without due regard to local market conditions, churn rates, customer brand loyalty trends and average revenue per user (ARPU) data.

It also lacked the requisite established marketing and distribution network to sustain a hostile and aggressive market entry strategy.

In the end, this strategy of free and very low-priced calls backfired, though it had proven profitable, just like Airtel’s, back home in India.

Is it any wonder the other telco firms have been struggling to connect with consumers, declare a profit and make money for their shareholders?

Airtel has seen at least eight CEOs over a similar period of time, and Orange Telkom has swallowed Sh120 billion of shareholders’ funds over the last eight years in the most expensive privatisation exercise this country has ever seen.

The heavily capitalised private equity firm Helios Capital Partners is inching towards financial close with the Government and Orange Telkom for a 60-70 per cent stake in the indebted Telkom Kenya.

It is anyone’s guess what strategy will be adopted by the new owners to revive the operator and bring it up to speed to pose any threat to Safaricom.

Still, these local telcos have played a significant role in stabilising pricing in the market, and have control in their niche segments, which has kept them in business and created some hurdles for Safaricom.

But, while Safaricom has been focused on innovation and future growth streams, and leveraged its brand name, recognition and equity to grow and diversify revenue streams, its competitors have not done as much.

Safaricom has run away with the agency network, and at last count had more than 100,000 agents across the country. Compare this with its second-closest competitor, Airtel, with an agency network of about 10,000. This means that although Airtel Money may have lower transaction costs, it is 10 times as difficult to find an agent.

However, this disparity is being addressed after the industry regulator, the Communications Authority of Kenya, helped Airtel and Safaricom reach a negotiated agreement. Under the terms of the deal, agents can now run M-Pesa, Airtel Money and Orange Money services in the same premises.

BRAND ALLIANCES

But Safaricom’s strategy of bundling services and products has integrated closely-related businesses into its network. It has also created alliances with other established brands.

These brand alliances, including with Commercial Bank of Africa (CBA) and Kenya Commercial Bank (KCB), have led to the almost-ubiquitous presence of its mobile money platform, M-Pesa.

This has led to convenience for both consumers and merchants in different levels and sectors of the economy. One can pay for any service, from health insurance and matatu fare to school fees and shopping through M-Pesa in all manner of outlets.

It does not end there. Through Skiza Tunes and Niko na Safaricom Live, the firm has embedded value-added services that appeal across the board. You can download your favourite music and videos, track news and trending issues, and get on social media, a burgeoning space that is driving the uptake of mobile data bundles.

Investment in its network and a focused network upgrade from 2G to 3G, and now 4G/LTE means that the customer experience on devices-on-the-go is as good as on a TV or desktop.

It has a head-start on data, too, having been allocated frequency spectrum resources by the Government in the 700-800 Mhz range, which TV and radio broadcasting stations vacated during the digital migration. This is part of the telco’s rollout of a Sh15 billion National Police Service (NPS) Security and Surveillance Project that is now live in Nairobi and Mombasa.

Safaricom has leveraged on its being a Kenyan firm. It has also endeared itself to citizens in times of need, spending Sh3 billion on health, education and financial inclusion through its Safaricom Foundation.

The firm has also tweaked its business model to reflect the changes in devolved governance. It has formed six marketing and operational regions that splits the 47 counties into six regions, each led by a head who reports to headquarters.

Beyond the mass appeal, a clear segmentation is discernible in its marketing and sponsorship deals to different demographics, from the acclaimed Safaricom Festival, to the Safaricom 7s rugby crowd, to Groove Awards for local gospel artistes. The Safaricom Kasarani Stadium branding deal rides on athletics heroes who have put Kenya on the world map.

Apart from being the top taxpayer over the last several years, the telco has experiential shops and customer service centres. These interface with customers on a daily basis, and sell gadgets, peripherals and equipment, opening up a new revenue stream and enhancing the firm’s market intelligence.

Through the M-Pesa Foundation and Academy, the telco will not only educate upto 1,000 bright but needy children annually, but also tap into the innovation and incubation ecosystem in the country. It will identify opportunities, applications, gaps and talents that will create the next big thing.

CREATING JOBS

A report by KPMG last year indicates that Safaricom’s non-financial contribution to Kenya is nine times its profits — Sh315 billion, or 6 per cent of Kenya’s GDP. It has created more than 4,000 direct jobs and more than 100,000 others indirectly last year.

This is social capital value that no other firm or Government ministry can lay claim to.

Airtel, for instance, is bearing the weight of the continued sale of its African assets — the firm sold subsidiaries in Burkina Faso, Chad, Congo Brazzaville and Sierra Leone to Orange France — lay-offs and changes in strategy.

However, in Kenya, the telco has assured its subscribers that it will not exit the market.

“Airtel remains committed to the Kenyan market, with significant investments of over Sh20 billion,” its managing director, Adil El Youssefi, has been quoted saying.

But Airtel’s net loss in Africa last year widened to $183 million (Sh18.3 billion) from $105 million (Sh10.5 billion) in 2014. Revenue dropped to $1 billion (Sh100 billion) from $1.14 billion (Sh100.1 billion).

Before acquiring Zain in 2010, Bharti Airtel was reporting revenues of $228 million (Sh22.8 billion) and had a subscriber base of 42 million.

The company’s African plan targeted revenues of $5 billion (Sh500 billion), EBIDTA (earnings before interest, depreciation, taxation, and amortisation) of $2 billion (Sh200 billion) and 100 million subscribers by 2013.

But five years after acquisition, Airtel has not achieved its targets. At the end of March 2015, Bharti Airtel had a net loss of $585 million (Sh58.5 billion) on revenues of $4.4 billion (Sh440 billion) from its African operations, and a subscriber base of 76 million instead of the projected 100 million.

It is against this backdrop that Safaricom’s brand, market power and strategy narrative must be viewed and acknowledged.

The writer is co-founder and East Africa MD of KEAMSCO, a New York, Bremen and Nairobi-based business advisory firm.

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