E-commerce in Nigeria: The offline story of tricky logistics
Delivery man illustration.  Source: Stears Business

When it comes to shopping patterns, there are periods where the old buying habits of consumers are in flux, and new ones evolve. These phases are golden for retailers.

A few years ago, a statistician at Target, an American retailer, realised that one of those key moments is around the birth of a child. Parents are exhausted and are willing to change shopping patterns while adapting to their new lives. 

Other similar moments include marriage and honeymoons when couples are willing to spend disproportionately more, as well as tragic events like deaths, where families spare no expense to lay loved ones to rest.

Now, pandemics have joined this list. As Brian Dumaine of the Fortune magazine puts it, if anyone were designing a company from scratch that could capitalise on a global crisis, it would probably be an e-commerce giant like Amazon.

In 2014 when the fear of an Ebola outbreak was at an all-time high, online retailers won. The Economist reported that despite poor transport infrastructure, weak technology solutions and a strong distrust of online payments, online retailers in Nigeria boomed.

That year, Jumia saw its orders triple as a result of the outbreak, due to demand for hygiene products like hand-wash, bleach and other cleaning products. 

These tales are not too surprising considering recent episodes of hand-wash scarcity in Lagos and hoarding of toiletries like tissue paper. 

At the time of the Ebola scare, the then CEO of Konga, Sim Shagaya, even expressed how e-commerce businesses had a role to play in limiting the spread of diseases, by allowing people to order goods without risking too much physical interaction.

In 2020, this pattern has returned. 

Globally, shoppers are now turning to e-commerce platforms. Purchases that were previously made in physical stores, such as stocking up essentials for more time indoors and equipment for home offices, are now being made online.

A well-known player in the space, Konga, had “a huge influx of organic customers on its platform than before,” the co-CEO Nnamdi Ekeh tells me.

“These are just people who are maybe using the platform for the first time, perhaps because a friend told them about it or they just decided to go online to find products to buy,” he says. 

This demand surge has even extended to newer e-commerce platforms across the country. Dellyman, an online marketplace for logistics companies established in March last year, disclosed that active customers on its platform grew by 91%, from 830 in January to 1586 in April. 

PricePally, another new entrant for online groceries, which launched in November 2019, reported a 213% growth, from 320 paying users before the pandemic to more than a thousand in the first week of this month. 

A June survey by Visa, the financial services company, showed that 71% of the consumers they interviewed (amongst the banked population) in Nigeria, shopped online for the first time as a result of the pandemic. 

However, the e-commerce business in Nigeria is not for the faint-hearted, and sudden spikes cannot be interpreted as long term sustainability.

The difficulty of doing e-commerce reflects vividly in the business of first-movers. The economics of e-commerce continues to raise questions about how profitable online retailing models can work in a country plagued with trust issues (many shoppers prefer to pay in cash and on delivery), high data costs and numerous logistics challenges.

 

It’s less about the internet

At first glance, even the most experienced entrepreneurs speak about e-commerce in relation to the internet. In 2019, Jumia’s co-founder and co-chief executive spoke with the Financial Times about how the growing smartphone usage in Africa —predicted to reach 690 million smartphone users by 2025— was a key advantage in scaling e-commerce. 

But internet penetration is a high-level narrative that is dying a slow death in light of recent backtracking on this scale strategy.

Konga.com, six years after its establishment as one of Nigeria’s most prominent e-commerce businesses, was reportedly acquired in 2018 for $1 (note that this figure has not been officially confirmed and the cash consideration may not reflect the nature of the deal structure). 

This year, Jumia.com lost its original investor, Rocket Internet, which sold its 11% stake. This action followed Jumia’s release of its 2019 report, where its fulfilment expenses (handling orders from packaging to shipping of goods) ate into its overall performance. In other words, the company spent more money on transportation of products to customers than it earned. 

The business of e-commerce seems simple: the buying and selling of goods over the internet. But the real value proposition of e-commerce is in logistics; the ability to move goods accessible online to a customer’s physical location, as quickly as possible. 

So, a customer in Mbieri village, Imo state, might be able to access a brand new e-commerce website launched in Yaba, but can that company profitably deliver its goods to that customer if its warehouses are 300 miles away in Lagos?  

It’s complex in Africa’s largest economy. 

 

It’s more about logistics

One of the significant factors that cripple the business of e-commerce in Nigeria is logistics. Global giants like Amazon are well aware of the challenge. Since Amazon’s inception, it has built a strong business on the back of data-driven insights that enables it to scale retailing successfully. 

Amazon’s business is powered by algorithms that can scan buying patterns to adjust what the company stocks in its warehouses, which locations to stock in and the fastest way to deliver it.

Before the pandemic, its success at executing this complex job led it to develop a reputation for near-instant delivery. Now, due to Covid-19 induced supply chain disruptions, some of its goods now take as long as four days to deliver, and non-essential items even longer. 

“Initially, when Konga launched in 2012, because of the low volume, we were able to use the likes of DHL, UPS and FedX,” Ekeh explains. “At that point, Nigeria never had any big National delivery network [capable of fulfilling 48 hours to 3-day deliveries].” 

