Will Africa’s E-Commerce Giants Ever Turn A Profit?

Will Africa’s E-Commerce Giants Ever Turn A Profit?

This week brought the news that Nigerian e-commerce company Konga will be rolling out an extensive warehouse infrastructure project, as it aims to help more merchants sell their products online.

Konga, which launched in July 2012 and along with Jumia is a major player in the Nigerian e-commerce space, said it had close to 60,000 merchants registered on its platform, but said that its new infrastructure would help it serve thousands more.

The company’s 60,000 sq ft warehouse in Lagos, which houses over 200,000 items, is set to double in size, while new fulfilment centres will be built in Abuja and Port Harcourt.

Developments like this are certainly crucial to the growth of e-commerce in a country like Nigeria, where logistics remains a serious challenge. The country is currently ranked 90th in the world Logistic Performance Index ranking, with its competitor Jumia also forced to try and overcome these problems by rolling out its own fleet.

Yet the need to spend big on logistics is hindering the ability of the likes of Konga and Jumia to turn a profit, which they are still some way from. Kinnevik recently adjusted its valuation of Konga, while Rocket Internet’s recent quarterly results showed Jumia’s revenue has actually fallen over the last year.

E-commerce in Africa is a very long-term play indeed. Aside from issues with logistics, there are also problems with online payments, which still suffer from a lack of trust, and the sheer fact Africans still prefer to shop off-line. Moreover, fewer than 30 per cent of Africans have internet access.

Paul Cook, managing partner of e-commerce investment firm Silvertree Capital, says companies like Jumia and Konga continue to be loss-making as e-commerce remains a small market with very high costs of doing business.

There are also specific challenges this year, with the economies in Nigeria, Kenya and South Africa all unstable. Cook says there have been some improvements when it comes to hindrances, but there is still a way to go.

“On the positive side, many of the early challenges to e-commerce, especially delivery and payment, are much improved compared to a few years ago, and it starts to be possible to run a “Western style” e-commerce company in much of Africa. This is a huge step on the road to viability as an industry, but markets are still small,” he said.

E-commerce powerhouses

This is why Silvertree Capital prefers to invest in more niche e-commerce companies, where the total investment size is smaller as such companies do not need stock across as many categories as the likes of Jumia and Konga.

The Nigerian e-commerce powerhouses, however, have their eyes on a far greater prize, and are prepared to stomach losses for a number of years. That is not surprising, given the financial muscle they have behind them. Jumia investors such as AXA, Goldman Sachs, MTN and Orange know what they have got themselves into, and Jumia is now valued at over US$1 billion. Konga’s investors, notably, Naspers, are no mugs either.

That is because the potential prize is so large. With a growing population, and middle class, retail is set to boom in Africa. There is a serious shortage of shopping malls compared to the developed world, especially in rural areas.

The internet has the answer. Less than 30 per cent of Africans are currently connected to the internet, but the number is growing. E-commerce will grow with it, with McKinsey & Co saying it will account for 10 per cent of retail sales on the continent by the year 2025. It will be a US$50 billion market by 2018, according to Frost & Sullivan.

Jeremy Hodara, co-CEO and founder of Jumia, is not concerned about the current lack of profitability, and says profits will inevitably stem from the growth strategy the company is currently pursuing.

“Our long-term strategy is based on growth with clear objectives of grasping even more market shares in the 23 countries where we presently operate and to optimise our client’s experience on our nine services’ platforms,” he said.

Hodara said e-commerce in Africa was extremely attractive to investors for three major reasons.

“First, African countries are unique in the way traditional retail has been leapfrogged by e-commerce. Africa suffers from a lack of modern retail facilities that cannot satisfy the demands of the growing population,” he said. “The online offer has much more opportunity and leverage in Africa where the offline demand is so scattered and low.”

Secondly, the demographic context is more than favourable to the explosion of e-commerce, with Africa’s population expected to reach 2.5 billion by 2050.

“E-commerce will undoubtedly surf on this wave, backed by a young population that is technology-savvy and will master and prefer this way of shopping,” Hodara said.

“Last but not least, the technological evolution of Africa, fueled by this young, middle-class generation is a real indicator of the potential and promise of e-commerce for investors.”

Hodara, then, is confident of ultimate success. Even Cook believes e-commerce will establish itself on the continent given time. But what is certain is that companies like Jumia and Konga have a few years of stomaching losses to come before they can reap the rewards of their expensive pursuit of growth in Africa.

Tom Jackson is a tech and business journalist in Africa, and co-founder of startups news portal Disrupt Africa. He splits his time between various African cities covering the latest development in the continent’s exciting economic story.