African e-commerce investment must continue when the Jumia party stops
The New York IPO of online African marketplace Jumia brings to mind Benjamin Graham's dictum that the stock market is a voting machine in the short term and a weighing machine in the long term.
Shares in Jumia have continued their advance since the IPO last week. As argued here, the initial euphoria tells us more about market sentiment than the prospects for e-commerce in Africa. Those buying shares in loss-making Jumia, now valued at over $3bn, might pause to reflect on the private valuation of rival e-commerce platform Konga, which was bought by Zinox in 2018. The purchase price paid by Zinox was never disclosed, with reports ranging from a nominal $1 to $230m. Konga claims that it will be able to turn a profit faster than Jumia.
The danger is that the unpleasant process of reaching a realistic market valuation for Jumia may lead to an overall freeze in African e-commerce investment. The consequence would be huge. The potential of African e-commerce platforms and the steps needed to realise it are analysed in a 26 March report from BCG analysts in Casablanca. BCG predicts that online marketplaces will create around 3 million new jobs in Africa by 2025.
For Jumia Founder Sacha Poignonnec, speaking to The Africa Report in 2018, this is a given. “It’s a proven business. It’s an irreversible trend that consumers buy online.”
That breaks down into 100,000 direct jobs at online marketplaces, indirect employment of 1 million, and a further 1.8 million jobs through increased economic activity.
The report points to correlations between e-commerce penetration and labour-market efficiency found in the rest of the world; these tend to grow stronger as economies become more developed.
The final mile
The potential of e-commerce in Africa is undisputed. E-commerce can reduce the number of intermediaries and allow merchants to sell directly to customers. Africa’s dearth of physical retail outlets makes this prospect especially enticing.
- In Europe, the average distance between major cities is 1,300 kilometres; in Africa it is 4,100.
- In 2018 there were 136 physical retail stores per 1 million inhabitants in Latin America, 568 in Europe, and 930 in the US, according to BCG. In Africa, there were fewer than 15.
Major improvements in communications and transportation infrastructure are essential if the potential is to become a reality, BCG argues, basing its findings on interviews with executives at online marketplaces in Africa.
- In Africa, BCG says, logistics add an average of 320% to a manufactured good’s cost.
- Return rates because the delivery service can’t find the destination can be as high as 30%-40%.
Most e-commerce in Africa is local, says Cameroon-based Rebecca Enonchong, founder and CEO of AppsTech. It’s a “very difficult and expensive market to get into”.
- BCG points to logistics startups such as Ace and Exelot, which are working to resolve bottlenecks in last-mile delivery.
Internet access must be expanded. Only around 20% of people in sub-Saharan Africa are online. High illiteracy rates mean that many potential consumers cannot understand online content or use digital technologies. “You have to build the entire value chain,” Enonchong says.
More open regulatory attitudes are also needed, BCG says. Some African governments are wary of opening sectors to online competition. Finance will remain a major issue long after short-term Jumia holders have sold and gone. According to BCG, 39% of companies in sub-Saharan Africa complain of limited access to finance, compared with 17% in Europe 11% in East Asia.
Investors and policy makers must not lose faith in African e-commerce when the Jumia bull run reaches its inevitable end: too many potential jobs are at stake.