Transport sector and brokerage – are you experienced?

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Outside Looking In

D E Wasake, FCCA

About my guest contributors:

In the agriculture transport/brokerage sector

Ssebunya simon is a business man in Kyengera owning a whole sale shop at the same time a middle man transporting agricultural goods from the villages to the markets in town. He has been doing this business for over 6 years purchasing maize from Mubende and selling it to the maize milling companies.

In the construction transport/brokerage sector

Semwogerere Fred is a businessman in Kampala owning a whole sale shop selling building materials at the same time transports building materials from the selling point to the building site of his customers. He started in business as a lorry driver of a 22 tonne Tata for his boss.

About the writer

For over 10 years I have worked with several clients in Uganda, The Bahamas and the United Kingdom in providing audit, tax, accounting and advisory services. My experience with various clients in the different sectors enables me to have a good understanding of this business. To see the full depth of my experience, please see my profile.

Article summary

In Uganda, the transportation of goods commonly construction material and agriculture produce is not often clear cut. Transporters are often brokers because the value chain is not yet advanced. With the absence of many large scale manufacturers/processors, Agriculture producers for example heavily rely on these independent transporters to get their produce to the market.

Likewise in the building construction sector, the concept of using a building contractor has not taken firm hold and so construction is often undertaken by the end user themselves. This means they heavily rely on the transporter to also do the purchase – hence the brokerage opportunity.

This sector is therefore not as “easy” as taking goods from A to B. In this article, we therefore have shown a blended model of transport as well as brokerage, the predominant model in Uganda.

We estimate that:

  • In the construction transport/brokerage sector, a starting investment of Shs 102m will give you a return on investment (number of years to get your capital back) of 4.49 years. Annual profits are estimated at Shs. 23m per year.
  • In the agriculture transport/brokerage sector, a starting investment of Shs. 78m will also give you a return on investment (number of years to get your capital back) of 1.72 years. Annual profits are estimated at Shs. 45m per year.

To achieve these estimates, the “advanced thinking” transporter has got to become experienced as a “musubuzi” (trader) – i.e get involved in brokerage or acting as a “middle man”. The margin made from combining brokerage and transport are higher this way. This however also requires higher working capital (to purchase produce/materials). This is the model we use in this analysis.

If you alternatively wish to stick to the traditional or conventional model of transport/logistics only, then in order to have sufficient income, you will need to enter into partnership with one of the following:

  • Large manufacturers/wholesalers – such as for beverages, alcoholics and Consumer Industrial Products (CIPs)
  • Large logistics companies – such as courier companies or even the e- commerce platforms (which require transporters to deliver to their customers).

We have not explored this aspect as the manufacturing, logistics sector in Uganda is overall still developing.

Background

If you are a regular reader of these articles, you will know that I often start with a personal story because I will have often dabbled in the sector or know someone close to me.

Unfortunately the closest I ever came to this sector is when as a child I was tasked by my mother with finding a truck driver to move house. In Ugandan speak this means to “shift” or “Kusenguka”. The rules were this:

  • The shifting was always in the night (at least after 7.00 pm) – thieves shouldn’t see your property as you move in!; and
  • You must haggle with the transporter because their initial prices are always inflated at least 25%.  That is the dance, and you must comply and do it for at least 5 minutes, otherwise, you are a rich fool (or a clueless foreigner). 

I however have a story from one of my team on this sector. Matthew initially thought the sector was easy until he got into it. He said this about his experience:

“Personally I have been a middle man purchasing chicken from the farmers and selling it to the high end customers in the hotels and restaurants and one thing I can say about this business is that it’s a venture to die for until both parties at both ends eliminate you from the middle and bridges that gap. At least that was my fate.

For the number of businessmen in the transportation business, take for example those purchasing agricultural produce from villages and transporting it to the capital city to be sold in the market areas that gap is nowhere to being closed. Customers whether farmers or manufacturers are always looking for that person to help them transport their purchased goods to their destination points since they can’t often afford to purchase vehicles for that one time need.

I have always thought of the transportation business to be one of the easiest. Simply buy the Lorries, get on the road and start making profits. I didn’t know that it’s such a complex business until I did a study on it. It’s a competitive space that involves using a lot of tactics to get customers.”  

The sector in Uganda

In Uganda, many entrepreneurs have realized that transporting goods from one place to another can be a very profitable venture. Because of the improvement in the road network, the transport industry has boomed. It takes shorter time and fuel to cover the same distance one was covering a few years ago when the roads were not tarmac and at the same time lower costs for vehicle owners to maintain their vehicles after a long drive. If you are planning to get into the trucking business, it is important that you know basic things required to operate a trucking business so that you don’t turn out to be another statistic of a small business failure.

