How the Private Sector is Shaping African E-Commerce

14 March 2018

The growth of the Internet can generate significant economic opportunities in Africa, in particular when it comes to e-commerce. What are the challenges hindering the development of African e-commerce, and how can the private sector reap the opportunities?

 

After the dramatic take-off of mobile telephony in Africa, the growth of the Internet is the next technological revolution expected on the continent, encouraged by urbanisation, the development of the middle class, and the high demographic proportion of young people. For now, the trend seems to be developing. Internet adoption is increasing, in particular south of the Sahara where the percentage of individual users grew from 7 percent to 20 percent of the population between 2010 and 2016 according to the World Bank. This evolution seems promising for Africa, as the growth of the Internet should help solve some of the major issues hindering the development of all the social and economic sectors, such as high transaction costs, spatial constraints, limited information exchanges, and lack of access to international markets. Digital solutions are appearing in non-market sectors, such as health, education, and governance. However, the growth of the Internet also presents new opportunities related to domestic e-commerce, that is to say the trade of goods and services through the Internet between companies (B2B) and between companies and consumers (B2C).

Over the last two years, this sector has been hugely popular with investors and entrepreneurs, galvanised by the current and expected dynamism of the e-commerce market in Africa, which could represent 75 billion dollars in 2025.[1] However, those who have embarked on this adventure are not finding it an easy ride. Regardless of the enthusiastic speeches about the technology leap in Africa, the spread of the Internet is limited on the continent by the low level of development as well as the market conditions. The simple transfer of e-commerce models that exist elsewhere does not work as it is ill-suited, which explains why international leaders of the sector such as Amazon and Ali-Baba have not yet established themselves there. The constraints with which operators are faced in Africa – both upstream and downstream – force them to develop skills and innovations unlike those that are needed in developed country markets. Through their actions, these key players help shape the structures and the ecosystem of African e-commerce.

The challenges of e-commerce in Africa

E-commerce was first developed in the more advanced countries. Its growth was fuelled by the wide-scale adoption of the Internet in these societies, which gave birth to a critical mass of connected consumers, in addition to company strategies that successfully captured this developing market. However, it is also connected to other contextual factors, in particular material factors. In these developed markets, online traders were able to levy the necessary logistical infrastructure, such as effective transport networks and postal systems, in order to be supplied and to deliver to customers. They turned to consumers from high-income countries who, due to their high purchasing power, their use of the banking system, and their trust in legal systems, quickly occupied e-commerce’s intangible market space.

Africa does not present such a favourable environment. The low level of development creates many barriers to the development of e-commerce, on top of the general obstacles related to the business climate.[2] The first barrier, which is present before the launch of any e-commerce activity, is related to the income level of Africans and gives grounds for questioning the true potential of the sector. Indeed, the growing interest for e-commerce in Africa is fuelled by hope arising from the emergence of an African middle class as a consumer class. However, although this middle class is today estimated at 350 million people, 60 percent of them belong to the "floating" middle class and have an income of between US$2 and US$4 per day, just above the poverty line.[3]  In total, more than three quarters of these people have an income under the US’ poverty line, which is set at US$13 per day. Although this international comparison in absolute terms is biased, as purchasing power depends on the cost of living, it provides an idea of the limits this level of wealth sets for the trade of consumer goods and services in Africa. On average, more than half of the expenditure of African households is on food.[4] After adding housing, transport, health, and education costs, the part of the budget devoted to purchasing non-essential goods is minimal for the lower categories of the middle class, in both absolute and relative terms.

The issue of purchasing power is crucial for e-commerce, as it limits the capacity of Africans not only to buy IT equipment, but also to access the Internet. In Côte d'Ivoire, for example, prepaid offers of 100 mega octets of browsing cost on average US$0.75, which represents a significant transaction cost for online purchases for these specific income levels. In addition, the number of potential consumers in the middle class, represented here on a continental level, is further reduced by the fragmentation and limited integration of African markets, which generally restrict the operational scope to national markets only. Furthermore, beyond the issue of purchasing power, other upstream structural constraints limit the development of the e-commerce market. For example, there are cognitive barriers related to illiteracy, or at least to the low level of digital literacy, while in some countries the geographically uneven development of telecommunication networks hinders the wide-scale spread of the Internet.

