It took Amazon almost 10 years to turn a profit.
Pan-African e-commerce giant Jumia isn’t there yet, but the company says it is on track for profitability despite losses of around $47.6 million in 2017.
In its latest financial results, Jumia saw its losses increase by 107.9 percent, which it attributed to continued investment in building its product.
The company made a host of investments, launching its own payment platform JumiaPay, as well as a consumer-facing mobile app that enables customers to easily access digital services.
In spite of the increased losses, however, there were positives, as Jumia reported a 22 percent increase in sales, and a 64.5 percent increase in gross merchandise volume (GMV).
“It was very good overall. We had great acceleration and a rebound from 2016 where we had some macroeconomic challenges,” Jeremy Hodara, co-CEO of Jumia, told Mogumdom in an interview.
“I have been saying since the beginning, in Africa if you want to buy products it is very difficult and the challenges you face in the physical world are not improving. Internally we have a lot of new vendors and products, and the prices are getting better and better. We have a lot more products at cheaper prices than offline.”
Hodara said Jumia does have a target date for breaking even, which it is on track to meet.
“It is not tomorrow morning, but we are on track. We made the progress we had to make so it is following the business plan,” he said.
Deepti Dhinakaran, a senior research analyst in ICT for the Middle East and Africa at Frost & Sullivan, said Jumia’s increase in sales had been largely driven by improved macroeconomic conditions across Africa, especially in Nigeria, as well as developments on the marketplace front, where it increased the number of active merchants to 50,000.
She said Hodara was right to be optimistic about the company’s efforts of becoming profitable in the medium to short term.
“Continued investments in building the distribution network, along with further expansion in terms of increasing its geographical footprint in Africa and its product portfolio to cater to changing consumer preferences, mean Jumia can expect to offset the increase in losses by achieving economies of scale while improving operational efficiencies,” Dhinakaran said.
It is a common phenomenon that e-commerce companies take a few years to become profitable, largely due to the high inventory and distribution costs they incur, and also because of the deals and discounts they offer to lure customers.
“This is evident from the fact that global e-commerce giants like Amazon took close to 10 years to achieve profitability,” Dhinakaran said.
“However, Amazon runs a highly successful on-demand cloud business via its AWS (Amazon Web Services) division besides e-commerce, and this division generates a steady flow of cash which the company can leverage to offset any losses and also to pump in more money to further strengthen its e-commerce business.”
This is not something Jumia does at this point, with Dhinakaran advising the pan-African e-commerce giant to focus on three areas if it is to achieve profitability at the earliest opportunity.
“One is scale regarding increasing the product portfolio while adapting to changing consumer needs and preferences, and also further expanding across Africa, including South Africa,” she said.
“This will help the company to benefit from economies of scale while having a direct impact in helping reduce its distribution and operational costs.”
The next area is consolidation. With Jumia having a presence in 23 out of 54 African countries, Dhinakaran thinks the company should rethink its operational strategy in countries where it is not doing well, while placing more focus on key countries like Kenya, Nigeria, Morocco and Egypt.
Lastly, Jumia should leverage its strong financial support from investors to optimise its distribution network.
“This will help in immensely reducing its operational and distribution costs. Optimisation of operations and achieving efficiency improvements is the way forward for Jumia to sustain in the long term,” Dhinakaran said.
“With Jumia already having implemented some of the above-mentioned strategies, we believe that the company is on its path to achieving profitability and can anticipate this to happen within the next four to five years.”
Tom Jackson is co-founder of Disrupt Africa, a news and research company focused on the African tech startup ecosystem.