This research took me two weeks to compile, so I hope you enjoy the read.
When evaluating the minimum population a business requires to remain viable, several key factors must be taken into account: market size, purchasing power, competition, and industry-specific characteristics. Each business type has its own set of dynamics, but using available research and public company reports, we can provide a framework to estimate the population necessary for various types of businesses in Kenya to thrive.
- Understanding Market Size and Purchasing Power
Population size alone does not determine a business’s viability. The buying power of that population is crucial. According to the Kenya National Bureau of Statistics (KNBS), Kenya has an estimated population of 55 million (2023), with urban areas like Nairobi, Mombasa, and Kisumu having higher concentrations of individuals with disposable income. Research from the World Bank shows that about 18.7% of Kenyans live below the poverty line, meaning the purchasing power of a significant portion of the population is limited.
The combination of urbanization and disposable income directly influences how much of the population a business needs to target. A business focused on high-end goods or services will require a smaller population with higher incomes, whereas a business offering low-cost goods may need a larger customer base with lower purchasing power to break even.
How I apply the above concept to my business: I repair and sell electronics, which means I need to operate in areas where the electronics I repair (TVs, smartphones, laptops, ovens) are in demand, and people can’t easily replace these items but have some spare change for repairs. Therefore, setting up my business near colleges, middle-class neighborhoods, and small to large towns makes sense.
- Industry-Specific Population Thresholds
Different sectors have varying minimum population requirements for success. For instance:
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Retail and Consumer Goods: According to industry reports, a retail business generally needs to capture 1-2% of a local population to break even. In an urban setting like Nairobi with a population of about 4.4 million, this equates to 44,000 to 88,000 active consumers. However, in a more rural area with a population of 50,000, this same percentage equates to only 500 to 1,000 consumers, potentially making it more difficult for the business to achieve economies of scale.
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Restaurants and Cafes: The food and beverage industry typically targets urban areas due to their higher footfall and income levels. A successful restaurant chain typically needs around 500-1,000 customers per week to stay afloat. In a city like Nairobi, this is relatively easy to achieve. However, in towns with smaller populations, businesses would struggle unless they offer a unique service or become a community hub.
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Telecom Services: In highly capital-intensive sectors like telecommunications, companies require millions of customers to sustain operations due to high infrastructure costs. For instance, Safaricom, Kenya’s largest telecom provider, had approximately 42.4 million subscribers by 2023. Telecom businesses must penetrate deeply into both urban and rural areas, and their threshold for profitability is closely tied to population density and customer lifetime value.
In my business, a good repair shop should target 100-150 devices a week, charging 500-1500 profit on average per repair. In my experience, to achieve these numbers, you need to be the only repair shop per 25,000 people, so in a town of 100,000 individuals, 4 repair shops can share the market.
- Lessons from Public Companies: Safaricom, KCB, and Tuskys
To illustrate, let’s look at Safaricom, Kenya’s most profitable company. Safaricom’s success is directly tied to its ability to tap into a broad customer base across Kenya, with the M-Pesa service generating a significant portion of its revenue from small transactions. Safaricom’s profitability, according to its annual reports, comes from being able to serve millions of customers at a low cost-per-transaction basis, making it highly reliant on a large population base.
On the other hand, Tuskys, a former supermarket giant, serves as a cautionary tale. Despite operating in urban areas, it was unable to maintain a sufficient customer base due to mismanagement, competition, and a shrinking consumer pool. Reports from business analysts suggest that even large businesses need constant growth in their customer base to remain afloat, and that this growth is driven by both population size and disposable income.
This is why I fear big cities like Nairobi. How many repair shops are along Tom Mboya or Luthuli Avenue? 50+??? Competition is still a concern even if you have a large population around you. Is the town growing? This is why I look at factors like universities and a large, growing middle class. A growing town means more devices to fix and more market share.
- Rural vs. Urban Populations in Kenya
In Kenya, the rural-urban divide is stark. Urban populations like those in Nairobi, Mombasa, and Kisumu have higher concentrations of wealth and demand for goods, while rural areas tend to have less purchasing power. A 2019 survey by KNBS showed that over 27% of Kenyans live in urban areas, and this percentage is steadily increasing with rapid urbanization.
For businesses, this urban-rural divide creates two distinct market scenarios:
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Urban Businesses: These businesses benefit from population density and infrastructure. In urban centers, a business can target a smaller percentage of the population and still generate significant revenue. For example, a local Nairobi barbershop might need only 500 regular customers (0.01% of the population) to remain profitable.
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Rural Businesses: In rural settings, the population may be spread over vast areas, and disposable income is lower. This means a business needs to either serve a larger proportion of the local population or offer essential goods to sustain operations. A rural retail business may need to capture up to 5-10% of the local population to remain viable, compared to the 1-2% in urban settings.
And this is why, for me, small to large growing towns are attractive. They provide the benefit of an urban setting with the added benefit of being one of the early investors. I’m the only general electronics repair shop for a 4 km area, and I’m in the CBD of a town with an 80k population, which is growing 3% annually.
- The Impact of Competition
Competition plays a significant role in determining the minimum viable population a business needs. In highly competitive sectors, businesses need a larger customer base to offset lower margins. For example, in the telecommunications industry, Safaricom, Airtel, and Telkom are in fierce competition. Safaricom’s dominance is due in part to its wide network coverage and loyalty program, which requires a massive customer base for sustained profitability.
In contrast, industries with less competition, like niche agriculture businesses, can thrive in smaller communities as they have a monopoly on local demand.
Wasee, this is simple: you want to start your business in an area with the lowest competition and highest demand. Good luck doing that in Nairobi CBD when the people in those stores import their own products from Asia, have a good customer base, and a higher barrier to entry. Kwenye niko, I’m my own competition.
- Government Policies and Business Support
Government policies also impact business viability. In Kenya, the government has been promoting initiatives like the Big Four Agenda, which focuses on manufacturing, universal healthcare, affordable housing, and food security. Businesses that align with these sectors may find that the minimum population threshold for profitability is lower due to government incentives and support programs.
Additionally, businesses that target the SME sector, which accounts for over 80% of employment in Kenya, can thrive even in areas with smaller populations by offering tailored services to entrepreneurs and local industries.
- Conclusion: Minimum Population Estimates for Kenyan Businesses
Based on the above factors, we can make some generalized estimates for the minimum population size a business needs in Kenya to stay afloat:
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Small Retail Business (e.g., Grocery Store): Needs around 1-2% of a local population, translating to a minimum of 5,000-10,000 residents in a rural setting or 50,000-100,000 in an urban setting.
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Restaurant/Cafe: Needs approximately 500-1,000 regular customers, meaning it should target areas with at least 10,000-20,000 people, with a preference for urban centers.
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Telecom or Utility Service: Requires millions of customers nationwide for profitability, especially in a highly competitive environment.
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Niche Businesses (e.g., Luxury Goods, Specialty Services): Can survive in smaller populations if they can capture a significant market share, sometimes as small as 2-5% of the local population.
In short, you will need around 1-5% of the town’s population to run a successful business, there should not be 20 other business like yours around. For example, in a town with an 80k population, I need to target at least 4k people a year or 12 a day.
Ultimately, for businesses in Kenya, focusing on urban centers with low competition, higher population densities, and disposable incomes remains the most reliable strategy for ensuring long-term profitability. However, innovative models that address rural needs can also thrive by adapting to the specific purchasing behaviors and community structures of smaller populations.