No walk in the park for e-commerce organisers in Africa
INVESTORS and entrepreneurs have eagerly anticipated the potential of e-commerce in Africa, where an increasingly young, digitally-savvy population is hungry for consumer options and connections to the global economy. Last week Zinox Group, owner of more recent Nigerian e-commerce entrant Yudala, acquired Konga, a leading online retailer in Nigeria, for an unpublished sum. The sale is rumoured to be at a substantial discount to the estimated $385 million (R4.6 billion) valuation reported by investor Naspers in 2016, and underscores the difficulties of e-commerce giants’ expansion through Africa.
Stakeholders and consultants have fuelled excitement with projections that online shopping in Africa is projected to grow to $75bn by 2025, yet hopes have been tempered by high customer acquisition costs and a failure of consumer behaviour to live up to expectations. Konga launched in Nigeria in 2012, but after four years the company had a paltry 184 000 active users, 1 percent of Nigeria’s population.
In January, Rocket Internet’s Africa e-commerce giant Jumia announced they were closing their e-commerce platform in Rwanda and six months earlier announced they were closing Jumia Marketplace in Nigeria.
How did well-funded and talented teams miss such an opportunity?
E-commerce is a $2 trillion global industry, but contribution from African markets has been weak. Headlines touting the rising “African middle class” omit that “middle class” in the region includes anyone able to spend $2 a day, and the consuming class – those able to spend $10 a day – makes up just 10 percent of Africa’s population.
In 2013, Jumia was expected to become Africa’s Amazon and reach profitability within a year and a half by bringing shoppers online. Years later, however, 76 percent of Nigerian consumers still visit traditional markets an average of 10 times per month and 67 percent patronise local kiosks even more frequently.
Jumia and Konga offered incentives such as free last-mile delivery, but efforts soon fell flat in the face of widespread scepticism.
Low digital literacy and trust deficits mean that consumers value the experience of buying from familiar faces and purchasing small affordable quantities on a daily basis more than the convenience of going online.
According to McKinsey, 85 percent of Nigeria’s social fashionistas would not go shopping alone. Shopping remains an important social experience, and person-to-person engagement, as well as direct sale through social media channels, drives decision-making behind purchases.
Dangerous game Putting one’s eggs in a single geographic basket is a dangerous game in markets where economic headwinds and currency risk can be substantial drivers to already fragile consumer spending.
In 2016 Nigeria entered its first recession in two decades, costing some 8 million people their jobs. Coupled with a 50 percent devaluation of the naira, consumers’ purchasing ability, particularly for imported goods, was hit hard. Kenya and South Africa have recently felt their own shocks, and such economic waves are unlikely to completely disappear on the continent in the near-term. Investors looking for fast wins in concentrated markets and who are unwilling to ride market volatility have proven to be disappointed.
Large, foreign players looking to add top-line growth have set their sights on Africa, contributing to a fiercely competitive environment. With the evolution of payments products, including Flutterwave’s GetBarter, African customers are now able to shop on global online platforms, such as Alibaba’s AliExpress, with an almost-limitless inventory selection.
International apparel platforms such as Asos offer free international shipping to many African markets (making delivery cheaper from London than the minimum $2 charge for purchases within Lagos) and whispers in the the local market allude to Amazon opening warehouses in Nairobi and Lagos.
Local player Mall for Africa gives consumers access to a wide range of US retailers and allows them to pay using local mobile money, debit card, or a bank account. Unfortunately, local-only players are forced to “race to the bottom”, undercutting one another in high-volume, low-margin strategies dependent on large marketing budgets.
A lack of infrastructure can lower firm productivity by up to 40 percent, eroding profitability in already narrow-margin e-commerce businesses.
Low internet penetration – only 22 percent of Africans today have online access – the meagre availability of financial services (including supply chain financing for suppliers and penetration of payments products for consumers), poor logistics networks, and weak ICT systems remain obstacles in the region.
As long as these barriers persist local e-commerce companies replicating models from Seattle or Hangzhou without those companies’ resources and internal infrastructure will find it difficult to succeed. Jumia and Konga experimented with cash-on-delivery as a workaround for sceptical or unbanked customers found new challenges in terms of driver safety and theft as well as a high rate of rejected orders: Konga has since eliminated this service.
Courier fleets The companies also found it necessary to build their own courier fleets, as the existing postal and logistics providers were unreliable.
Ultimately, the time may not be right for mainstream online retail in Africa. Winning online in Africa markets requires a long-term persistence to change (or adapt to) consumption habits, geographic diversification, and overcoming infrastructure gaps.
First-mover advantage can take time to manifest: this is as true in the US as in Africa. If the next wave of e-commerce companies can weather the coming years, learn from their peers and reform their models, they may survive long enough to reap the benefits of pioneering the wave.