There has been growing discussion about the potential of e-commerce in developing countries. This discussion intensified recently when pan-African e-commerce firm Jumia went public in the US, becoming the “first African unicorn”.
The IPO prospectus, a 270-page outline of the firm released as part of this filing, has sparked much debate. Elsewhere, TechCrunch has dug into the financial intricacies of Jumia, and online debates have raged linked to the question “Is Jumia really an African firm?” (see here and here).
I won’t detail those two issues here. Instead, below I will discuss the insights that the prospectus provides us about e-commerce platforms operating in Africa. This is especially useful as we have been struggling with a lack of detail on e-commerce, with firms reluctant to share commercially sensitive information.
1) The market for e-commerce in Africa is already large, and growing rapidly
Jumia announces that it had 4 million active customers in the year 2018, growing rapidly from 2.7 million in 2017. This translates into “Gross Merchandise Volumes” (GMV) of €828.3m in 2018, from €507m in 2017. As these figures suggest, e-commerce is bringing in a significant number of customers on the continent and is growing at a rate of over 50% in the last year.
Regionally, the largest countries for Jumia’s business are Nigeria (29% of GMV) and Egypt (20.5%). Interestingly, in the largest 5 markets, only 50% of goods are delivered in primary cities with the rest evenly split between secondary cities and rural areas. Most customers are mobile users, which comprise 81% of all traffic in 2018.
2) …but making profits is a challenge. Jumia is a loss-making firm
The growing size of e-commerce has not yet translated into profits. Jumia made a €170m loss in 2018.
This is attributed to a number of factors. As a platform, sales are mainly made by third-party sellers (90%). So the €828m GMV translates to just €130.6m revenue for Jumia. Jumia then faces high costs for operating including warehousing, delivery, sales and advertising and the platform. Once these are considered, the €130.6m turns into a €170m loss.
How does Jumia plan to become profitable in the future? By becoming a market leader in Africa, Jumia will rely on expanding markets to increase sales volumes over the coming years. Alongside this, they describe the potential of reduced costs in fulfilment (storing and delivering goods) and growing use of mobile payments that should make each transaction more efficient over time.
3) The role and prospects for Jumia platform sellers
Jumia has 81,000 sellers and the prospectus hints that quite a number of these are African, although there is no data provided. Interestingly, commissions from sellers for sales only contributed moderately to revenues. Jumia makes similar amounts of revenue from services such as fulfilment (delivery costs to buyers) and “value-added services” (premium services for sellers).
As Jumia grows, its aim is to attract ever more sellers to the platform. “Competition between sellers is…essential to our monetization, as it increases the appetite for sellers to use our services”. This statement suggests that the platform will move low margins and high competition, with sellers relying on value-added services as a source of expansion. For local sellers, these future directions suggest concerns about this platform supporting widespread upgrading of local SMEs in Africa.
4) Data is an important component of the relationship with sellers
We know that data is vital to many platforms, and Jumia is no different. A seller score “..a data-driven scoring of a seller’s performance” is a key aspect of Jumia’s relationship with sellers. The score is important to the success of sellers, where platform algorithms use this score to determine the order of products in searches. Jumia also gamifies the “seller score”, associating it with a range of other advantages for sellers.
In order to support sellers, Jumia supports third-party financial services for its sellers, using this score as a way to demonstrate creditworthiness. This mirrors alternative credit-scoring schemes we have seen elsewhere in Africa.
5) African e-commerce platforms face significant and often unexpected risks
Many of the challenges for Jumia are similar to those challenges of e-commerce elsewhere [1]. One key challenge repeatedly mentioned is the “…failed deliveries, excessive returns, late collections, unrecoverable receivables and voucher abuse”, with 14% of all sales (by revenue) being failed deliveries or returns. These risks particularly emerge from the use of cash payments on delivery (COD), a common approach to payments for online goods in developing countries.
Beyond this challenge, an eye-opening aspect of the prospectus is the unexpected challenges encountered by Jumia:
- In Kenya, a Jumia warehouse was robbed and €500K of merchandise was stolen
- In Egypt, a €5000 fine was imposed by authorities due to the platform offering “unlisted drugs”
- In Kenya, a scam involving electronic payments suppliers led to €550K losses
- Jumia has undertaken investigations around allegations of internal fraud and bribes in countries such as Nigeria and Morocco connected to relationships with platform sellers
6) Policy challenges for e-commerce in Africa are significant
In line with other platforms, Jumia operates a relatively “asset light” way across multiple countries in Africa. Even with close to a billion euro in GMV, and with offices in 18 countries, it is a tiny direct employer with around 4,800 staff in Africa.
This “asset light” approach, however, comes into collision with African governments’ desire to regulate e-commerce. Jumia discusses the challenges faced in a number of countries including taxes, particularly VAT on imports; uneven data protection rules, and restriction of cross-border personal data transfer; and regulation on financial and mobile payments.
There has been pressure for harmonising such rules globally in order to support cross-border business models of digital firms such as Jumia. However, African governments are keen to ensure that they are able to operate their economies appropriately, including collecting taxes and nurturing local firms, in the face of e-commerce imports [2]. It is therefore understandable that policy might vary according to the political goals of different nations in Africa. These challenges are likely to intensify coming years given current disagreements on harmonising e-commerce at the WTO, and African CFTA discussions on e-commerce rules still at an early stage [3].
Platform firms, therefore, require careful mapping of national rules and regulations, and in Africa the “asset light” model may only be viable to well-funded platforms. For smaller platforms, it may be better to focus on a smaller subset of countries.
In summary, the Jumia prospectus indicates that digital economies are expanding and we can expect to see a growing set of firms operating across the continent. However, given the challenges encountered by Jumia, easy profit and growth are not a given. For platform sellers, e-commerce provides new potential market opportunities, but careful consideration of how platforms best support them, will be vital to success.
References
[1] UNCTAD (2015) Information Economy Report 2015 – Unlocking the Potential of E-Commerce for Developing Countries, UNCTAD, Geneva, Switzerland.
[2] Azmeh, S. & Foster, C. (2018) Bridging the Digital Divide and Supporting Increased Digital Trade: Scoping Study, Discussion Paper, GEG Africa, Pretoria, South Africa. http://www.gegafrica.org/item/782-bridging-the-digital-divide-and-supporting-increased-digital-trade-scoping-study
[3] Foster, C. & Azmeh, S. (2018) E-Commerce and the African Continental Free Trade Agreement (AfCFTA), Discussion Paper, GEG Africa, Pretoria, South Africa. http://infomediation.net/publication-e-commerce-and-the-african-continental-free-trade-agreement-afcfta/
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