This year, Africa Internet Group (AIG), the parent company to e-commerce brands such as general retailer Jumia and travel site Jovago, became the first venture capital-backed business in Africa to be valued at $1 billion after sizable rounds from the likes of insurance giant AXA and French mobile network operator Orange.
AIG is not the only e-commerce focused business to have received large amounts of funding over the last few years, with Nigerian online retailer Konga and South African e-commerce firm Takealot also taking on significant investment.
Yet, behind the scenes, all is not as rosy. Within weeks of the AIG funding announcement, Jumia laid off dozens of staff. Konga and DealDey have had to do the same. Takealot was forced to merge with its closest competitor, Kalahari. For all the excitement, Africa’s highly funded e-commerce companies are simply fighting to stay afloat right now.
There are a number of reasons why e-commerce is taking its time to take off. PwC says online retail sales in South Africa, for example, will rise to $770 million, while Frost & Sullivan believes the African e-commerce market will be worth $50 billion, both by 2018. Yet the current viability is minimal.
South Africans, for all the potential of e-commerce, still prefer to use physical shops. Even the many Africans that would like to shop online are inhibited by low levels of connectivity, with only around 20% of Africans connected to the internet, according to the Internet Society. Poor infrastructure also poses problems, with the likes of Konga having to roll out their own expensive fleet services to combat logistical problems. There is also a lack of trust in online payments, requiring the adoption of services such as pay on delivery at additional infrastructural costs.
Who says you’re middle class?
“Many people still believe that anyone asking for payment information online is a scammer,” said Scott Hadfield, co-founder of South African e-commerce startup Hello Pretty.
“In fact, it’s not entirely uncommon for small businesses who sell on Hello Pretty to get accused of being scammers when advertising their products on Facebook for no reason other than the fact that they’re selling something online.”
The other issue is whether most Africans can afford the kind of consumer spending that can create profitable e-commerce businesses. The general consensus is that the African middle class is growing, with the African Development Bank (AfDB) saying in 2011 that 313 million people—34% of the population—fell into this bracket
But is this growth really as large as people say? The AfDB characterizes “middle class” people as those spending between $2 and $20 per day, not necessarily enough for them to be regular online shoppers. Consultancy firm EIU Canback is more conservative on the growth, saying the percentage of middle class Africans increased to just 6.2% of the population in 2014, up from 4.4% in 2004. South Africa’s Standard Bank believes there are only 15 million middle class households in Sub-Saharan Africa’s 11 largest economies, excluding South Africa.
With the tribulations of the major African e-commerce players well-documented, and the size of the money drain clear, some investors and startups are taking an alternative approach by focusing on niche markets. From Nigeria’s Gibadi, a marketplace for business and industrial goods, to South Africa’s Hello Pretty, which provides access to independent designers and creatives, more focused niche e-commerce ventures are becoming the norm.
This is attracting investors, with Cape Town-based Silvertree Capital especially focused on the area. Though initially focused on South Africa, the company is now venturing further afield after agreeing a joint venture with Ringier Africa. Partner Paul Cook says the focus right now in on the basics, good service and good products, at realistic prices.
“The opportunity is to build a relationship and offer value to customers and suppliers in a way that a general retailer can’t, which can—with luck—make the economics work out better,” he said.
Hadfield said the benefits of niche e-commerce are that it is easier to focus on one target market, while overheads are lower, though inevitably the market is smaller.
“If the niche is focused on, say gamers or another digital-oriented consumer market you’ll have a lot more potential to see profits in the short term than if your niche is targeting a market that’s not traditionally online oriented,” he said.
George Amaefule, head of marketing at Gibadi agrees, though he says niche e-commerce companies face many of the problems as the likes of Jumia and Takealot.
“A focus on niche market, depending on the size, may reduce initial investments and cut a lot of overheads on operating cost. There’s a slightly higher chance of profit opportunity,” he said.
So what now for the likes of Jumia, Konga and the rest? A long wait for profitability, that’s what. For now, the huge funding rounds are allowing them to keep playing the long-game and battle for market share. Yet the long game may yet prove to be longer than expected. Cook says profitability could take many years to achieve.
“Their culture and marketing is deeply rooted in prioritizing growth over unit economics, and that cannot be changed overnight,” said Silvertree’s Cook. “For example, it is unclear how much of their revenue would stay if they suddenly raised prices. And while there is some change of focus currently, there’s no “do or die” pressure to make the required dramatic changes as there is still, for now, investor money coming in.”
Even the likes of Amazon took years to turn a profit, so on the face of it there is not necessarily too much to worry about for those backing the likes of Jumia and Konga. But with serious questions being raised about just how quickly Africa’s consumer class is actually growing, investors putting their money into the seemingly bottomless pit that is e-commerce will be hoping the rate of development quickens to make their expenditure worthwhile.
All this is not to say there are not good investments to make with African startups betting on the rapid growth of an African middle class. The issue might be whether e-commerce startups are necessarily the best gamble to make at this stage of the market’s development.
That’s the billion-dollar bet.