Bad business: the makings of an ecommerce venture in Africa

If you had to pick any industry that Africa seems to have clung onto since its tech boom, it has to be ecommerce. For the most part, it’s relatively easy to set up an ecommerce shop. There may be some logistical challenges, but it seems to be an easier industry to play in.

Ecommerce globally is a big deal these days, but the fall of EcoMom shed some light on online shopping’s dark side. A telling report by the company’s financial controller, Philip Prentiss (one of only three people with knowledge of the company’s financials), exposed how the company was trapped into a loss-making spiral. In essence, its discount model meant the more products it sold, the more money it lost.

For an ecommerce startup, EcoMom had a lot of cash from investors. It also had a good product and, by all accounts, should have been a success. On the surface it was, but on paper it was failing. Prentiss’s postmortem analysis of the company’s financials tells the story of how some ecommerce businesses can become a victim of their own model. It seems that for a every buck ecommerce businesses make, they can lose even more due to heavy discounts, free delivery and competition.

So why is everyone in Africa jumping on this not-too-stable wagon?

“As the next frontier, Africa is seeing some good investment from credible investors, which is helping to drive growth,” says Daniel Guasco, head of Groupon South Africa. He reckons that if you compare “brick and mortar as your starting point, an ecommerce company is easier and quicker. You don’t need retail space and shopping centres”.

This is one of the things that makes this space very attractive – you can start with little to no money and help already established businesses bring their products online, leaving them to handle the logistics. All you need to do is set up a site and integrate a payment gateway.

However, ease of access cannot be the only reason why this space has boomed and why people want to create their own sites, no matter how saturated it gets. For Konga CEO Sim Shagaya, the Nigerian case for ecommerce is quite simple: lack of formal retail.

“Nigerians have been on the search for a great shopping experience, which they weren’t used to with traditional brick and mortar stores found in majority of cities in Nigeria,” he says.

That for him is the inspiration for his company: to empower Nigerians by giving them access to a great selection of goods and great prices which are different from what is found in their locality.

If you think about it, online shopping makes sense for Africa and its growing middle class. As a continent with mostly developing economies, increasing broadband access and a status as the “rising” continent, it follows that Africans will be enthusiastic online shoppers. The African consumer is transacting on mobile devices playing with “petty” ecommerce, if you will, through airtime purchases and other virtual goods – so why not everything else?

So of course it’s big here. It is big here for the same reason it is big everywhere else, Paul Galatis of luxury kitchenware site Yuppiechef notes.

“A heightened interest in Africa and its potential from international investors who all want to be early movers on the continent,” is also a big contributing factor to the ecommerce boom, he says.

It is a great space to invest in, says everyone,  and at the rate new stores are popping up it must make good business sense, yes?

Maybe.

According to Galatis, fewer than one percent of all retail transactions in South Africa are being carried out online. This number is significantly higher in the United States, where he estimates this number to be between 10% and 12%.

“In Africa, I have no doubt this number is tiny — but I believe this that has to do with a combination of: limited but growing access; limited but growing disposable income; but, most importantly, the limited number of online stores delivering exceptional experiences to the people of Africa,” he adds.

So it is a long game and a waiting game, but why are some of the big players with big money running from it?

A few weeks ago Naspers announced that it had effectively shut down some of its more niche ecommerce players, which were all part of the company’s African Internet Accelerator (AIA) programme. The programme was founded in the spirit of South Africa’s supposedly booming ecommerce scene. Is this no longer the case?

For the emerging markets media and internet giant, it seems it is a case of segmenting its “focus specifically on the general e-tail businesses such as Kalahari”. So go where the money is and don’t bother with too many shops.

The case isn’t that much different in Nigeria, though Shagaya takes a more optimistic view to profit and return. Infancy, rather than lack of profit, is the real problem he says.

“Ecommerce in Nigeria is still in its very early stages, the growth of ecommerce in this region will be a lot different from what we have seen in the West. We are building this system out in a way that will work for our own people,” he says.

Gausco agrees. The vision is long-term and that’s where the real return is, he argues.

“You need substantial infrastructure and much resources to properly grow establish a ecommerce company in Africa – probably more so than developed markets – as you don’t just need a store front you; normally need to build the logistics and customers service etc yourself,” he says.

Zando’s CEO Sacha Breuss argues that the last year has been a successful one for the company.

“We have been able to continuously grow our portfolio, underlining our position as South Africa’s biggest ecommerce fashion destination with more than 20 000 different products online,” he says.

But he does not mention whether or not the company, which is rumoured to have retrenched some staff last year, saw any profit this year. Nonetheless, he maintains that the company is “convinced that this is the basis for a profitable and healthy growth going forward”.

“There is a very small market. Online retail in Africa is difficult. Where do you get the product to sell in Africa?” asked Emilian Popa, CEO of Africa Internet Accelerator at Tech4Africa last year.

He cautioned against the ecommerce business in Africa unless you had the money to burn and were willing to wait. The way he saw it, Africa’s challenges when it comes to ecommerce were sometimes far too great and sometimes outweighed the reward.

The future of his company is uncertain at this stage.