Article Written by: Osahon Kelvin Edogun
My goal for this article is simple: By the time you finish reading this article, you should understand if investing in Nigeria’s e-commerce is right for you.
According to TechCabal, Nigeria is the 33rd largest market for e-commerce with a revenue of US$6.9 billion in 2021, placing it ahead of Denmark and Columbia. This may look like a big deal, but not for Nigeria.
Ecommerce DB, a site that provides insights for e-commerce stores worldwide, reports that the biggest player in the Nigerian e-commerce market is Jumia.
Jumia, which had a revenue of US$22 million in 2021, is followed by Slot and Ajebo Market as the second and third largest stores with US$7 million and US$6 million in revenue, respectively. Altogether, these top three stores account for only 1% of Nigeria’s online revenue.
The gap as shown above is a bit worrisome; and the absence of Konga in the lineup is a lot more troubling.
Before Jumia and Konga, the only notable e-commerce platform that existed in Nigeria was Kasawo, founded by Raphael Aphaedor and Tunde Kehinde. Kasawo was later purchased and renamed Jumia, which launched in Lagos and later became Pan-African.
The concept of e-commerce became popular with the success of Amazon and Ebay. In fact, the first owners of Jumia, The Samwer Brothers, made their first entrepreneurial break by building a replica of Ebay for the European market, named Alando, and sold it to Ebay.
Background: The Rocket Internet Group
So, we know that Jumia was founded by four guys: Raphael Afaedor, Tunde Kehinde, Jermy Hodora, and Sacha Poignonnec. Let us explain how the Jumia Group worked until recently.
Jumia is a product of a large company known as the Rocket Internet Group, run by The Samwer Brothers in Berlin, Germany, with over 25 international offices in 50 countries and a total of over 20,000 staff.
Jumia was one of the products launched at the time The Samwer Brothers thought Nigeria was worth exploring in 2012, alongside Kaymu, Jovago, Easy Taxi, Lamudi, and Carmud. At this point, Nigeria’s first attempt at e-cab hailing died a natural death, while other businesses later merged with the Jumia brand.
For instance, Kaymu became Jumia Marketplace; Jovago became Jumia Travels; Lamudi became Jumia House; and Carmudi became Jumia Cars (Jumia Deals). These other businesses have either been further expanded or shut down, leaving just Jumia Food and Jumia Marketplace alive today, with the recent addition of Jumia Pay.
Jumia as a product is a clone of Amazon. The Samwer Brothers’ strategy was quite simple: Clone a very successful online product in matured economies and replicate in developing countries with a functional financial system and access to telecommunication services.
This was a bet on the clone product’s fast growth and adoption, in order to build valuation of the company and trade a sale.
Key to their strategy was hiring top talents from MCkinsey and Co., and sending them to launch these products in Africa, Asia, and South America as Co-Founders. Hence, why Jumia has four co-founders and a CEO. Quite a complex structure.
Jumia and Konga have done one thing for their African market: opened up technology and online commerce. They showed us that it was possible to buy products online and this drove online retail in Africa to the heights it has achieved today. But this came at a high cost – the cost of consistent losses.
The most recent financial statement by the board has shown strong growth for Africa’s foremost e-commerce business. Orders increased by 35% year-over-year, GMV increased by 21% year-over-year, revenue increased by 42% year-over-year, but it also shows strong growth in cost and losses.
Jeremy Hodara and Sacha Poignonnec, Co-Chief Executive Officers of Jumia comment,
“We remain focused on scaling the business towards profitability. In the second quarter of 2022, we have successfully delivered on each building block of our path to profitability: usage growth momentum, monetization acceleration and cost discipline. Despite a deteriorating macro environment, we maintained a strong pace of usage growth. Orders, Quarterly Active Consumers and GMV grew by 35%, 25% and 21% respectively, on a year-over-year basis. Leveraging robust usage growth, we further accelerated monetization. Gross Profit and Marketplace revenue were up 14% and 17% year-over-year respectively, the fastest growth rates of the past 5 quarters. In the context of rising inflation and input cost pressure, cost discipline remains a top priority for us. We drove usage growth and monetization acceleration with lower-than-expected marketing investments with Sales & Advertising expense of $41.0 million in the first half of 2022 compared to our guidance of $50-55 million.”
While this report is worth celebrating, let’s put this in layman’s terms: It cost Jumia US$22 million in ad money to make a revenue of US$57.2 million, asides other costs.
Long story short, Jumia lost US$10 million to operations in the last quarter after ten years of operations and an investment of over US$1 billion. This is worth discussing.
Let’s backtrack a little.
Remember we said Jumia was a clone of Amazon, the company which produced the wealthiest man in the world? A report on CNBC’s website however quotes,
“Despite Amazon’s dominance in e-commerce, online sales are not actually a main profit engine for the company. Instead, its cloud computing division, Amazon Web Services, has actually generated the majority of Amazon’s operating income since 2016. Profits from advertising and third-party sellers are also booming.”
So, does this mean Jumia should begin to set up data warehouses like Amazon?
Konga began the offline retail model, which has proven to be a highly profitable business model in the past decade, although Konga’s earnings have been hush-hush after its acquisition by the Zinox Group. There has been a recent publication that valued the omnichannel stat US$2 billion.
If this model has proven to be profitable, why so many losses?
Cost of Sale.
One line explains why.
But, why is it so expensive to sell a product online?
Well, advertising costs seem to stand out amongst every other cost. Thereby begging other questions: Is omnichannel the future for African businesses? Should e-commerce companies like Jumia go omnichannel? Is cutting costs the way to go? And, what should we really do?