 

A DHL truck

Source: Gerard Donnelly

 

Although logistics companies like DHL, UPS, and FedEx, are well-established in Nigeria, they operate a limited network. These companies are better at delivering goods from one hub in one state to a hub in another. But they don’t cover all 36 states. 

Delivery of some goods could then take up to a week or more. And customers may even visit collection centres to pick-up items themselves. 

Relying on those businesses for last-mile logistics (the delivery of goods to end-users’ destination on time) which is the core focus of e-commerce, wasn’t productive. 

As an online marketplace, Konga’s value proposition is dependent on its ability to deliver items to consumers as fast as possible. Its selling point is less about the products it sells on its website and more about the service it offers. 

“I always tell my staff that we are not trying to sell products at Konga; we are trying to change the way people buy. Which is a more difficult task,” Ekeh says.

So customer fulfilment is a priority.   

Globally, an advantage for big e-commerce businesses during the early stages of operation is the ability to rely on a country’s postal service for package shipment. 

For instance, Amazon historically relied on the US Postal Service, USPS, and third-party logistics companies, like UPS and FedEx (which have a more robust network abroad than Nigeria), for the delivery of goods to customers. It did this until last year when it gradually started abandoning them after building its own logistics network.

E-commerce retailers in Nigeria don’t particularly have this advantage of a national postal service. The Nigerian Postal Service, Nipost, the local equivalent to USPS, suffers lapses that are detrimental to e-commerce retailers such as late delivery of goods and general inefficiency due to poor infrastructure and funding.

Spotting how important logistics is, two founding executives at Jumia (Tunde Kehinde and Ercin Eksin) launched their online logistics company, African Courier Express (ACE) in 2014, following their exit from Jumia.

Four years into the business, Konga launched an exclusive logistics service, K-Xpress, as a solution to the problem it faced delivering goods to customers on time. While it took up to a week to deliver products before, it can now take two to three days.

Although adequate logistics improve delivery time and increases the likelihood of retaining customers, the cost of building stronger logistics networks —akin to the 1-day delivery services offered by the likes of Amazon Prime, can be prohibitive for new players.

 

Beyond logistics, warehousing is key

In Lagos, Domino’s Pizza will not deliver to you if none of their branches is close to your location. 

Considering e-commerce is less about the website and more about the capacity of the retailer to move an order across distances cheaply, the closer that item is to the customer, the faster the delivery will be. And possibly, the lower the cost for the business.

As an e-commerce business, warehousing is of crucial importance in the success of supplying products to end-users. 

Amazon, the fourth most-valuable firm in the world and a global e-commerce giant, has ruthlessly built an efficient delivery network, by experimenting with a few approaches.

One strategy is called commingling. To quicken delivery time, Amazon tracks its inventory so accurately that it identifies an exact replica of the product closest to the customer, and delivers it to them. 

In other words, the pair of Adidas shoes a customer orders from one third-party merchant on Amazon, might not necessarily be from that seller’s goods or what they submitted to Amazon’s warehouse. 

Consider this: the physical limitations of travel control the time it will typically take to deliver a product to a customer in Imo state from Lagos. But if the buyer’s product can be shipped from a warehouse closer to their location, then that time boundary can be broken. 

This is critical for customer satisfaction. A survey showed that almost 90% of consumers identify the speed of shipping as a key factor in the decision to shop with an e-commerce brand again.

Commingling gets risky, though. 

When one replacement merchant’s product is fake, and the original seller's is not, it ruins the system. The seller gets paid once the customer receives the product. But could also get the flak from a customer for faulty goods from a different seller's inventory. For this system to work well, both commingled products have to adhere to quality standards.

This is a heightened risk in Nigeria, where customer trust is at an all-time low and fake products are widely available. Nigerian customers already distrust online retailers and have pushed them to experiment with models like payment on delivery. However, even these approaches prove tricky.

Jumia had to restructure its business so that riders no longer carried significant cash around while dealing with the reality that cash on delivery had a much higher return rate.

In a country where buyers are sceptical about paying for goods online and are more willing to shop from international e-commerce platforms, there is a limit to the potential for experimenting with these new warehousing techniques.

 

Adopting a similar approach by prioritising proximity for deliveries

However, online retailers have learnt from experience. To survive, they’ve engaged in partnerships and increased physical outlets to improve their service to customers. 

Konga did a merger with Yudala, another e-commerce company —as part of the restructuring that took place when it got acquired in 2018— to increase its retail outlets. 

Yudala’s initial business model was to complement physical retailing with e-commerce. So after the merger, both retailers took advantage of business synergies. 

Konga reportedly had over 10,000 third-party sellers registered on its site. Yudala, on the other hand, reported 21 physical retail outlets in 10 Nigerian states, though it simultaneously managed an e-commerce site for the stores. That helped Konga to increase its physical locations for warehousing, which allows it to control product collection from third-party retailers and maintain the distribution and replacement of inventory. 

“We now have what’s called the omnichannel model, where you have physical stores; we also have our online e-commerce business, the online marketplace,” Konga’s co-CEO, Nnamdi Ekeh tells me.

