Unpacking sub-Saharan Africa’s online retail industry

Internet use in sub-Saharan Africa is on the rise, supported by growing smartphone ownership and connections to multiple undersea communications cable systems. Broadband uptake grew 34% per year between 2008 and 2015, and penetration is anticipated to reach 80% by 2020, up from 20% in 2015.[1]

This growth has spurred the emergence, though still nascent, of an online retail industry. Recent years have seen the establishment of numerous e-commerce companies, while in countries such as South Africa, traditional brick-and-mortar retailers are increasingly embracing online sales.

Sub-Saharan Africa’s e-commerce industry still faces numerous challenges, however, such as a distrust for online commerce, low bank card penetration, underdeveloped transport infrastructure, and a lack of proper address systems. This report examines the online retail industry in three of the continent’s key markets: Kenya, Nigeria and South Africa, looking at the main e-commerce operators in each and highlighting some of the strategies that they are using to entice customers.

Kenya

Population: 44.2 million

GDP: $64.4bn

GDP growth 2015-2020 (average annual): 6.2%

GDP per capita: $1,434[2]

When it comes to consumers embracing technology, Kenya is generally seen as one of sub-Saharan Africa’s most advanced countries. This perception is due in large part to the success of mobile money transfer platforms such as M-Pesa, which has over 17 million active users. The widespread use of mobile money has spawned numerous other companies that have built solutions on top of these platforms.

According to the Communications Authority of Kenya, the country had 26.8 million internet/data subscriptions by the end of June 2016.[3] Most of these are mobile data connections, with all other ways of accessing the internet (such as fixed fibre optic and fixed cable modem) accounting for less than 1% of total subscriptions. Mobile subscription data should, however, be taken with a pinch of salt, as many people have more than one SIM card.

Kenya’s e-commerce companies come in a variety of shapes and sizes. One of the biggest players is Jumia, which is owned by Berlin-based Rocket Internet, along with a string of other investors, including MTN, Millicom, Orange, Axa, Goldman Sachs and CDC. Jumia also has a presence in several other African countries. It sells a wide assortment of goods, including fashion, electronics and beauty products. Another prominent Kenyan general merchandise e-commerce platform is Kilimall, which was founded by Chinese national Yang Tao.

There are also several other specialist operators. Rupu, for example, is a daily deals and discounts platform owned by Swiss media company Ringier AG. The company says its customers are increasingly interested in events and activities such as horse-riding excursions or golf lessons.[4] And Mama Mikes, one of Kenya’s oldest e-commerce companies, is targeting Kenyans living abroad who want to send gifts to their family and friends back home.

In line with a trend seen in other African countries, the e-commerce marketplace model has also taken hold in Kenya. Both Jumia and Kilimall offer merchants the opportunity to run virtual stores on their respective platforms. With Jumia Market, merchants can list their products free of charge, but Jumia takes a commission on each sale. One company that has achieved success through selling on platforms such as Jumia, is Hong Kong-based smartphone maker Infinix Mobility. Focusing on an e-commerce model has allowed the company to keep prices down by eliminating the cost of operating brick-and-mortar stores or using third-party physical retailers. Cutting middlemen from the distribution chain has also reduced the threat of counterfeiting its products.[5]

Distribution challenges and stiff competition from traditional retail

Despite significant growth in mobile and internet penetration, Kenya’s e-commerce industry remains in its nascent stages. Accurate industry statistics are hard to come by, but Rocket Internet, a major shareholder in Jumia, offers some clues in its annual report.[6]

For the full year 2015, Jumia had 1.2 million active customers (those who have made at least one transaction over the period) across the 11 countries where it operated at the time. (Although the annual report says that Jumia has a presence in South Africa, it has no dedicated South African website – we therefore omitted South Africa from the calculation.) It doesn’t offer country-level data, but if the total number of customers is distributed proportionally based on the population of each country, as the table below shows, Jumia would have only about 90,000 active customers in Kenya.

The below method for determining Jumia’s country-level customers, though useful, is oversimplified, it must be noted. For example, owing to the more developed nature of the markets, we would anticipate the real Kenya and Nigeria figures to be higher, and those for Tanzania and Uganda to be lower.

