On April 12, 2019, Jumia—Africa’s largest e-commerce company and the first African tech unicorn—debuted on the New York Stock Exchange. The company’s stock was priced at $14.50 and is now trading at $23.29, at the time of this writing, representing a 60% increase in value since its debut. Although Jumia has accumulated close to a billion dollars of losses, the company is now worth close to $2 billion. How can Jumia sustain its growth?
Online shopping in Africa comes with a unique set of challenges as e-commerce is still nascent. Many customers are wary of paying online, to which Jumia has responded with payment on delivery. And though Jumia’s target market is enormous—approximately 700 million people live in the 14 countries where Jumia operates—many of these potential customers lack data connections and live in extreme poverty.
To reach as many people as possible under these conditions, Jumia does more than just e-commerce. The tech company also offers a travel website, a food delivery service, and more. But for Jumia—or any other e-commerce platform company in Africa—to succeed, the company should not shy away from targeting nonconsumers of e-commerce who have traditionally been unable to access it due to cost, complexity, and other factors. If entrepreneurs develop a viable business model that targets this vast nonconsumption, they will not only stand to gain significant returns, but will also create a strong foundation for development in many countries where they operate.
Developing a business model that targets nonconsumers
To do this, entrepreneurs can learn from the wild success of discount retailers, who developed an entirely new business model targeted at the low end of the retail market and eventually disrupted full-service department stores. It happened like this.
Full-service department stores, which traditionally targeted customers looking for a seamless and luxurious shopping experience, offered their customers excellent customer service with sales attendants who were very knowledgeable about most products in the store. In order to make money considering their cost structure, they needed to have a 40% gross margin on their sales for a 120% annual return on capital invested in inventory (ROCII). This worked for them until the emergence of discount retailers in the 1960s.
Around this time discount retailers Wal-Mart and Kmart recognized an opportunity to target people who couldn’t afford or access department stores—nonconsumers—as well as current customers of department stores who would gladly pay less for a less luxurious experience. To reach these customers they needed to completely reimagine the industry’s traditional business model. Discount retailers reduced operational costs by offering nationally branded hard goods such as paint, hardware, kitchen utensils, toys, and sporting goods which didn’t require them to hire highly knowledgeable or well-trained salespeople who knew every detail about most products on the shop floor. In addition, at the onset, discount retailers selected unserved or underserved locations for their stores. Wal-Mart, for example, opened stores in rural areas where there were few large retailers. This decision not only decreased competition, but it also increased foot traffic as customers now had a one-stop shop close by.
Other modifications included stockpiling policies, operating processes, and supplier relationships that allowed these companies to turn inventories more than five times annually, in comparison with full service department stores that had annual inventory turns of three. Notice that the discounters didn’t accept lower levels of profitability by targeting the low end of the market; their new business model enabled them to make money at gross margins of about 23% on average, and maintain a similar 120% ROCII as the full-service department stores.
The e-commerce retail business is no different. To capture the vast nonconsumption that exists in Africa, Jumia will need to construct an entirely different business model from one that targets existing consumers. For instance, Jumia will need to spend significant resources educating the public on the merits of e-commerce. This decision is not dissimilar from that of other companies who create new markets. When Tolaram introduced Indomie Noodles into the Nigerian market, most Nigerians thought the product was worms. But the company educated the public on the product and today sells more than four billion packs of noodles in the country annually.
In addition to education, Jumia will also need to continue to invest in the necessary infrastructure to enable its products to reach its customers. In order to make and successfully sell noodles, Tolaram built electricity power plants, water treatment facilities, a logistics company, a packaging company, and distribution and retail outlets. In the same way Tolaram isn’t just a noodle company, Jumia isn’t simply an e-commerce company. It must also be a logistics, infrastructure, and education company, because these are some of the things that are necessary when creating a new market.
For Jumia, the path to profitability requires trial and error as the company learns how best to address the needs of its new customers. But if the company continues to focus on targeting nonconsumption, it is likely to live up to its hype and spur significant development as it provides jobs, invests in infrastructure, and generates tax revenue for the governments where it operates. Whether investors in the public markets are willing to wait for the company to do that is an entirely different story.