E-commerce is Africa’s big opportunity, we are told. And so it is, with more people getting online, rising incomes and improving logistics, online shopping has rightly been identified as an exciting sector for Africans starting businesses and those looking to invest in them.
Yet an e-commerce play is by nature a long-term one. For all the attention foisted on the likes of Jumia and Takealot, these companies remain unprofitable, the latter to the extent that it was forced to merge with its major competitor. The reason for this, is at though future prospects for e-commerce are widely assumed to be excellent, for time being the market is simply too small.
This was demonstrated by a PwC survey released this week in South Africa, which found South Africans still prefer to use physical shops as opposed to buying goods online. This is unlikely to change for a long time – even in places such as the United Kingdom (UK) and the United States (US) online retail accounts for only around 15 per cent of purchases. But with online retail sales in South Africa sitting at less than one per cent of the total, the long road ahead for e-commerce is as in evidence as the significant opportunity.
The physical store is still the main contact between the retailers and consumers, and though more than half of South Africans say they have researched products on their phones or used them for price comparisons, only nine per cent used their phones to pay, with almost half of people citing security concerns.
This small market size is not an issue restricted to South Africa, it exists across the continent. Only 26.5 per cent of Africans are connected to the internet, while the United Nations says eight of the 10 countries with the lowest levels of internet availability in the world are in Sub-Saharan Africa. And with those that are connected still not shopping online in their droves, the road ahead seems a long one.
This accounts for the need to take some tough decisions in terms of making the sector less competitive. Takealot adequately sums up both the sense of opportunity and problem in the sector, raising US$100 million in funding from Tiger Global and then merging with Kalahari. The company admitted to the move was driven by the need for scale in order to compete against brick and mortar retailers.
Aside from the size of the market – which is the major factor in hindering the growth of e-commerce – there are other challenges for those launching such businesses. There is a lack of adequate logistics infrastructure, which is crucial to e-commerce businesses. This has been a particular issue in Nigeria, where the likes of Konga.com have had to develop their own fleet services – at considerable cost – in order to overcome logistical challenges. It will also take time for e-commerce businesses to overcome skepticism when it comes to buying online, particularly when it comes to payments security.
In the meantime, customer acquisition is the name of the game, with companies like Jumia putting off profitability until another day as they look to scale to as many countries as possible and raise the profile of e-commerce. The investment has kept rolling in, meanwhile, with the likes of Jumia, Konga and Takealot having become serial fundraisers, and more niche e-commerce sites springing up every day.
These investors know e-commerce is a long game given the currently small market size, but they have serious long-term benefits in mind. The same PwC report referred to above predicts the value of online retail sales in South Africa will rise to ZAR9.5 billion (US$770 million) by 2018, while Frost & Sullivan estimates the e-commerce market across Africa as a whole will be worth US$50 billion by the same year, compared to US$8 billion in 2013. It is projected figures like this that keep entrepreneurs and investors alike flocking to the sector in spite of the more short-term difficulties.