A lack of trust in online commerce remains a significant hurdle for Kenyan operators, which is why most companies allow customers to pay on delivery, either in cash or via M-Pesa. An underdeveloped address system further complicates matters, as unmarked buildings mean couriers often find it difficult to locate delivery destinations. For this reason, earlier this year the Communications Authority of Kenya announced plans to improve the national addressing system, specifically to boost the e-commerce industry.[7]

Kenyan online retailers face strong competition from brick-and-mortar chains. Excluding South Africa, Kenya has one of sub-Saharan Africa’s most developed formal retail industries, reducing the need customers have for e-commerce – many goods are readily available in local stores. While homegrown supermarket brands such as Nakumatt, Uchumi, Naivas and Tuskys are yet to find traction with their own e-commerce offerings, they each have relatively large physical footprints throughout the country. Kenya has also attracted foreign entrants such as France’s Carrefour and South Africa’s Game. And recent years have seen the development of numerous shopping centres in Nairobi and beyond.

But Sam Chappatte, managing director of Jumia Kenya, nevertheless believes that e-commerce has a unique value proposition – cutting out middlemen means it offers competitive pricing; it has a greater assortment of products; and it guarantees quality in a country where counterfeit products are a problem.[8]

Case Study: Kilimall – seeing potential in secondary towns

Although Nairobi is Kenya’s undisputed commercial hub, e-commerce company Kilimall sees untapped opportunities in the country’s secondary cities and towns. The growth in second-tier cities has been spurred by the process of devolution: introduced in 2013, it divided the country into 47 counties, each with its own local government and county headquarter. These headquarter cities have experienced an influx of government officials, which has subsequently led to greater commercial activity and economic growth.

Shopping options in these towns are still more limited than in the capital, and according to Kilimall founder Yang Tao, the company is getting traction in second-tier cities such as Mombasa and Kisumu, as well as towns like Kisii and in Nyeri: “People in these towns are beginning to be curious about e-commerce. They are sceptical about paying money in advance, but I find Kenyans to be open to new things, even a bit adventurous,” he said in an interview in 2015.[9]

Last year, Kilimall partnered with the Postal Corporation of Kenya, enabling its customers to collect goods and place orders at over 600 post offices countrywide.

Nigeria

Population: 178.7 million

GDP: $493.8bn

GDP growth 2015-2020 (average annual): 1.7%

GDP per capita: $2,763[10]

Nigeria’s large population and relatively underdeveloped formal retail industry mean that it holds significant potential for online retailers. In addition to lower prices and a greater assortment of goods, e-commerce means customers don’t have to spend hours in traffic to visit a mall or market. Online shopping is of even greater value for those living in smaller towns or cities, where the choice of goods may be limited.

Over the years, several e-commerce companies have entered the market. Jumia and Konga are two of the biggest players. Konga counts Swedish investment company Kinnevik and South Africa’s Naspers among its backers. In addition, there are numerous other operators focusing on specific segments: Mall for Africa allows Nigerians to purchase goods from major Western retailers; Supermart specialises in online grocery shopping and delivery; and DealDey features daily deals for things to do, see, eat, and buy in Nigeria.

But despite the country’s large population, recent user figures from Jumia and Konga reveal that the market is not as big as some might expect. Using the method described in the Kenya section, we estimate Jumia Nigeria’s e-commerce and marketplace to have about 380,000 active customers. Konga investor Kinnevik recently caused quite a stir in Nigeria’s tech community, when an interim report for the six months ending 30 June showed the company had only 184,000 active customers during the previous 12 months.[11] Still Kinnevik seems upbeat about Konga’s future, saying that the company broke even – before overhead costs – for the first time this year in September. It values its 34% stake in Konga at 133m Swedish Krona (US$14.7m), which would give the company a total valuation of $43.2m.

According to Nigeria’s minister of communications, the internet penetration rate as of August 2016 was 47.44% (about 85 million people).[12] The minister didn’t reveal how the figure was calculated, but as with Kenya, if it was done using total internet/data subscriptions, instead of actual users, the real number of people online is likely to be lower.

Both Jumia and Konga have introduced marketplaces that allow merchants to sell their own goods using these platforms. Konga has shifted focus by carrying an inventory of high-volume products only, and relying on third-party merchants for other goods. “Konga has morphed… from a business that does e-commerce, to a business that helps African businesses do e-commerce,” said the company’s chairman, Sim Shagaya, at conference in Cape Town last year.
Overcoming payment hurdles, investing in warehousing

Due to the low penetration of bank cards, e-commerce operators in Nigeria face some unique challenges compared to their counterparts in the rest of the world. According to the EFInA Access to Financial Services in Nigeria 2014 Survey, only 36.3% of Nigerian adults have access to a formal bank account.[13] Due to regulatory reasons, the mobile money industry is also less developed than it is in east Africa.