Many businessmen (and women) are involved in commercial goods transportation transporting different items ranging from agricultural produce, building materials, fuel among others. For Semwogerere Fred (one of my guest contributors) a Kampala businessman owning a whole sale shop, the business of selling building materials has transitioned into transporting the same materials to the building sites for his customers while other businessmen like Ssebunya simon (my other guest contributor) enjoy the occasional transportation of agricultural goods from the villages to be sold in town and the neighboring markets to enjoy the benefit of making a good profit out of it.

Why engage in commercial goods transportation of agricultural goods and building materials in Uganda?

A good road network is a pillar of every economy. Any person who travelled on Uganda’s roads upcountry 10 years ago will find a marked difference if he moved on the same roads today. The Uganda National Roads Authority (UNRA) is delivering on its mandate since it was formed in 2008.  It is committed to delivering on its strategic objective of increasing accessibility across the country by improving the transport network, which is a cornerstone to national development.

Roads are critical to the transformation of all sectors of the economy because they facilitate easy and quick movement of goods and services from the source or point of production to the market. This is particularly critical in Uganda, where more than 80% of the population is engaged in agriculture (and often rural based), a good road network becomes even more critical (to transport the produce from the rural/production areas to the consumption areas in the cities).

In Uganda someone needs to bridge the gap between the farmers and the consumers as the farmers are not often able to absorb the other activities such as bulking, aggregation and transport after they have finished to harvest their produce. This shifts the task to the middlemen who specialize in this field to get the produce to the market.

On the other hand, businessmen involved in the transportation of commercial goods like building materials have resorted to brokerage as they not only get involved in transporting the building materials but they also purchase the materials on behalf of the builder. They have incorporated the price of transportation with the price of the material being transported to get a better profit margin compared to a situation where they only transported the goods alone.

Since they have been in the business for a number of years, they have managed to master the business dynamics and have bridged the gap between the seller and the builder hence becoming profitable middlemen.

So with the above introduction, are you really experienced (as a musubuzi)? Can you easily get into this sector?

FIRST THE CONS (WHAT MIGHT HOLD YOU BACK)

1. Access to financing (lease or working capital)

While there are many vehicle leasing and financing options available (as the vehicle is the security) a key requirement for many lenders is experience in the sector. DFCU leasing for example require 2 years’ audited accounts, a bank statement for 12 months, Tax documents. This means you need experience in the sector to get access to lease financing. It can seem self-defeating. How can you get experience without the loan/financing?

Another key source of financing you will need to consider when getting into this sector is a working capital facility. As an example, in the agriculture sector in our financial model, you need to purchase maize worth Shs. 148m from the farmers/traders.  Unless you are able to gain their trust (as our guest contributor did), you will need to consider some form of financing. Thus more reason to have proper corporate governance and books of accounts so as to be eligible for such facilities.

Our advanced thinking tips to counter this?

#1. Understand lender requirements. Our key “advanced thinking” tip is that at the start you need to have this awareness of what lenders often require. It is critical for you at the start so you can formalize your operations at the onset (such as incorporation, bank account, tax registration) – or if you are considering partnering with someone already experienced, you need to bear this in mind, they will need to be running a proper business to access financing.

#2. Advance payment. Another key tip in the absence of access to financing is for the “advanced thinking businessman” to get an advance payment from his or her customers (especially in the construction sector) to supplement on their revenues and then make a significant purchase that maximizes profits and in turn help to cover the operational costs.  Of course on the other hand the businessman can secure interest free or cheap financing from “the bank of friends and family”.

#3. Move up the value chain. As indicated in the introduction an “advanced thinking” alternative for the businessman would be to move away from brokerage and specialize in logistics only. You can do this by your vehicle(s) to Consumer Industrial Product (CIPs) companies (such as Hima Cement, Nile Breweries) to be used for transportation of their products (Assuming they don’t have sufficient own fleets).

A related key area of future growth and consideration is the rise of e- commerce and internet retailing. In Uganda online retailers (such as Jumia, home DUUKA, Kaymu or couriers like DHL by necessity rely on a logistics network and as e – commerce and internet buying increases, then this sector will become even more critical.

You will need to consider vehicle/fleet tracking solutions as a start in order to give them that assurance of delivery to their customers.   Moving up the value chain means you will have assurance of supply and hence no need to do brokerage.

2. Fluctuating fuel prices

No one can say with certainty that the fuel prices will be stable for a given period of time. The cost of fuel is a critical factor in the performance of the economy because alternative fuel/energy sources are not well developed in Uganda. In other instances, drivers have a tendency of stealing fuel from the trucks and this ends up leading to increased fuel costs to the businessman.

Our advanced thinking tips to counter this?

