Many have asked me to project the best possible acquisition Amazon could make in Africa. Of course, no one knows the grand strategy of Amazon in Africa except that it runs a lackluster e-commerce operation in South Africa. I had noted that Amazon is not in South Africa to win in e-commerce, but to use the goodwill associated with its ecommerce operation to sell cloud computing services across Africa. So, Amazon is not thinking of profitability in South Africa’s ecommerce, provided its presence there makes it easy to corner all the startups to become customers to Amazon Web Services. That is the One Oasis Strategy.
But with Alibaba showing signs that it will play in Africa with recent visits by Jack Ma, Africa is now part of the big equation. The implication is that Amazon may like to play to win in our continent. Alibaba had noted that it would be investing billions of dollars to develop new businesses and markets. Africa is certainly part of that new market.
But while we discuss how these companies will enter, I do think none is coming to buy any ecommerce operator. Recent changes in the industry show that market is moving seriously and winning in ecommerce will depend on doing well in the physical space. I will explain what could happen, in Africa, by examining what Amazon is doing in India, which mirrors to a large extent the African market.
This is the Amazon strategy in India: forget big ecommerce acquisition, buy/develop and deepen the offline business. The company understands that having a website and listing items without how to move them will not drive growth. India does not have a great postal system that rivals what Amazon depends on in Europe and North America. So, there was no need of buying big ecommerce operators, especially if they do not solve the logistics problems. What did Amazon do? It went into buying supermarkets and physical stores to improve its distribution and pickup locations. Yes, Amazon has been buying supermarket chains, focusing on the offline in India, even when developing its ecommerce operations, largely organically.
The African Strategy
I do think Amazon will execute the same strategy in Africa: it will be more strategic to acquire pockets of supermarkets and integrate them into one brand across major African cities than buying any ecommerce operator. There are few supermarket chains in Africa. Only South Africa with Shoprite and others like it has developed top-grade supermarket chains. In Nigeria, nothing like that exists: we have supermarkets but they are not chains.
In Nigeria, we are talking of supermarkets like H-Medics (Abuja) and others of its size. These shops will be integrated into one brand, and then linked to others across cities. By the time you have them in 30 cities, you have a solid chain. Those shops will reduce costs of distribution by serving as pickup and collection centers. Under one management, you will see massive benefits from economies of scale.
Offline is part of Amazon’s vision for the future of commerce. In U.S. where it is doing all to win in grocery, it has understood the limitations of online-only business model. Yes, for Amazon, having physical stores will be a huge offense. If Amazon does not develop the physical space, in most sectors like grocery where the money is still domiciled offline, and those offline competitors move online, any current advantage Amazon enjoys could be neutralized. You do not want the players you disrupted in books to disrupt you through grocery, the largest of sectors in consumer buying. With the money in the physical domain, Amazon going there makes sense. Its acquisition of Whole Foods is part of executing that offline strategy that strengthens the online business.
Even Alibaba has the same plan as I noted earlier today. Alibaba is investing in Sun Art, the largest retail chain in China; call it the China’s Walmart. In Africa, I expect these offline players to dominate how Alibaba and Amazon will compete in the continent. Largely, owing to the need to scale, with lower marginal cost, my prediction is that Amazon will be pursuing deals in physical stores, in Africa, even while growing its ecommerce operations organically, when it does decides to massively pursue African market.
This offline trajectory will play out in Africa. If Alibaba and Amazon come, they will focus on building supermarket chains, from the disparate small stores we have across our cities. They will integrate them into one brand. Using the one-brand operation and economies of scale associated with such integrations, they will reduce the distribution costs which will make their online products more price-competitive. Once they do that, they will improve their scalable advantages. The electronic (i.e. website customer acquisition and on-boarding) part of the business will be grown organically.
---Visit our Store for my books, cases, notes, etc. Now, enjoy our consolidated subscription for all contents (past, present and future).
-- We offer Advisory Services (tech, strategy & Africa).