This, coupled with issues around trust, means that cash on delivery (COD) is a still a popular payment method for Nigerian online sellers. But COD comes with many inefficiencies – and increases operating costs. According to Raphael Afaedor, chief executive officer of Supermart, a large percentage of COD customers decide not to go through with a transaction once the courier arrives.

In response, Nigerian e-commerce companies have introduced several initiatives aimed at improving the payment experience. Konga has partnered with banks to launch its KongaPay mobile payment solution, while Jumia recently announced that it will be introducing its own payment system, called Jumia Pay.

Appropriate warehousing and distribution strategies are critical to e-commerce success in Nigeria, especially because of its underdeveloped transport infrastructure. The growth of the marketplace model has also introduced new demands in terms of warehousing and logistics.

For example, to reduce the processing times for merchant orders, Konga is rolling out a countrywide warehousing infrastructure project. Currently, merchants have up to three days to drop their goods off at a distribution site, from where Konga will deliver the items on their behalf. But by having stock readily available in a warehouse, Konga can greatly reduce the delivery times. There are also plans to double the size of its flagship Lagos fulfilment centre to 120,000 square feet.

In terms of deliveries, Nigerian e-commerce operators typically use a mix of their own vehicles and the services of independent logistics providers such as DHL and UPS. Jumia has its own division, Jumia Services, which provides a complete e-commerce fulfilment platform relying on internally and externally managed warehousing, order-processing, and logistics service providers. Jumia Services can also be used by third parties.

Case Study: Jumia Market – allowing others to sell online

Jumia Market, part of the larger Jumia Group, is an online marketplace through which Nigerian small and medium enterprises (SMEs) can sell their goods. There are currently 50,000 merchants listed on the platform. Sellers can list their products for free, but Jumia takes a commission on sales, ranging from 3% to 12.5% depending on the category.

Jumia Market doesn’t keep any inventory, and merchants are responsible for coordinating their own delivery – either delivering it themselves or using the Jumia Services e-commerce fulfilment platform. Lagos is currently the platform’s biggest market, although it is also finding traction in cities such as Ibadan, Abuja, Port Harcourt, Calabar, Kaduna and Kano.

Sefik Bagdadioglu, managing director of Jumia Market, believes that there is an opportunity to boost sales by offering shorter delivery times. He illustrates this using the anecdote of meeting a woman at a traditional market who told him that she uses Jumia Market to check the price of specific products, but then goes on to buy it offline. Asked why she doesn’t complete the order on Jumia, she said that she wants the product immediately, and cannot wait two days for delivery.

South Africa

Population: 55 million

GDP: $314.7bn

GDP growth 2015-2020 (average annual): 1.4%

GDP per capita: $5,727[14]

A 2016 report by South African technology research firm World Wide Worx (WWW), shows that the value of online sales has increased by around 20% per year since 2000, and that last year’s increase of 26% saw the value of online retail reach R7.5bn (US$525m).[15] It is expected to double by 2020.

WWW says that the increase in online sales is attributable mostly to growth in the number of experienced internet users ready to transact online, rather than a rise in the amounts being spent by existing users. The research firm predicts that online turnover will account for 1% of all retail sales during 2016, a target its managing director and principal researcher for the survey, Arthur Goldstuck, describes as: “A psychological barrier for investment in e-commerce initiatives by physical retailers.”

Most of South Africa’s largest brick-and-mortar retailers have an e-commerce platform – though to varying degrees of sophistication. Those who have listed online retail as a strategic focus or priority in their annual reports include: Woolworths (food and clothing), The Foschini Group (clothing), Truworths (clothing), Mr Price (clothing), Massmart (branded consumer goods, including electronics, liquor, wholesale consumables), and Pick n Pay (food).

There are also a significant number of e-commerce-only companies. These include Takealot, which sells a range of consumer goods, similarly to Amazon; clothing e-retailers Zando, Spree and Superbalist; and Yuppiechef, a kitchen and household goods stockist.