#1. Fuel reserve. With the unstable prices of fuel, the advanced thinking businessman would set aside some money to cover the unexpected costs derived from increased prices of fuel when they are making their budgets so that they are not taken up by surprise when the prices increase while they are in the middle of transportation of goods. This would involve monitoring fuel trends and making estimates of the cost say for the next 6 months. If need be, perhaps fuel reservoirs can be hired, particularly as your operations expand.

#2. Combat fuel theft. Install fuel sensors in the fuel tanks of the trucks. These help to monitor the amount of fuel consumption per truck in any given period of time. You can for example get the fuel sensors from FMS – Fleet Monitoring Systems Ltd.

3. Mechanical issues

It’s common for the vehicles to break down for one reason or another and this may cost the businessman a lot of money if the vehicles are not working.

Our advanced thinking tips to counter this?

#1. Fixed rate contract. It is recommended that you contract with a garage to service your vehicles at a fixed rate every month. This will save you from unscrupulous mechanics who want to rip you off by telling you they are fixing and replacing parts which are already working.

#2. Employee mechanic. Another alternative for the businessman would be to hire a permanent mechanic and place him on a pay role then contract with a shop selling genuine spare parts so that in case a vehicle breaks down and needs a replacement of a given part the businessman purchases the part and then tells the mechanic to go and collect it and fix it on the vehicle. This will enable you to get genuine parts for your vehicles if they need replacement and available mechanic services whenever you need then.

4. Seasonal business in the agricultural sector

Commercial goods transportation especially of agricultural produce is not a continuous business as it highly depends on the harvest seasons of the crop that you are dealing in. Let’s take an example of maize; it has traditional been grown seasonally during the rainy seasons of Mid-February or March to June, and second rains from Mid-August to December. As a result, the businessman only gets to purchase the product when the prices are low just after the traditional harvest season so as to maximize profits and hardly makes any purchase or makes no purchases at all when the prices are high during “off seasons”.

Our advanced thinking tips to counter this?

#1. Diversify. To counter this, the advanced thinking businessman will have to widen his customer base and revenue and deal in a number of produce such as beans, tomatoes, onions among others depending on the harvest seasons as opposed to most middlemen that precise in a given produce and only make purchases when those products are in surplus

AND NOW THE PROS (A reason to smile)

1. Improving transport network

Any person who travelled on Uganda’s roads upcountry 10 years ago will find a marked difference if he moved on the same roads today. The Uganda National Roads Authority (UNRA) has made it a point to tarmac many of the roads going up country to ease transportation in those areas. This makes it easy to transport commercial goods such as lake sand from the areas of Entebbe, Kamengo, Kasange among others to the building sites.

2. Ready market

There is a ready market for the agricultural produce that’s being transported from the villages to the markets in the different towns. Middlemen as traders offer to their customers an assortment of products acquired from various sources. The middlemen first secure the demand from their different customers in the markets and wholesale shops and then they get to know how much of the produce they are going to purchase. This gives them a guarantee of purchase when the purchased product finally reaches the market.

On the other hand, for the case of building materials there is a great need for the service of transporting building materials from the selling point to the building site as most of the contractors building residential and commercial buildings don’t have transportation vehicles of their own to transport the materials to the site after buying them. This is the opportunity to the businessmen involved in that sector.

3. Availability of agricultural produce

Farmers in Uganda's 2.5 million smallholdings and scattered large commercial farms produce the majority of their own and the rest of the country's staple food requirements. This means that the country can greatly rely on a constant supply of agricultural produce from the farmers. As a trader involved in transporting agricultural commercial goods you are guaranteed a continuous business all year round.

4. Return on investment

In our financial model, we estimate that:

  • In the construction transport/brokerage sector, a starting investment of Shs 102m will give you a return on investment (number of years to get your capital back) of 4.49 years. Annual profits are estimated at Shs. 23m per year.
  •   This is calculated as follows:

    • Startup capital: Shs. 101,684,000 (A)
    • Net profit: 22,645,000 (B)
    • Return on Investment (ROI) (A/B) = 4.49 years
  • In the agriculture transport/brokerage sector, a starting investment of Shs. 78m will also give you a return on investment (number of years to get your capital back) of 1.72 years. Annual profits are estimated at Shs. 45m per year.
  • This is calculated as follows:

    • Startup capital: Shs. 78,341,250 (A)
    • Net profit: 45,399,735 (B)
    • Return on Investment (ROI) (A/B) = 1.7255

In both models, the largest portion of the startup cost is in respect of the vehicle/truck purchase.  We have not factored in a working capital loan as this can be managed on a month by month basis but best practice suggests you will need to also have say 3- 6 months working capital.

