Jumia Reveals the Grand Plan

No one has to wait any longer to know the grand plan of Jumia. Simply, Jumia wants to build a massive market share. That market share comes first before any push for profitability. In one of the most candid comments in the industry, Jumia revealed that it is yet to attain profitability.  The Global CEO, Jeremy Hodara, made that revelation during a press conference where Jumia announced that it would be making loans to some of its Nigerian partner-vendors.

Hodara [Jumia Global Chief Executive Officer (CEO), Jeremy Hodara], who disclosed that despite Jumia celebrating five years in Nigeria, “we have not been profitable. Despite that, we are still investing in the business in various forms. Jumia is a Nigerian company that will be here for another 100 years. We are on the long term. Nigeria is our biggest market. We are not in a hurry to make profit.

It took Amazon about 25 years before they could become profitable. But we shall remain consistent, serving the Nigerian economy thoroughly.”

(See NB below. Amazon is not even up to 25 years old. The theme of the comment is right. But the company technically made a cameo profit after year 10, and then went on losses.)

This revelation is not necessarily surprising as the parent company, Rocket Internet, has been publishing Jumia’s financial statements for quarters. But what is exciting about the statement is the reference to Amazon. That reference to Amazon is the heart of Jumia and that is the lens to examine the grand plan on what Jumia plans to do in Africa.

Jumia Grand Plan

Jumia wants to conquer territories and become a dominant category-king. It wants to own the ecommerce ecosystem by running losses as much as necessary. As it spreads and expands, it can manage its marginal cost which is heavily affected by the distribution cost. That distribution cost in a region with no postal service is the main pain point. The only way to manage that cost is to have scale. Once critical scale is maintained, Jumia can serve more customers at cheaper distribution rates.

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.

Note that the internet side of this business has a near-zero marginal cost since it does not cost Jumia anything to sign up an additional user.  But the logistics part does require huge marginal cost making Jumia to constrict its geographical area of operation. Usually, an internet-based business should be in a position to serve any customer irrespective of location. However, ecommerce is not necessarily a pure internet business because of the logistics part.

Lessons from Kalahari

Jumia understands what it wants to do and that is a very good thing. It has operated for five years in Nigeria and was referring to the fact that Amazon operated for 10* years (see NB, Amazon is not even up to 25 years) before profitability. The implication is that Jumia is open to go long on its grand plan to build a massive business before pursuing profitability. This means that anything written because of the likes of Kalahari, a defunct ecommerce business operated by Naspers, Africa’s most valuable company, is irrelevant. Kalahari was losing money and Naspers decided to shut it down. Jumia has a different philosophy: long-term market domination before the plot to profitability.

The Amazon Illusion

Yet, Jumia has to consider this statement very well: “It took Amazon about 25 years before they could become profitable. But we shall remain consistent, serving the Nigerian economy thoroughly”. Technically, Amazon got to profitability after 10* years and then went back to years of losses. But it made it to sustained profitability later but not necessarily because of ecommerce but by something else. Amazon became (sustainably) profitable because of Amazon Web Services (AWS) which sells cloud services to startups and companies around the world, even when it was losing money on ecommerce operations. So if Jumia focuses on the profitability without considering the very reason why Amazon was profitable, at about the 10^th year, it may miss the mark.

The Amazon ecommerce business is the best product from Amazon and it was also the first customer to AWS. AWS was built to serve Amazon ecommerce business. People associate Amazon with ecommerce but Amazon makes money from AWS relying on the goodwill and scale that the ecommerce provides as it bulldozes itself around the world. When merchants join the ecommerce platform, AWS ensures that computing resources are available to deliver top-notch user experiences.  These two products are now inseparable in the Amazon world.

That said, Amazon has scaled so well that its ecommerce business is making money. If Jumia does the same in Africa, it will reach that level where profitability will come from ecommerce.

All Together

Today, we have seen where Jumia is going. It is here for the marathon. Unlike companies like efritin which came to Nigeria and expected to pack money in boxes back to Europe within weeks, Jumia understands that the market may not be easy. So, with its grand plan of pushing for growth and market share before worrying of profit, Jumia will find success, over time. The future is ecommerce and the question has always been thus; who can sustain the losses to make it happen? Jumia wants to be in that midst. All it needs to do is to keep raising money and pumping same in the operations.

Efritin (pronounced ‘Everything’) has stopped further investments in Nigeria and has wound down operations, just 16 months after its official launch.
Investigation showed that high cost of data and operational demands forced the e-classified advert player to close shop.

Lastly, I do expect Jumia to keep raising money to sustain its operations. A very great reward awaits it, because if it takes over and dominates the territories, it will define the architecture of ecommerce operations in Africa. The stated grand plan has the capacity to make that happen.

NB: Jumia CEO made a rounding error in the 25 years of Amazon. Amazon was created in July 1994 and is not even up to 25 years. Amazon made “cameo” profit the first time in 2004 but then went on losses until it got back to profitability. AWS was launched in August 2006 and continues to fuel Amazon profitability since then.

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