The merger has helped to have more reliable stores closer to customers’ actual location, especially as bad road networks and infrastructure have been one limitation to e-commerce operations in the country. 

More so, it further helped to secure payment at the collection centre for customers who did not want to pay online. 

 

Online purchases

Source: Rupixen via Unsplash

 

Another e-commerce business, Dellyman, is taking a similar approach to prioritise proximity. It’s an online marketplace for logistics services which aggregates the assets of other logistics companies on its platform, then connects users (e.g. a cake seller) to a logistics vehicle (bike, van, etc. depending on the load for dispatch) closest to them for deliveries. 

So as always, Nigerian businesses are finding solutions. But one fundamental problem remains - the low purchasing power of Nigerians. 

Lack of discretionary income stifles the scalability of investment in e-commerce. For now, e-commerce retailers can only scale as far as the existing infrastructure allows. 

 

The real battle is in finding profitable customers

When Efritin.com, an online marketplace, closed shop after barely 16 months of operating, its Swedish investor, Saltside, explained that they “didn’t get desired returns on their investment.”

One of the likely reasons was because it didn’t have enough active customers to sustain the business. This is despite Nigeria being Africa’s most populous nation. 

Having an active user base is crucial to recurring revenues of any retailer. Otherwise, the costs will overwhelm the business. Essentially, fixed costs and the need to reinvest in growth mean that even when the business isn’t generating revenue, it still has to spend. Due to the increasing costs of doing business in Nigeria, profits are a long way off for most retailers.

When an e-commerce retailer launches, it needs to make major one-time investments in fixed assets such as its warehouse, delivery infrastructure, and technology. Over time, it has to cover expenses like rent, utilities, electricity and human capital across various departments like sales, warehousing, delivery and customer success.

Besides, retailers risk incurring significant expenses in marketing, which are crucial to acquiring customers. Across the world, and especially in growing markets like Nigeria, it is more expensive to acquire new customers than it is to retain old ones. And marketing isn’t cheap. 

Back in 2014, during the heyday of the drive for new customers, Konga’s initial marketing budget of $1 - 2 million for the final quarter of the year, more than doubled to $5 million due to a marketing war with Jumia.

But, even though marketing helps to acquire new customers (especially first-time users), it doesn’t guarantee that they will stay long enough to improve the average revenue per user.

 

Unit economics helps us understand the business model of e-commerce 

Spending large sums on marketing must align with the amount of revenue it attracts. Here, two concepts from the unit economics playbook are helpful: the lifetime value of a customer (LTV) and the cost to acquire the customer (CAC).

LTV refers to the amount of revenue that a company can anticipate receiving from a single customer throughout the life of the business. The CAC is the total cost to acquire that customer.

This approach helps to answer a fundamental question, which is the basic building block of all e-commerce retailers: can you generate more revenue from each customer, than you spend acquiring them?

This is particularly important for a business model that relies on continuously increasing growth because it has a low margin on each product.

“E-commerce is an at-scale business,” explains Olumide Olusanya, an expert in the space who pivoted from e-commerce, GlooNG, to e-procurement, GlooPro.

This scale assumption gets even trickier when you consider the size of the market. 

“There are not enough customers to sustain an e-commerce business in Nigeria, which is why people start and shut down. How many deliveries are you doing, and are you doing enough of that to cover your fixed costs or indirect costs as the case may be,” he tells me.

Nigeria’s large population (over 180 million, which makes it the most populous country on the continent) and its huge number of internet subscribers (138 million as of April 2020, highest in Africa and the sixth-largest in the world) makes it a high-interest market for e-commerce.

But it is an illusion. Nigeria’s addressable market for online retailers is significantly smaller, and it is part of the reason many e-commerce businesses have pivoted from the market. 

In January 2019, BusinessDay reported that e-commerce businesses struggle to count up to 500,000 active customers in the country. For context, Amazon, the behemoth that has inspired many e-commerce retailers, has more than 150 million Prime members —a number that grew by more than 50 million in the last two years. Prime members do not reflect the size of Amazon’s overall customer base, but only those who subscribe to its premium service.

 

It’s all in the numbers 

No doubt, this is a good time to be in the e-commerce business, and today’s online retail stores will grow from this influx of users. Being an e-commerce retailer is about growing the market —and there is room to grow. The Economist reports that fewer than 1% of retail sales in Jumia’s markets take place online, while Mckinsey bets that this will increase to 10% by 2025.

But in the meantime, e-commerce retailers will need to pay attention to customer habits and hooks —there is a risk that today's pattern will revert once the pandemic dies down. The e-commerce model fundamentally relies on active users that generate recurring revenues and not just those who utilise the service at irregular intervals.

As much as these new e-commerce businesses announce the recent rise of customer activity on their platform, the real value to the company is how much these new customers spend. And for how long. 

Think of it this way: 100 active customers spending ₦100 every day only during lockdown is less valuable than ten active customers spending ₦10,000 daily now and post-pandemic.

 

Follow our financial journalist on Twitter @fisvyo

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