Jumia’s IPO puts its profitability on the horizon
Jumia can leverage its first-mover advantage as the first African tech startup on the NYSE to attract all the capital it needs to expand, edge up and eventually become profitable.
Jumia Technologies AG made history on April 12 when it became the first African technology startup to be listed on the New York Stock Exchange (NYSE). Barely days after it went public, Jumia’s market capitalisation surged to $3.07 billion on April 26 from its $1.5 billion valuation on the day it launched its Initial Public Offering (IPO). This pushes forward the “unicorn” status of the e-commerce giant.
To an extent, there are some similarities between Jumia and Amazon, the American e-commerce company. Amazon.com, was founded in 1994; it went public in 1997 and recorded its first profit six years later (2003). Jumia, founded in 2012 as Africa Internet Group (AIG), is yet to record a profit. The company has accumulated losses of nearly $1 billion in the process of executing its growth strategy across Africa.
So far, it is unclear how soon Jumia would turn a profit. Following capital investment in March 2016 from AXA, a French insurance multinational; MTN, the South African telecoms company; among other investors, Jumia’s Co-CEO, Sacha Poignonnec, said the group aimed to be “profitable in the next three years.” Like Amazon, Jumia is a platform for connecting buyers and sellers. It has different subsidiaries, including Jumia Travel, Jumia Foods, Jumia Deals (for classifieds), Jumia Pay and Jumia Services (logistics division).
Jumia’s IPO marks a significant moment in Africa’s burgeoning e-commerce sector and tech ecosystem. Regardless of the quibbles some people have over whether or not Jumia is an African startup, the company’s primary market is Africa. Headquartered in Germany, Jumia's Co-CEOs are French nationals, Jeremy Hodara and Sacha Poignonnec. Nevertheless, its impact on the African continent cannot be ignored.
A Nigerian couple recently testified on Twitter that it joined Jumia as a seller in 2017 with N50,000 worth of goods. As of April 2019, the couple has made sales to the tune of about N5 million. According to Boston Consulting Group (BCG), a global management consulting firm, online marketplaces could create about three million new jobs, ranging from delivery drivers to retail and hospitality workers, across Africa by 2025. BCG said e-commerce can boost African economies by expanding the supply of goods and services, making assets more productive, and unlocking new demand in remote locations.
But despite the euphoria of online shopping and the great potentials of the African e-commerce sector, there are huge challenges that companies like Jumia and its competitors such as Konga and MallforAfrica would need to surmount. Some of these challenges include low internet and mobile banking penetration, trust deficit, logistical difficulties, amongst others.
Because of these challenges, most African economies are ranked in the bottom half of the the United Nations Conference on Trade and Development’s (UNCTAD) 2018 business-to-consumer (B2C) e-commerce index, which measures the readiness of 151 economies for online shopping. The highest-ranked African country, Mauritius, is placed in the 55th position of the index. Nigeria is ranked 75th, followed by South Africa (77th), Tunisia (79th), Morocco (81st), Ghana (85th), Kenya (89th), Uganda (99th), Botswana (100th) and Cameroon (101st).
The index uses indicators that represent the entire process of online shopping, namely internet usage, bank or mobile money account penetration, the reliability of postal services, among other indicators.
Since online shopping cannot take place without internet access, the growth of e-commerce companies in a given market is largely dependent on the availability and penetration of the internet.
As of March 2019, there were 474,120,563 estimated internet users on the African continent, representing 35.9% of the population, according to the Internet World Stats. This is a far behind, compared with the global average of 58.4%. Broadband penetration is even lower in Africa. According to the Nigerian Communications Commission (NCC), Nigeria’s broadband penetration stood at 30.9% as at November 2018. In the United States, 82% of the households have access to broadband internet. Amazon has been able to leverage this to grow its active customer base to over 310 million active customers, although its customer base extends beyond the U.S.
E-commerce companies can only do very little to increase internet access and usage. The onus lies on governments, as BCG recommends, to create a healthy business environment for e-commerce companies to thrive. Despite operating across 14 African countries, including Nigeria, Kenya, Morocco and Egypt, Jumia boasts of only four million active users. This is less than 1% of internet users in Africa.
This leads to the next challenge that is militating against the profitability of Jumia and other e-commerce companies in Africa. This is the ease of making online payment or checkout. Many people are wary of putting their account details online. They prefer to pay on delivery.
According to the CEO of Jumia Nigeria, Juliet Anammah, the company will continue to offer the cash-on-delivery option as long as there are customers not comfortable with online payment.
One of the issues with this option is that it allows customers to cancel their orders arbitrarily or refuse to accept the order, thereby accruing losses to the company which would have incurred the cost of delivery.
Reliable delivery service is key to the fulfilment of the promise of convenience made by e-commerce companies. Part of the logistical nightmare faced by these companies is the poor addressing system in Nigerian and African towns and cities. There are many cases of late and wrong deliveries, consequently discouraging many people from making new orders.
Without a proper street naming and property addressing system, Jumia has invested heavily to enable the company reduce the hassles of delivering orders to customers. Jumia’s efforts in this regard include continuous training of delivery partners, developing technology to track routes, and using data to determine best routes to improve efficiency.
One of the reasons people prefer payment-on-delivery option or completely avoid online shopping is lack of trust. In answering the World Values Survey question, “Would you say that most people can be trusted?”, 85% of Nigerians said, “No”. As stressed by the American Economist, Kenneth Arrow, almost every commercial transaction involves an element of trust. According to him, much of the economic backwardness in the world can be explained by the lack of mutual confidence.
Applying this to the context of e-commerce, which involves commercial transactions with zero to minimal physical contact, the fear of not getting exactly what you ordered for, late delivery, and not getting your refund perpetuates distrust in customers.
E-commerce companies are also wary of making deliveries in certain areas. For instance, in 2017, one of Jumia’s delivery agents was murdered by a customer who didn’t want to pay.
Ultimately, Jumia will need to overcome these challenges, boost its revenue to convince investors that it is a viable business proposition. Thus far, the journey to profitability appears to be long and rough, especially as more competitors emerge. Recently, DHL launched an e-commerce app that allows Africans to shop directly from more than 200 retailers in the United States and the United Kingdom and have their goods delivered by DHL Express.
Nevertheless, Jumia can leverage its first-mover advantage as the first African tech startup on the NYSE to attract all the capital it needs to expand, edge up and eventually become profitable.
Daniel Iyanda is Financial Nigeria’s Staff Writer.
This article is published under the series Finance and Technology, a new platform of Financial Nigeria magazine, promoted by Simplex Business Solutions Limited. Knowledge leaders in the interception of finance and technology are welcome to contribute to the industry platform. Editorial contributions should be submitted to email@example.com.
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