It should be noted that the agriculture model appears to yield significantly better predominantly because of the “prospecting” around produce. You can buy it from farmers at low farm gate prices, store it till the scarce season and sell it higher or alternatively just transporting to the right market gives higher margins.

The construction industry will not have similar prospecting as clients often buy their own products especially the costlier ones and there is less bargaining power held by the transporter over suppliers.

The models are below:

Start up, revenue and profitability in the transport sector

P.S Clicking the above link will take you to a google docs links.

N.B: For prudence, the return on investment of 4.49 for the “poorer” performing sector of Construction has been used to rank with other sectors (rather than the agriculture one).  

The basics you must bet right before investing:

In the agricultural sector

1.Specialization

There are many types of agricultural goods from which to choose from, including but not limited to maize, beans, tomatoes, mangoes bananas among others. Each type brings with it its own challenges, so choose a crop that does not have a lot of competition in the market of transportation. Similarly, make sure you do your due diligence to ensure that there is actually a need for this type of agricultural crop in the market.

2. Customer acquisition

You need to acquire a customer base for the products that you going to deal in. since agricultural products are perishable in nature, there is need to sell them off as quickly as possible to the consumers to avoid the products getting spoilt in storage.

3. Sourcing the product

As a businessman involved in agricultural goods transportation, you will need to source the products you are going to purchase from the farmers. You will need to know which area grows which crop best and the preferred area for each crop for example people prefer bananas from Masaka compared to bananas from Mbarara. This gives you an upper hand compared to your competitors.

In the construction sector

1. Location

You must make sure your lorries are situated in areas that are selling building materials. This gives you an easy reach of customers who are looking for lorries to transport there materials to the building sites after purchase an example of such an area is shops located at Good shed opposite the fire brigade next to the Kampala city clock tower locally known as the “sawa ya queen.”

2. Drivers

Hire trained and licensed drivers with clean records who have had experience of working with other transportation companies and organizations. These drivers are well versed with company policies and follow traffic guidelines. In order to avoid your drivers paying out police bribes as a result of not adhering to traffic regulations, use experienced drivers – you will be saving a lot of money

Insights from my guest contributors

In the agricultural sector

Ssebunya simon is a business man in Kyengera owning a whole sale shop at the same time a middle man transporting agricultural goods from the villages to the markets in town. He has been doing this business for over 6 years purchasing maize from Mubende and selling it to the maize milling companies and he can tell you with certainty that he has no regrets though sometimes there are challenges here and there. The reason he  managed to succeed in this business is that he  managed to create a bond of trust with the farmers that he purchases from the produce and sometimes when he is short of capital they give him the produce on credit and once he has finished to sell the produce he sends them their balance on mobile money. He says he has come a long way studying the market and bending along its curves as well as understanding his customers and that is what has kept him going.

In the building sector

Semwogerere Fred is a businessman in Kampala owning a whole sale shop selling building materials at the same time he is in the transport business transporting building materials from the selling point to the building site of his customers. He is also involved in transporting other building materials such as sand, hardcore stones, aggregate stones and bricks among others. He has been doing this business for more than five years and he says he has enough experience to outstand the competition.

In his own words:

“I started this business as a lorry driver of a Tata the one of 22 tones and I was working for my boss transporting sand, hardcore stones, aggregate stones, bricks and other building materials. While doing the transportation business I learnt a lot of things including where I could get from cheaper materials. I then promised myself that one day I would own a lorry of my own and thank God here I am with three of them. The transportation business of building materials has changed now days we charge our customers a combined price consisting of the price of materials and the transportation price because we know where to get from the materials at a cheaper price and they charge us per vehicle and not per ton. We offer good prices to the building constructors and they don’t complain because they know the task of looking for them and transporting them to the site. “

Final word

The Uganda transportation sector will for the foreseeable future depend on the brokerage aspect (or being a “musubuzi”) owing to the bottlenecks where the many small subsistence farmers can’t get the large scale to transport their produce to the market. They therefore depend on the transporters. The same goes for the construction sector. Until the emergence of large scale independent contractors, the transporter has a critical role to play.

As a final thought, this sector will even be more important with the emergence of e commerce and internet selling where online retailers will be looking for a reliable logistics partner. This is an area to tap into.  

So are you experienced?

Otherwise, best of luck and of course if you need some help, do not hesitate to speak to us to get the ball rolling, Inachee after all represents Home Grown Energy in Motion.

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And now the disclaimer: While I have taken steps to research this information as well as based on my experience, you should not solely rely on the information given here to base your investment decisions. You should seek business advice from a professional knowledgeable of your specific circumstances. I (or Inachee) shall therefore not be held responsible for any loss you may incur when acting on this information.