High cost of logistics is making it difficult for online platforms to survive

E-COMMERCE has long been touted as Africa’s next high-growth market. Several reasons are cited for the optimism, among them the continent’s large, relatively young, and tech-savvy population, increasing mobile internet penetration, a fast-growing middle-class and rising disposable income.

The burgeoning industry has seen the birth of homegrown e-commerce platforms such as Jumia (Nigeria), Takealot (South Africa) and Kilimall (Kenya), and the market’s potential has not gone unnoticed by bigger international players like Amazon, Alibaba, Shein and even Facebook, all of whom are positioning themselves for a piece of the e-commerce pie.

Africa, however, is a truly unique operating environment and presents its own challenges, from logistical constraints, underdeveloped infrastructure and limited payment gateways to security, access to capital and a customer trust deficit. The playing field, which is becoming increasingly crowded and putting pressure on margins and profitability, is ripe for both consolidation and disruption.
Of the continent’s e-commerce markets, South Africa, Nigeria, and Kenya are among the most advanced and offer valuable lessons to potential entrants and upstarts about how to overcome Africa’s idiosyncrasies, and what happens when you don’t.

E-Commerce in Africa

Africa’s e-commerce journey began when South African platforms – Kalahari.com and Bidorbuy.com – started out in 1998 and 1999 respectively at the height of the dotcom boom. Since those early days, e-commerce on the continent has grown exponentially. There are over 264 active e-commerce sites across 23 countries in Africa. South Africa alone boasts overs 105 e-commerce platforms, while Kenya and Nigeria have 60 and 58 respectively.

E-commerce sites have sprung up to cater to almost every consumer need – from food delivery services to everyday groceries. Data shows that in Africa fashion, electronics, and media are the biggest online spend categories. This is followed by toys, hobbies and DIY furniture.

Africa’s biggest e-commerce website is Nigeria-based Jumia which attracts an average of over 32 million visitors a month, followed by South Africa’s Takealot and Egypt’s Souq with 10 million unique visitors per month each. The e-commerce penetration rate in Africa is expected to breach the half-a-billion user mark by 2025 (40%), up from just 139 million users (13%) in 2017. That represents a compounded annual growth rate of 17%.

Notably, most of the e-commerce traffic comes from mobile devices – more than 70%. It is expected to be almost exclusively mobile by 2040. The 281 million currently active online shoppers in Africa are forecast to drive revenue to US$49bn in 2023 and to US$82bn
in 2027.

From a growth perspective, Africa’s e-commerce story is a compelling one. But from the profitability point of view it is still a long way from maturity. Despite the double-digit revenue advance since 2017, Africa makes up less than 1% of the US$6.3tn global e-commerce economy. While the expansion of mobile telecommunication networks, uptake of smart devices, rising disposable income and large population are big drivers of online commerce growth, they don’t tell the full story. A 2017 report by Disrupt Africa found that less than 30% of Africa’s e-commerce start-ups were profitable. The lack of profitability is not limited to start-ups, however. Many of the biggest e-commerce companies on the continent have not yet turned a profit after more than a decade of trading, surviving only on capital injections from venture funders or parent companies. Nigeria’s Jumia, South Africa’s Takealot and Kenya’s Kilimall, all leaders in their respective countries, offer valuable insight into the challenges of turning an e-commerce profit in Africa.

Logistics & Fullfillment Issues

Operational and management issues aside, Africa is a difficult place to do business. Jumia’s 2019 annual report shows that the company’s fulfilment expenses (cost to ship and deliver orders) were US$1.6m higher than its gross profit. Managing logistics in Africa is particularly challenging. Informal spatial and suburban planning in many areas make precise delivery addresses difficult to identify. That can result in failed deliveries, order cancellations and returns, which for Jumia, are as high at 20%. The remoteness of some delivery areas as well as underdeveloped road infrastructure have meant that the company has had to adapt its delivery methods, which include bicycles, roller-skates, and more recently, drones. This creates additional layers of complexity and adds costs to what is already an expensive business model that works on thin margins. South Africa’s Takealot is another example of an African e-commerce leader yet to make a profit.

Despite accounting for half of South Africa’s online purchases, Takealot incurred a US$13m trading loss in the six months to June 2022 on sales of US$384m. Like Jumia, rising logistical costs and complexity are one of the reasons the company has yet to turn a corner. A weaker exchange rate, higher inflation, rising interest rates and pressure on disposable income have been a blow to both sales and operating expenses. The country’s biggest retailers, Checkers (Sixy60), Woolworths (Woolies Dash), Pick ‘n Pay (PnP Express), Makro / Walmart and Mr Price among many others have all launched e-commerce platforms that leverage their existing store infrastructure across the country, allowing same-day delivery. To compete, Takealot has had to invest substantially in additional warehousing, inventory, and distribution centres, pushing out its breakeven timeframe.

Nairobi based Kilimall has styled itself as a marketplace rather than a true e-commerce retailer. It offers small businesses a way to sell their products to Kenya’s growing digital shopping market. It has since grown to over 10,000 sellers from both Africa and China, and exports Kenyan products to Chinese buyers. The firm’s strong connection with the world’s biggest manufacturing hub is seen as a distinct competitive advantage. The company has faced a wave of complaints about the poor customer service, quality of its products or orders not being delivered at all. The experiences of Jumia, Takealot and Kilimall highlight the challenges faced by e-commerce players in Africa, but also the industry more broadly. There is a multitude of challenges to navigate just to complete a sale, let alone fulfil the order and make a profit in the process.

Internet Connectivity and the Cost of Data

Poor internet connectivity and the high cost of data are less of an issue than they have been in the past but are nevertheless an inhibitor to faster and broader adoption of mobile browsing and conversion to sale. While data costs have eased over the past 5 years, Africans still spend a disproportionately high amount of their average monthly income on connectivity. E-commerce sites in Africa (as with the rest of the world) have been optimised for mobile browsing and low data consumption but true progress will only be achieved through regulatory reform that force data costs lower and the wider roll-out of free wi-fi in public areas.

Payments and the Trust Deficit

Given Africa’s large unbanked population, many consumers either operate on a cash basis (often outside the formal economy) or rely on mobile money and digital wallets. At just 31.5%, Africa has the lowest proportion of adults with a bank account anywhere in the world. The continent does, however, have the highest proportion of its adult population with a mobile money account globally (22.5%).

E-commerce sites in Africa have been quick to integrate mobile payments into their platforms which has brought about the inclusion of many buyers that would otherwise have been excluded from e-commerce participation. Several e-commerce companies have gone further by allowing payment by cash on delivery. While this has this been an important strategy to broaden access to their platforms, it was also critical to addressing a trust deficit. Cash payments introduce their own challenges, however, particularly as far as security is concerned. Nevertheless, e-commerce companies have had to adapt to consumer demands for cash payments, particularly in Egypt, Kenya, and Morocco.

Despite the many challenges that come with operating an e-commerce platform in Africa, the continent should not be seen as an impossible place to do business. The pandemic accelerated the adoption of online shopping around the world, but even more so in Africa given it was still in the early phases of gaining traction. Perhaps most important to remember is that the retail pie hasn’t grown with the onset of e-commerce. Instead, there are simply more competitors fighting for the pie, and growing market share fundamentally comes down to price and convenience. For those that dare to brave the long game in Africa and can ride out marginal (at best) profits, the continent holds the potential to deliver extraordinary returns for serious disruptors.

The above extract is reproduced with the kind permission of the NTU-SBF Centre for African Studies (CAS) and written by Ronak Gopladas, a political economist, writer and speaker. To read the full article visit www.ntu.edu.sg/cas