It therefore seems as though e-commerce’s target market must limit itself to the richest classes and the upper middle class, as well as the diaspora community, as illustrated by the case of Afrimarket, a start-up which allows people to order online items from France and then organises their delivery to several French-speaking African countries. However, even though the segments of connected consumers are expanding, operators are also confronted with downstream operational constraints that are preventing them from easily penetrating this market. One of the main obstacles is the low penetration rate of banking services and the predominance of cash transactions, which further limit the development of online cashless transactions, all the more so as these cause mistrust due to the real or perceived digital insecurity that prevails in African countries. Furthermore, e-commerce is stymied by social and cultural practices in countries that have still not fully transitioned towards supermarkets and where markets are still a community activity and a place for socialisation. Finally, even once these constraints have been overcome, online traders are still confronted with logistical nightmares. The inadequacy of road networks, even in large cities, and the lack of a postal system create costly regularity and flow issues in the product delivery phase. Along with the issue of purchasing power, managing the “last mile” is probably one of the main challenges with which of these operators are faced.[5]

A sector that appears dynamic

Despite these constraints, e-commerce shows itself to be a dynamic sector in Africa. A recent report entitled Afrishopping identified 264 companies engaging in e-commerce activities in 23 African markets, in various subsectors of online sales, including capital goods, clothing, taxi services, and travel.[6] The report also identified a high concentration in a few national markets such as Kenya, Nigeria, and South Africa. Within the sector, there is a wide variety of players, both in terms of size – with the presence of small start-ups as well as large multinational groups – and of industrial trajectory. Indeed, a few companies specialised in e-commerce from the start, whereas others came to it from another activity, like the Safaricom group in Kenya which intends to apply its understanding of mobile payment technology to sales through its online platform Masoko.

This apparent dynamism does not belie the difficulties and constraints mentioned above. On the contrary, several experiences have revealed the extreme vulnerability of businesses, including those with the most support, such as Kenyan company Kalahari and South African company Mocality, who ceased trading in 2011 and 2013, respectively, and the French company Cdiscount which, in 2016, limited its activity from three countries to one country – Côte d’Ivoire. These three companies, just like others, stated that they could not find the expected profitability in these African markets. The Afrishopping report mentioned above estimated that less than 30 percent of e-commerce ventures generate profits. De facto, the current trend is much more complex than it seems. The case of the Jumia group, sometimes called the "African Amazon”, may help determine its nature.

Jumia is an e-commerce platform founded in 2012 in Nigeria by the Africa Internet Group, a subsidiary of the German company Rocket Internet. The group has progressively become more international while developing several start-ups specialising in various e-commerce subsectors (sales, real estate, catering, etc.). After being united in 2015 under the umbrella of the Jumia Group, they became an ecosystem of nine companies that are currently active in 23 African countries. In 2016, the group received investments of several hundreds of millions of euros from large investors such as Goldman Sachs and Axa Assurances, turning Jumia several months later into the first African “unicorn”, valued at more than a billion US dollars. However, these trust marks struck a false note in comparison with the group's actual results, as it has constantly shown deficits since its creation, despite a remarkable increase in revenue from 29 to 135 million euros between 2012 and 2015. This interest for Jumia can be explained by the rhetoric of its leaders. They describe their project as a long-term opportunity which aims to position the group advantageously in a market that is about to emerge.[7] In other words, Jumia is not looking to make an immediate profit but to prepare its future conquest of the African e-commerce market. This forward-looking perspective, which is used by other key players, does not mean that they are passively waiting for this emergence: faced with significant constraints, they are designing adaptation and transformation strategies.

The strategies of African e-commerce firms

Given the market conditions, e-commerce firms implanting themselves in Africa cannot be content with reproducing online sales models that exist elsewhere. In order to operate, they must adapt themselves to material constraints and consumption patterns. The main break with the original e-commerce model is the high level of investment made in offline activity and associated human resources. This can be seen, for example, through the development of call centres, responsible for monitoring orders and relationships with a customer base that is often inexperienced, and the acquisition of a fleet of vehicles dedicated to delivering items and collecting cash payments. Given the lack of street names, the knowledge of traffic and delivery areas acquired by the drivers thus becomes a competitive advantage. Another example of tangible investment is the creation of exhibition halls for items that will then be sold online, which helps develop personal connections with customers while slowly gaining their trust.[8] Through these adjustments, operators may progressively penetrate the consumer market as it exists today.

