Gloo. ng and Supermart. ng Should Merge

Gloo.ng and Supermart.ng are the two leading food-focused ecommerce companies in Nigeria. They are doing businesses in one of the most difficult sectors to execute any type of ecommerce operation. It is very hard to standardize grocery, and also the quality element is not a pure science. Yet, these two companies are accumulating capabilities to serve customers, find growth, and flourish.

Supermart is a grocery delivery service that enables shoppers to buy grocery from different supermarkets and stores, and then deliver the purchased items to the customers. This company essentially does not carry any inventory. It is an aggregator. The implication is that it can enjoy high scalable advantage digitally. However, since it runs a delivery company, in a nation with no postal service, it has a huge marginal cost in the physical part of the business. No wonder, it has a geographical boundary where its services are available. By this location restriction, Supermart cannot be considered a truly digital company since its marginal cost is largely in the meatspace: web business typically serves all locations, unconstrained by geography.

Gloo is largely similar. From its Crunchbase entry:

Gloo.ng is an electronic procurement engine dedicated to delivering direct to the doorsteps of her clients, on a same-day basis and at very affordable prices, a wide variety of high quality brands of supermarket goods. Gloo.ng provides her clients very convenient, very efficient and very affordable means of shopping for supermarket goods, saving them irreplaceable time, needless stress and valuable money, thereby enriching their lives with the happiness these savings facilitate.

These two companies are running a really brilliant business model: aggregation which could have made them asset-light companies. However, since Nigeria does not have a postal system, they are quickly flipped to become asset-heavy since investments in bikes, vehicles, and associated equipments, are necessary to run logistics in places with no postal services. The logistical arm is the weakest link of the business vision. As they grow, they have to increase capacity to serve more cities. As that happens, the inherent reduction in marginal cost which could have benefited them for scalability will not flatten rapidly. It means that both Gloo and Supermart cannot simply scale as digital companies because the marginal costs are dominated by the meatspace operations. I do expect them to remain in locations like Lagos, Port Harcourt and Abuja for years.  The challenge to cover all major Nigerian cities will be daunting.

I did note some of the major challenges of ecommerce in this Harvard Business Review piece.

Distrust: Rich Africans have yet to embrace online shopping, due to online fraud. In Nigeria, for example, where phishing is common, people are skeptical about putting their credentials online.

Cost of broadband: Africa enjoys tremendous growth in mobile internet which is the popular means for people to access the web.

Logistics: Amazon.com and eBay are great companies that depend on the U.S. postal system to serve their customers. I sell my own books online in U.S.; once a buyer makes payment, I drop the book off at the post office to close the transaction. In Africa, it’s more complicated with nonfunctioning postal systems. Online businesses operate delivery motorbikes, which increase the cost of doing business there.

African open market: In Africa, there are “markets” everywhere, starting with the security guards who run stores in front of their masters’ mansions. There are open markets, supermarkets, and even unemployed youth selling things at traffic stops in major cities.

Literacy rates: Even if all the infrastructure and integration issues are fixed, illiterate citizens may be unable to participate directly on e-commerce sites that require reading and writing skills. .

Every ecommerce firm in Africa (except South Africa) will deal with some of these challenges. Gloo and Supermart are experiencing some already. That is the main reason why they have bounded their geographical locations. And they are smart to do so. Providing grocery delivery services to someone in Opobo will not make good business sense.

Why They Need to Merge

It is always hard to ask Nigerian companies to merge. We are not good in that. But when you look at the operations of both Gloo and Supermart, you will quickly see where the bulk of the money is going: logistics. Since they do not really carry inventory, their main cost model goes to logistical operations to deliver very fast once clients buy the items. To do that, it means they have to keep expanding logistics as they expand. Scale will bring higher efficiency in asset utilization. And that is why I think both should merge. That will give them the opportunity to combine their resources, and reduce distribution cost which is the main driver of the marginal cost in the business.

In ecommerce, there are three components of marginal cost: cost of goods sold, distribution cost and transaction cost. Only the distribution is relevant for these two companies. And it is the cost that clearly shows that to win, these companies have to combine resources.

There are three major marginal costs which are consequential in the broad ecommerce business: cost of goods sold (COGS), distribution cost and transaction cost.The distribution cost is the most challenging in Africa because that is the cost that turns an ecommerce operation into a traditional physical business. The first, COGS, is incurred irrespective of the nature of the business. It is the cost of production, i.e. the cost of producing the product which is being sold. The last, transaction cost, is mainly the fees incurred as part of the commercial transaction activity. This can include a merchant fee for accepting credit/debit card from the payment processor. Here, I explain how the distribution cost can be handled.

Shoprite Acquisition

The future of commerce is digital.  That means even if companies like Shoprite are not interested in digital businesses now, they will in near future. Hybrid commerce requires the elemental composition of atoms and bytes to win. Shoprite may like to acquire a strong Gloo/Supermart post-merger to run its delivery business. Executing this model will help Shoprite enjoy benefits associated with invertibility construct.

All Together

The business of grocery will remain challenging because of the fragmented nature of the sector. There are also open markets everywhere. But as the days pass, digital grocery business will find its space. Unlocking the opportunities will require more investments. If Gloo and Supermart combine, they will have higher scale to redesign a sector they have pioneered.

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