Why Amazon Ecommerce Strategy Fails in Nigeria, Africa

Why Amazon Ecommerce Strategy Fails in Nigeria, Africa

From Nigeria and Africa, when you look at Amazon, you see an ecommerce operator. But if you try to copy Amazon, you would likely struggle. There is one product which Amazon offers its customers which no ecommerce operator has created in Africa: Amazon Prime, a paid membership service offered by Amazon that gives users access to free two-day delivery, streaming music and video, and other benefits, for a monthly or yearly fee. Citigroup projects the membership number to hit 275 million members over the next decade. (At the moment, Prime has less than 150 million members.)

If you take an average of $100 per year, in the club membership, you are looking at $27.5 billion [projected] per yearly revenue. That is money Amazon will receive from users simply to grant them privileges to buy things from its ecosystems.

Now, if you clone amazon.com website and forget to “clone” the Prime Membership, you would be off by miles. Yes, Amazon can afford to lose $10 billion on discounted wares and shipping because it knows that it would collect $27.5 billion [projected] from the club membership. At the end of the day, the company would be made whole. This Prime membership is an engine that powers the Amazon business: it added many new users this holiday season.

Amazon  had another record-breaking holiday season, the retailer announced this morning. The company says it added “tens of millions” of people who signed up for Prime memberships, both paid and on a trial basis. Its worldwide customers also shopped and ordered more items than ever before, including “millions more Amazon devices” compared with this time last year. The device best-sellers, as on Black Friday, again included Amazon Echo speakers and Fire TV.

[…]

  • Prime membership continued to grow this holiday – tens of millions of people worldwide started Prime free trials or began paid memberships, to benefit from FREE Same-Day, One-Day or Two-Day shipping, in addition to FREE two-hour delivery with Prime Now.

Largely, if you follow its massive discounting without remembering the revenue it collects from Prime, your strategy would not be worth the paper it is printed on. Or if you have the strategy in an electronic format, it would not be worth the digital space it is occupying in your device.

Prime is one key reason Amazon ecommerce strategy will not work in Africa until someone can figure out how to build a local Prime equivalent. Amazon through Prime offers users competitive prices when compared with physical stores. Without your Prime equivalent, you would face some of these challenges I had noted in Harvard Business Review while also struggling to beat prices offered by open markets and local supermarkets. You cannot win with that level of double-whammy against you. And that explains why we have to invent a model that can work at home.

 

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#1 Comment

The same $100 people pay for Amazon’s Prime is not far from the monthly pay for several categories of middle-class income earners, and somehow we expect magic. By the time you settle your landlord, pay for security, buy fuel for your generator; you might be struggling to eat.

We simply do not have the numbers to experiment like Amazon, both from the operator and consumers sides, the economy isn’t that robust to do these things at scale.

If you look at our demographics, most people who are enlightened and tech savvy do not have money, while the minority with deep pockets either do not trust the web or are pure illiterates. So we are limited at the moment, it goes beyond models and strategy; the most important thing would be to expand the economy, to allow the demographics who can drive growth and adoption to participate.

As for the operator side, Amazon was patient enough to build something huge and intimidating, and a lot of investment went in there. Raising $2M or $5M and expecting returns within three years may not do much, if anyone even attempts to clone Amazon.

A success in the ecommerce sector must have a precedence, from where the bloc of the purchasing power would be modelled after, we do not have such yet.

#2 Comment

You’re right that local solutions are needed for local e-retailers to survive. And indeed, I believe our retailers are making great strides in that already. For instance, the pay-on-delivery solution that has worked so well.
However, it’s good to remember that Amazon Prime did not start until 11 years (1994 – 2005) after Amazon itself was born. And for those 11 years, they survived just okay with the normal sales and discounts. As such, it might not be totally correct to say that African e-retailers cannot successfully discount without a Prime-like offering. Sure it might be tough, but not unnecessarily impossible.

My Response: [ ]- you made the point. Amazon lost money during those early years. Because of American markets, it could continue to lose money until it started making money. If you want to copy that, be open to keep losing money. However, from Kalahari to old Konga, no one is open to absorb those loses before the turning moments. So, in our models, we want to achieve profitability since we do not have access to that next capital under loses.

#3 Comment

What really drives the high Amazon Prime subscriber base is the fast delivery of purchased items (without any extra cost for the subscriber), and what makes that feasible is the unique mix of efficient mailing/shipping systems available to Amazon (US Postal Service, UPS, and now … their own home-grown Amazon Logistics to fill delivery gaps in the short term….and soon to be deployed are drones as part of Amazon Logistics in the longer term).

You def. can’t copy that in Nigeria or Ghana today, because such robust logistics systems simply do not exist. Just “cloning” Amazon’s prime membership or any paid membership is not enough.

The main selling point for Amazon prime membership is the fast delivery of items… and not the other added services (video streaming, etc). Find a way to deliver items quicker and safer and customers will pay any nominal club membership fee to join in.

My Response: Absolutely – the marginal cost of logistics in Africa is high without functioning postal systems. Our path to solid ecommerce MUST include great postal systems

#4 Comment

Amazon adapted the Sams club, Costco, and BJ’s model for ecommerce and it has worked beautifully. Let me remind you that for the first 10 years Amazon did not make a dime but the investors stuck with the management because Amazon was transparent in its objectives to investors. Amazon controls all the value chain. Logistics, payments and warehousing. Amazon has the numbers so they have the customer base to play with. The keys to Amazon success are 1. Superb Management. 2. Access to Capital 3. Superior infrastructure and lastly 4. The bottom of the pyramid which majority belongs to. We are all looking for “deals”.

My Response: Awesome – expanding your points: (1) Africa has great managers (2) Because we do not have access to next capital, no one will wait for 10 years to see profitability. That is the issue why old Konga, Kalahari etc struggled. Our gestation period to be profitable does not exceed 5 years in African startups before investors flee. (3) The best infrastructures Amazon enjoyed are US Postal service and tax collection waivers which tripped online for shoppers in U.S. Nigerian startups enjoy neither. (4) We have more bottom of pyramids. As you noted, there are many inherent advantages which cannot be cloned and the need for adaptation.

#5 Comment

Prof ,when you say local invention is needed ,I understand adaptation is needed. If the rate for membership is lessened and the delivery system meticulously elaborated ,I don’t see why cloning Amazon in Nigeria will be impossible .If in the next 10 years Amazon does not reinvent itself ,they might face a serious competition from the new technologies evolving everyday . Adaptation is the key .

My  Response: Sure – my point is the “delivery system”. Without US postal system, we would not have Amazon today. And without the tax collection waiver, Amazon would have failed. But by waiving the tax collection burden for online stores (US is gracious there), Amazon products became artificially cheaper by 8-10%. Magically, no one wants to pay tax because if you buy from Amazon, it is tax-free! (I know one has to self-report the sales tax. Too bad, no one does that)

#6 Comment

Very well said sir. But just as someone already pointed out, and having worked for a while at one of Amazon’s fulfillment centers, one thing that is key to Amazon’s success is its commitment to her customer- prompt service and delivery. Moreover, in these developed nations, there are already in place, infrastructures to facilitate their services. Also, We must not forget that Amazon has grown over the years. They did not as a matter of fact start up with the Amazon prime initiative. Infact, Amazon consistently lost money as a public company during its early years. Amazon prime was only initiated in 2005. I would therefore not say that it is entirely impossible to clone the Amazon business in our continent but we must first address issues pertinent to our continent which our counterparts have already found solutions to.

 

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