Last year, multinational internet and media giant Naspers acquired a 46.5% stake in Takealot, and the site merged with Naspers’ South African e-commerce platform Kalahari.[16] Takealot aims to become the continent’s “largest online retailer”,[17] and now also owns Superbalist.[18]

High growth figures, though still a small portion of overall sales

Online trade still contributes a relatively small proportion to overall sales for South Africa’s brick-and-mortar retailers. For example, Woolworths South Africa’s online sales are just 0.5% of total revenue, with food accounting for most of this.[19]

However, online sales growth off this low base is encouraging. Massmart reports that its Makro brand attracted 74% more visitors to the website, and that online general merchandise and liquor income rose by 100% in the first six months of the year.[20] The e-commerce sales of Woolworths increased by 25% in the 52 weeks ended June 2016; Mr Price’s annual figures show online turnover growth of 63.6%, compared to sales in physical stores, which grew by 7.9%.[21] Pick n Pay’s e-commerce revenue went up by 38%, and it claims to operate the largest online grocery business in Africa. [22]

Both Woolworths and Pick n Pay plan to create new ‘picking locations’ (existing outlets from which online orders are collected and sent for delivery) or build ‘dark stores’ (warehouse-like distribution centres dedicated to online shopping). Massmart reported that it rolled out 20 additional pick-up lockers in the last year, allowing customers to collect their goods from convenient places such as petrol stations.

Besides relatively low income levels, internet access constraints and changing people’s shopping habits, among the challenges to brick-and-mortar retailers when it comes to online – and to the future of their physical retail business – is the fact that tech-savvy consumers can see what is being offered globally. This allows consumers to compare prices and quality and, ultimately, choose to order from overseas if they wish to.

Luke McKend, country director for Google South Africa, says Google Analytics show that, “South African consumers tend to showroom; they compare prices online while looking at a product in a shop. So retailers shouldn’t be too focused on mobile conversion rates (although this is important) but rather take a broader view. Customers searching on a mobile may convert in store, rather than online. This makes mobile presence critical for retailers.”[23]

Case Study: Superbalist – giving millennials want they want

Superbalist is a popular online-only retailer among its 18-30 target market. It has transitioned to three different models since starting in 2010, says co-founder Claude Hanan: “Group buying website to flash sales website to traditional fashion retail website.” In the process, it has grown from three to 140 employees, is selling 16,000 products per day, and has been acquired by e-commerce behemoth, Takealot. Hanan started the online fashion retailer “On the premise that… millennials locally demand the same level of shopping experience that their peers in international markets have access to.” He says that at the time, nobody was providing this, “online or offline”.

Part of the way that Superbalist attracts visitors to its website is with editorial content focussed on South African ‘creatives’ and profiles of young people. In other words, its marketing relies on a perception that Superbalist cares about young South Africans – and by proxy cares about what they care about – and that, like them, it is socially responsible and concerned with sustainability. This approach makes sense when considering the finding from Nielsen that: “73% of global millennials are willing to pay extra for sustainable offerings – up from 50% in 2014.”[24]

Hanan says that in five years’ time South Africa will have caught up with the rest of the world, and that there are three things holding back online retail: “Awareness. Cost of data. Investment into the channel by the big bricks retailers.”

Conclusion

Looking at both the traditional retail landscape and the online opportunities in South Africa, Kenya and Nigeria, one thing is clear: if brick-and-mortar retailers want to increase their e-commerce business, and online-only companies want to command a greater market share, they need to convince shoppers that buying online is, most of all, more convenient than – and as trustworthy as – physical stores.

South Africa’s highly developed retail sector means that shoppers can easily go to a store and buy what they need, taking it home immediately. What could convince them to shop online would be price and the quality or variety of goods available.

In Kenya, the troublesome address system means that shoppers might be dissuaded from going online because of the inconvenience of dealing with couriers. However, as this situation improves, online retailers have time to perfect their systems, and entrench habits in areas not accustomed to high shopping centre density, like the secondary cities.

In Nigeria, the Jumia and Konga marketplaces are tapping into a desire from companies to have an online presence, offering them an easier way to do so than by establishing their own platforms. The marketplace model also means that e-commerce companies hold less of their own stock, reducing risk. Low bank-card penetration is also driving online retailers to develop convenient payment solutions that could boost their sales, and reduce dependency on cash on delivery, which adds to overhead costs.

The bottom line is that while online retail may have unique appeal, few will trust their time and money to something that threatens to be more trouble than what they are used to. Online retail needs to be safe, fast and offer a better deal than its physical competitors. It must be, in a word, convenient.

This article was specifically written for the NTU-SBF Centre for African Studies by Jaco Maritz & Helen Sullivan.