These strategies are not limited to adaptations. Faced with the weaknesses of the market, operators have set up corrective actions on several levels in order to promote the use of their platforms and grow the consumer market.[9] This approach consists of investments into training suppliers on their B2B information and online ordering systems and into marketing campaigns to reach the population. For example, Jumia sends its "JForce" to regions and neighbourhoods that are poorly connected: agents with tablets who present the platform to passers-by and show them how to order. Online traders are also investing into the development of multilingual mobile applications in response to the preferred use of smartphones to access the Internet as well as the ethnic diversity of potential consumers. The crucial element is the integration of mobile payment technology to increase the volume of cashless transactions and limit processing costs for cash payments. This payment method is sometimes promoted through discounts for those who use it to pay for their purchases. Finally, operators are using their experience of the market and the data gathered to lobby the authorities on e-commerce, for example by producing reports on the state and weaknesses of this sector – something Jumia does regularly – or by implementing social and environmental self-regulation in order to strengthen their reputation among leaders and consumers, like the Kenyan group Kilimiali which recently joined the “Buy Kenya Build Kenya” initiative.

Conclusion

The current dynamism of e-commerce in Africa stems from a forward-looking and forward-planning approach on behalf of the operators. By establishing themselves in immature markets, they are shaping an original model of African e-commerce. It differs from that of developed countries through its intense offline activity, which is necessary in order to overcome the many constraints of the marketplace. The operators are implementing adaptation and mitigation strategies, the purpose of which is firstly to position themselves on the market and then to consolidate this position, respectively. By contributing in this fashion to the spread of e-commerce, they are providing an example of the role the private sector could play in Africa’s economic transformations. However, they still need to be supported by the states through high quality infrastructure, the effective promotion of Internet access, and more favourable business regulations. Given the positive effects of e-commerce on development, including by enhancing market access for populations, boosting the economy’s performance, and encouraging the formalisation of trade (thereby increasing tax revenue), African states have a crucial role to play alongside operators in the co-construction of the digital economy.

Author: Maxime Weigert, Economist, Geographer specialised in Africa.


[1] McKinsey Global Institute. Lions go digital: The Internet’s transformative potential in Africa. November 2013.

[2] Elsmani, Rusha, Rahim, Abdul, and Mahmoud Mohammed Abdelgadir. “A Review of the E-commerce Barriers Faced by the SMEs in Africa.” International Journal of Innovation and Business Strategy (IJIBS), Vol. 7, No. 1 (2017).

[3] African Development Bank, Organisation for Economic Co-operation and Development, United Nations Development Programme. African Economic Outlook. Paris: OECD, 2017. The following analysis on income details is based on an analytical and methodological study of the middle-class published by the ADB in 2011, to which the AEO refers when it comes to assessing the scale of the middle-class: Ncube, Mthuli, Lufumpa, Charles Leyeka, and Steve Kayizzi-Mugerwa. “The Middle of the Pyramid: Dynamics of the Middle-class in Africa.” Market Brief, African Development Bank, 2011.

[4] See also for example Bricas, Nicolas, Tchamda, Claude and Florence Mouton (eds.). L'Afrique à la conquête de son marché alimentaire intérieur. Enseignements de dix ans d’enquêtes auprès des ménages d’Afrique de l’Ouest, du Cameroun et du Tchad. AFD, “Études de l’AFD” collection, no. 12, 2017.

[5] Expression borrowed from Jonathan Rosen’s article “Ghana’s last mile”, MIT Technology Review120, no. 1 (Jan/Feb 2017).

[6] Disrupt Africa, Afri-Shopping: Exploring the African E-commerce Startup Ecosystem Report 2017, 2017.

[7] RFI. “Jérémy Hodara, co-fondateur et co-dirigeant de Africa Internet Group.” 9 January 2016.

[8] See the example of Chinese company Amambo in West Africa in Sarkar, Sudeshna, “Sino-African e-commerce takes off”. African Business 439, Mach 2017.

[9] Weigert, Maxime. “Jumia Travel in Africa: Expanding the boundaries of the OTA business model.” Tourism Review, 2018 (In press).

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