Let us rewind back to the year 2010, when there was no Jumia or Konga. The Nigerian eCommerce market was in its most elementary form. There was neither data nor serious pressure from any startup.


But this is 2017, Jumia is now celebrating its 5th year of its anniversary. Coincidentally, Konga, its arch-rival in the market will also be clocking five years in the next two weeks. While these two startups are worth celebrating, there are more stories, intrigues, and pointers that they are far from where they had planned to be.



In the early part of 2011, these two startups were not existing in their present shape or form which brings us to the question: How did we get here?

The Konga story
In the midst of Nigeria’s economic malaise, a young gentleman called Sim Shagaya (aka Simdul) had the hunch to start his own eCommerce company. After working at Emotion Advertising, an Out-of-home media company, Sim soon discovered what the most practical alternative. He teamed up with some energetic folks to start DealDey, a daily deal site that replicated Groupon’s business model in the Nigerian way. To be fair to his assumptions, Nigerians are by nature bargainers. His idea of DealDey is a bargain-oriented platform that will connect buyers with sellers.


Sim Shagaya, Founder and Chairman, Konga

DealDey started showing serious traction, perhaps through solicitation, Kinnevik, a Swedish tech investor (who will later become a partner, frenemy and later an ‘enemy to Oliver Samuel’s Rocket Internet) in 2012 staked USD1 million into the company. The investment was a filip for the startup shooting its revenue (according to reports) to about NGN400 million (USD1.2 million as at then).

Sim Shagaya received another hunch to push his luck further. As at July 2012 ame period when DealDey raised its growth funding, Sim had started Konga. Probably with part of his ‘cash-out’ from DealDey equity sale, he started retailing baby products and wears to target mothers in Lagos.

Seeing what Oliver and his brothers are doing with their ‘Jumia rocket’ Kinnevik quickly staked in USD3.5 million into the business. Not wanting to lose out, Naspers joined the fray to stage a comeback by participating in a USD10 million Series A funding round alomgside Kinnevik.

These investment and few others subsequently raised by both startups marked the beginning of a ‘fist to fist’ competition between Jumia and Konga. With both companies having access to foreign direct investment, FDI, the market became all for grabs.

Where are they now?

Five years down the line, the reality has fully set in. These two companies have downsized (the right word according to them is rightsizing) several times to return value to its shareholders. While Jumia’s losses has continued to pile up, Konga seems far away from profitability even with deep cuts to its workforce, marketing costs and change of business model.

Kinnevik, a very down to earth tech investor who saw the handwriting on the wall announced at the end of this year’s first quarter that it carried out a writedown of the value of its investment in Konga to USD13.8 million. But do not get it twisted Kinnevik disclosed it was taking more cash out of the business. Its receivables for the year 2016 rose to USD2.9 million compared to USD688,000 it took out in 2015. To be fair, Kinnevik was simply trying to get some money back after four years. Its total investment in the company was according to public disclosure around USD25 million (I would do the same thing).

Both Jumia and Konga said they are trying to ensure they break even anytime soon. However,  their ‘soon’ is different from the soon you know.

As a matter of fact, Rocket Internet’s Chief Financial Officer, Peter Kimpel said on the 24th of September 2016, on the same day he reported a net loss of EUR35.4 million for Jumia (entire African operation) that he sees Jumia breaking even by 2019 (now you see). While this is possible, the company will need more than cutting its workforce and a change in its business model to pull such ‘financial stunt’.

The reason for this is simple. Jumia and Konga’s early traction in revenue was a wake-up call to many Nigerians (investors and entrepreneurs) that eCommerce was a viable business to go into. Between the year 2013 to 2014, more than 60 eCommerce companies (a guesstimate) were floated with various names and but using the same template. As the dust settles, the ‘famous duo’ have now been joined in the general merchandise business by Yudala and Payporte with more than 15 other niche eCommerce sites coupled with many untracked social media and ‘Instagram merchants’, the landscape is already saturated.

In hindsight, it turned out that a third party logistics solution was better for any weather

With a low barrier to entry, every day that goes by, these two companies are weakened by smaller players who are not really doing great but are diverting attention, getting fringe sales. The smart ones are focusing on a particular city and servicing a closed circuit audience. Jumia and Konga are now on maintenance mode till they hit profitability. However, there are more roadblocks on their way.

In 2004, a company called Persinnas Retail constructed what it planned out to be the Walmart of Nigeria. Unknowingly to many, the actual Walmart clone was not the owner of the building but a tenant- Shoprite.

Within 12 years Shoprite has floated over 25 stores selling everyday needs of Nigerians. However, the shopping mall culture is another phenomenon. Retailers who compete head on with Jumia are Konga are all over these shopping malls amking sales to millions of people who are used to the cash and carry lifestyle of Nigeria. With billions of Naira exchanging hands at this malls, eCommerce companies are more or less niche players in Nigeria’s retail landscape.

A major advantage for shopping mall retailers is the lush and aspirational appeals of the malls. Before now, many Nigerians were only conversant with shopping malls in Hollywood movies. The surge in construction of malls and their cozy milieu is a big deal for teenagers, young adults and the middle class. Flanked by competition online and brick and mortar mall retailers, the market for eCommerce is not as big as it was painted after all.

