Why B2C e-commerce hasn't yet scaled in African markets
This week, select members of the Afridigest Thought Circle—an expert community of founders, investors, executives, and thinkers—provide insight, commentary, & analysis on e-commerce in Africa.
Afridigest provides ideas & analysis for startup founders, operators, and investors across Africa and beyond.
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This week, Thought Circle members were asked to reflect on the state of e-commerce across Africa and share thoughts on why it hasn’t yet scaled. For example, Jumia, the continent’s most notable e-commerce player, reported "annual active consumers" of just 6.8 million on a continent of ~1.3 billion people.
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QUESTION OF THE WEEK
Why hasn't B2C e-commerce taken off at scale across Africa (yet)?
Often-mentioned factors tend to include internet penetration rates, smartphone penetration rates, logistical & delivery challenges, underlying payments infrastructure, market fragmentation & operational costs, over-reliance on cash, poverty, and trust. Which of these, if any, or what else are the primary factors in your view? What would it take for e-commerce to take off at scale? During what time frame do you think e-commerce will blossom across Africa, if ever? Or do you find this question's assumption mistaken and take the view that e-commerce has indeed taken off across Africa already - perhaps in another form, for example via Instagram and Whatsapp?
Firas Ahmad
Group CEO & Co-Founder, AzamPay
AzamPay develops payment management solutions for companies operating in East Africa. It’s associated with the Azam Group, one of the leading industrial conglomerates in East Africa. The Azam Brand was ranked as the 5th Most Admired African Brand by African Business Magazine in May 2020.
For e-commerce to take off at scale in Africa the following four key issues must be addressed:
Smartphone penetration has not reached critical mass among end consumers for widespread e-commerce. Those that do have smartphones may not even use them as smartphones, focusing primarily on Whatsapp as a communication tool or for the phone itself as a status symbol. Smartphone penetration is not enough, in addition, smartphone fluency is required — meaning a critical mass of consumers capable of downloading and placing an order on a smartphone without any technical support or hand-holding.
Total Addressable Market – The number of middle to upper-class consumers with the financial resources to purchase online remains limited and highly fragmented across major cities. E-commerce operators face an uphill climb with respect to economies of scale required to manage logistics, inventory, and produce profits given relatively smaller, localized customer bases. This can be both a challenge and an opportunity. Ultimately, as African economies continue to grow, we will reach a tipping point where the addressable market achieves the required scale and operators start to see value in recovering costs associated with servicing customers. In the immediate to medium term, e-commerce operators will either sustain losses or have to be creative about how they address the customer base while keeping transaction costs low.
Logistics and Last Mile Delivery – Reaching the end consumer with products is a complicated task. If you look at e-commerce providers who achieved scale in developed markets, they did so on the backs of existing third-party logistics carriers. For example, Amazon, for the first 20 years of operation, shipped all its products through the US Post Office, UPS, or FedEx — all highly mature, cost-effective, and reliable options. Furthermore, the range of options allowed Amazon to negotiate lower rates across all three providers, passing savings on to consumers while keeping costs low. For Amazon, the problem of getting the product to the consumer was not something they had to solve internally to reach scale. Outsourcing logistics to proven third party providers with adequate service level agreements and guaranteed delivery confirmations means Amazon could focus on the business of selling and distributing without concern for last-mile delivery. This is not the case for African operators who must take the entire logistics value chain in-house or risk quality of service issues totally out of their control. The lack of qualified and reliable third-party logistics providers is a major impediment to scaling digital commerce in Africa.
Trust – Without trust, there is no e-commerce. If the customer doubts whether the product they ordered is the one they will receive at the price they agreed to, no transactions will take place. Service level requirements, delivery confirmations, return policies, transparent pricing, escrow payment mechanisms, quality products, and other factors all contribute to whether or not consumers will be open to using e-commerce to purchase goods and services through their phones. In particular, payment platforms must go beyond payment processing and look into models of trust facilitation for digital commerce. In mature economies credit cards managed this trust between buyer and seller, however as all transactions on mobile money are pre-paid, this functionality is not native to mobile money. A systematic trust mechanism built into payment networks is necessary for e-commerce to develop.
While there are significant challenges to e-commerce in Africa, the opportunity is tremendous. By aggregating demand across larger populations, e-commerce holds the promise of delivering products and services that otherwise would not reach African consumers for many years. While e-commerce started in the US and Europe as primarily a convenience tool, in Africa it can begin as a primary shopping experience especially for higher-value products that are not widely available.
Nivi Sharma
COO, BRCK & Co-Founder, eLimu
BRCK operates the biggest public WiFi network in sub-Saharan Africa and is the on-ramp for frontier market internet users. After the 2019 acquisition of Surf, BRCK’s network includes over 2,000 public hotspots across Kenya, serving over 500,000 users a month. (And eLimu is East Africa’s leading digital educational content provider.)
Digital access continues to be a big barrier for e-commerce — access in terms of:
smartphone ownership
access to a 2G/3G/4G/WiFi signal
affordability of connectivity, and
digital literacy about how to vet and navigate the e-commerce space.
Logistical/delivery challenges are also important. In Kenya, a big limiting factor to B2C e-commerce was the lack of an effective postal system combined with the lack of physical addresses. This was overcome by