The easiest way to waste money and destroy value in Nigeria is to start an ecommerce business. As I have noted many years ago in a seminal piece in Harvard Business Review, making money on ecommerce in Africa would happen but would take a really long time. I do not expect any to work till after
2023 (2022). But before then, it is putting good money in a value-destroying venture that would bleed cash until the owners give up. Ecommerce today in Africa is simply a loss-making online endeavor only people with deep pockets can do. You can be in it if you do not care for profitability.
In Nigeria, ecommerce is not a digital business. Yes, it is a traditional business because the highest element of its marginal cost is offline. That you have a website should not confuse you on that reality. Until we have a postal system that works, running ecommerce as a business would remain challenging [please continue to expand sales channel through your website; doing that does not make you an ecommerce firm. That distinction is important to avoid confusion here].
All ecommerce firms in Nigeria have defined geographies to manage the logistic problems [they do not deliver nationwide]. Interestingly, doing that removes one key element of the supposedly internet business from the typical global attributes: unbounded and unconstrained by geographies [Amazon ships across U.S relying on the United States Postal Service]. In other words, they are not internet companies because they are structured by limits imposed by geography due to marginal cost.
At a time, I asked one question: what is your marginal cost? It was very tough as we spent minutes looking at cost. Largely, to have scalable advantage, your marginal cost must tend to zero in a digital business. In other words, having an additional customer must not carry any new cost
My client had a great marginal cost in the web side of the business, but in the logistics side, the amount goes high. To add an additional customer in a new city will require cost, even though the marginal cost in an already covered city may be low. So, the only way to bound the cost is to narrow the service region. By coming to that conclusion, the company is no more an Internet business. That scalable advantage has gone and the unconstrained distribution channel which Internet offers has been made meaningless.
An OLX shrinks and Konga redesigns, Jumia is looking for a way out via IPO which will be good if it can attract great value in the market. But unlike the first African unicorn (at least $1 billion in valuation when insurer AXA invested €75m for 8% in 2016), Jumia is now worth less. (Jumia’s parent Africa Internet Group is now largely Jumia as the firm has seen massive consolidation under the Jumia brand in Africa).
Jumia, the pan African online retailer present in 14 countries, maybe put up for sale. The company’s owner, Rocket Internet, is reportedly seeking an IPO for the business with a listing of shares to the value of €200m ($246m).
Rocket Internet is reportedly seeking to release cash by exploring a stock market listing for Jumia, the online retailer it helped establish in 2012. Jumia has operations in 14 African countries, and currently has 500,000 merchants using the platform, and more than 5m SKUs. It also operates a hotel booking platform and an online food delivery service connecting consumers with local restaurants.
In the first nine months of 2017, Jumia saw its losses widen to €80.7m ($99.1m), while revenues were just €57.3m ($70.4m). To put this in context, Amazon launched in 1994, and first delivered a profit in Q4 2001, seven years later. It wouldn’t deliver a full year profit until 2004. Until 2016 it was still considered unusual that Amazon delivered four consecutive quarters of profit. Jumia’s group revenues mask the importance of one market: Lagos, Jumia’s first market and by far its single largest driver of revenues. The Nigerian market generally has seen sluggish growth since 2014, although it is picking up now, and slower growth in demand has been compounded by fragile market conditions in Algeria, South Africa, Kenya among others.
The biggest challenge in ecommerce is the marginal cost paralysis. And unfortunately, no ecommerce company can fix it since none can price without consideration of losing buyers to supermarkets and open markets. So, any ecommerce operator that wants to keep its products low must discount it and that means absorbing the marginal cost. That is what they do. And they keep doing so until they run out of more money.
As I explained in the HBR, buyers have options, from local open markets to hustlers on traffic lights. Any ecommerce must beat the alternative ecosystems on price to win new customers and keep present ones. To do that, they would need volume, only possible with a nationwide or regional operation. But without logistics like postal systems, that will not happen. Do not waste your money starting an ecommerce business in Nigeria until
2023 (2022). It is the most unfortunate way of wasting capital in Nigeria. Only the post office can make our ecommerce take off and without that infrastructure, ecommerce is a waste of efforts, in Nigeria.
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