What could have gone wrong?

Nigeria’s Internet market audience and consumer dynamics being a peculiar market was perhaps over-simplified by premium analytics and often times patronising research reports churned out by the likes of KPMG, PriceWatersHouseCoopers and the likes.

The report that Nigeria’s has an emerging Middle class who are a darling to bet on was a huge sell to both pseudo and genuine foreign investors.

Without sounding like a broken record, it became apparent that apart from Nigeria’s socio-economic infrastructure which was and still epileptic was not just the deciding factor for these Internet companies. There was a bigger problem than envisaged.

Not until 2015 when the global oil market was going on a downward spiral, it never dawned on anyone that we have been living in a bubble. This is not an eCommerce or dot com bubble but a growth bubble of the Nigeria’s economy. With oil selling at USD110 per barrel as at 2012, the value of the Naira (NGN) rose drastically against the dollar (USD). The majority of imported gadgets, clothes, shoes and electronics that formed 99% of what eCommerce sites sell soon became cheaper than expected.

Nigeria’s Internet space was in a frenzy, the country soon joined the Black Friday sales with both Jumia and Konga declaring record sales and revenue in the region of billions within 48 hours.

The binge is now over, Nigeria’s oil boom has since disappeared. For an economy that relies on crude oil sale for more than 70% of its revenue, it did not require a soothsayer to know that Oliver Samwer’s Rocket Internet will need serious pilot so it will not crash land.

What did they do wrong?
There are varied opinions on what they could have done right. Some analysts attributed their misfortune to critical parts of their business model. All other things being equal, it will be a disservice not to mention that eCommerce companies contributed to their own problems.

First is the concept of pay on delivery, POD. They backed the idea on the newness of eCommerce to many Nigerians and lack of trust from the public in buying and paying online. The approach soon became an albatross, but in the midst of surging sales during the oil boom, it was easy for Sim Shagaya and Oliver Sawmer to gloss over the damning statistics that POD was bleeding their businesses’ bottom line.

The havoc wrecked by POD soon became apparent in the wake of the recession when sales tanked due to higher prices and an unprecedented drought in the disposable income of Nigeria’s purpoted emergeing middle class. Since they were alleged to have copied Amazon, Ebay and or Alibaba; one would have thought they would have copied what Amazon and Ebay was doing that Nigerians were paying upfront for packages that will reach them more than three weeks after they paid for it foreign currencies. A return policy that protects both the buyer and the seller would have sort out the ‘lack of trust’ mantra and the ‘fake product’ stereotype.

There was also the miscalculation that you have to have a proprietary logistics operations. When they started out, they had partnered with UPS and DHL. As more cash flowed in, they poached and invested in their own logistics operations. As sales dry up, they soon realise running a logistics business became a huge hole in their balance sheet. In hindsight, it turned out that a third party logistics solution was better for any weather. So if POD is eradicated, customers will get serious to receive their package. Lost revenue will reduce and the business would grow at its own pace.

Another question was whether it was right for these startups to have left Lagos in the first place. It makes sense that if 70% of Internet traffic comes from Lagos, simple logic means the business should stay in Lagos. The misconception was also fueled by the assumption that eCommerce is for everyone that fits into the white collar and middle socio-economic class with access to the Internet. The market was more or less overrated. If I was running an eCommerce company, I will not leave the shores of Lagos until the year 2020. Nigeria has many cities with one of the least developed infrastructure and elementary retail structure. Economically, they mostly survive on monthly subventions from the federal governemnt based in far away Abuja. The collapse in Nigeria’s oil revenue soon exposed the fact that Lagos is the only economically viable state/city in Nigeria.

Looking ahead

Nigeria’s economy will surely recover. It will however, make a painful exit out of its worst recession in the last 20 years. The economy is expected to take another shape and form. Importation will not just become expensive but less interesting. With crude oil price continually falling, the government will grudgingly invest in non-oil sectors. FDIs will chase after the new oil which will be revealed by data.

Jumia and Konga have come to stay. The worst that could happen is an acquisition via an exit of some its investors or a merger in the worst case scenario. The next couple of months will be a decider for both companies and many investors who now have decide their next move.

However, the five-year journey of eCommerce in Nigeria is worth having. Thousands of jobs have been created (many have been lost as well). Many Nigerians have learned digital media and data analytics skills that they are now applying to ventures that are creating jobs and adding to the country’s GDP.

 

The next five years would be better than what we have now. I personally congratulated Oliver Samwer, Sim Shagaya and everyone else who stuck out their neck to start what many could not start.

SOURCE: https://brandspurng.com/2017/06/

nice write up

Interesting

This is nice. They've come a long way. The future is bright for these online retail stores...

Had to read the long write up cos of the FPTC.
It was worth it.
Take time to read it.
Nice one OP.
FP certified.

I personally find this site very resourceful in terms of Banking, Insurance and finance news, articles and opinion.
https://brandspurng.com