Challenges of E-commerce in Nigeria
In 2016, I joined Payporte Nigeria’s most preferred online store. Later that year, it signed a deal with Multichoice to become the official sponsor for Big Brother Naija; It’s first airing after ten years. This was a great move at positioning Payporte as a leading player in the e-commerce scene.
By 2018, I had resigned. I was owed salaries and so were all of my colleagues.
What is my point here?
General marketing approach to e-commerce is too expensive, and e-commerce companies cannot succeed without a never-ending cash flow.
A lot of staff within the fast rising e-commerce company would tell me they knew exactly why the company failed. Some sighted management, some said procurement, others even blamed marketing. But from my findings, Payporte was just like every other e-commerce at the time. No company in the industry had it better than Payporte in terms of how they led their teams or what they sold. However, all the big players (i.e. Jumia and Konga) had spent at least ten times the resources Payporte had spent to achieve top-of-mind awareness.
In my opinion, Payporte only ran out of cash because, as earlier stated, e-commerce in Nigeria cannot survive without a ton of money. And, no. You cannot bootstrap your way to success in e-commerce.
1. The major challenge of e-commerce today is cost of sale
Let’s take Shoprite, for instance.
Shoprite’s cost of sale is less than Jumia’s. This is an interesting fact, knowing that one of the arguments for why everyone thought e-commerce was the future of business was its scalability. While e-commerce stores remain scalable, we must consider the cost of putting up products for sale online.
A product on the shelf at Shoprite goes through the same processes as products on the Jumia online store. However, the significant difference is, shelved products at Shoprite would require a series of promotional phases before arriving at the online point-of-sale at Jumia.
While these phases may vary from company to company, they include: photography, picture editing, creative designing, product upload online by content management team, and finally, digital marketing efforts.
2. Another point of challenge for e-commerce is the hassle of delivery
If you have run a small business in Nigeria before, you will understand how tough it is to manage two dispatch riders. Now, imagine having hundreds of them making simultaneous deliveries all over the city; a real headache!
Also, physical stores like Shoprite seem to possess an advantage over online stores like Jumia in Nigeria. A major reason is the slow reception to online shopping over in-store shopping by the majority of customers, even in 2023.
3. The rate of returns on purchased items is huge
In fact, herein lies the major issue.
Back in 2017, the CEO of Payporte, Eyo Bassey, announced that Payporte had canceled its payment-on-arrival policy. Why?
Payporte resumes operations by 8am everyday. By 12 noon, there is an average of two hundred orders waiting to be dispatched. Total sales as at this time is N5 million.
By 4pm, total orders for the day have amounted to one thousand, with a total sales volume of N45 million.
By weekend, however, the sales department only reports a total sales amount of N3 million for the entire week!
Where did the outstanding balance go?
I once ordered pizza on Uber Eats in Manchester, England. Before delivery, I realized that I had to leave where I was at the time and I changed my delivery location to where I would be. Somehow, the system did not catch my update and the driver arrived at my previous location. When he called and I informed him of my change in location, he told me he would leave the pizza on the road!
After a lot of back-and-forth, he agreed to take the pizza back to the store. I could not go to the pizza store to pick up by myself that night, as I was leaving Manchester to London and had a train to catch. Long story short, I was charged £44 for pizza that I did not receive.
If this had happened in Nigeria with the pay-on-delivery policy, the driver would have had to return the pizza. The store would then have also had to resell the pizza and pay out-of-pocket for the services of the Uber driver.
Cases like this happen in their thousands.
The cost of returned goods due to pay-on-delivery policies is a major concern, amongst other issues, which altogether sum up the total cost of getting the customer to order the product in the first place.
In my opinion, these are costs that can be managed and further reduced:
- Website placement costs.
- Marketing costs.
- Returned goods and/or canceled sales costs.
Conclusion: Lessons from the Fintech Industry
Despite its success in deploying mobile apps for the banked, there was a segment of the market that needed to explore payment beyond cash. E-commerce came into Nigeria when the tech-savvy really did not have any purchasing power.
Ten years later, things have changed. But the market for those who can really afford these products is still small, and logistics is still a mess. So, everyone spends marketing dollars scrambling for the few available e-commerce believers.
The African Model
Payments are successful in Nigeria because everyone needs to make payments, money needs to move, and this is the same for e-commerce. Everyone needs to purchase groceries, fashion items, and home equipment. In fact, these are huge markets on their own.
The big question is, why has payment thrived amidst unfavorable regulations, fraud, and stiff competition, but not in e-commerce?
Mature Banking System
The Central Bank of Nigeria (CBN), in conjunction with commercial banks, set up the NIgeria Interbank Settling System (NIBSS) as a single and automatic clearing house for banks in efforts to foster a fluid banking system and payment structure. This has spurred technological innovation and speed in the financial industry and everyone now feeds off the insatiable huge market that is Nigeria.
While fintechs have ridden on the back of products developed by NIBBS, Interswitch had done all the dirty work of developing working systems of payment for over a decade, before the likes of Paystack and Flutterwave emerged with simplified applications.
Financial inclusion really became a thing in Nigeria when the Interswitch Group set up the Interswitch Financial Inclusion Services division in 2016, of which I was a founding member.
Before then, Paga and Pocketmoni had the highest share in the market.
It was not one market everyone had eyes on and the success of financial inclusion opened a new way of thinking for me; a new way to see commerce.
An Untapped Market
Jumia and others may have to reconsider their approach to reducing costs, increasing sales, and having people do the heavy lifting while they provide the infrastructure for commerce.
The marketplace option is a step in the right direction, but it is barely a scratch on the surface. Just like the approach by financial institutions, an off-the-clouds sales approach that offers intermediaries a simpler delivery system can help reduce cost of marketing and rate of returned goods.
The market for e-commerce as it is today is still small, but the total addressable size for commerce is enormous. Players need to think outside the box.