I offer opinions to global clients. Read this summary on what some hedge funds, private equity firms, etc ask. Despite employing the most brilliant among others, they also look for commoners like us.
Client [2014] – What is your view on the long-term performance of ecommerce companies that syndicate purchases for Africans from developed markets like UK and US? We’re exploring a couple of companies in this sector for investment.
Ndubuisi Ekekwe [I wrote a 4 page document but I will summarize here] – These companies will outperform in the short-term because of massive information asymmetry, low penetration of mobile internet and digital payment systems. These companies are valuable because they help people buy things in UK, USA, etc but their core value proportion may not be sustainable. They have no leverageable factors which could compound over time. In short, they are de-leverageable since they will lose positioning in 7-9 years as digital markets mature.
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I posit that Africa will improve on payment in 3-4 years and access to the Western digital markets will deepen. If people can buy these things directly, these intermediaries would be disintermediated. So, the biggest risk is how fast Amazon, eBay, JC, etc will begin to accept payments in leading African markets. If those are available and the shops can put logistics to ship to the customers via Fedex, DHL, etc, the aggregation services of these firms will not be necessary.
In other words, it makes no sense to pay and wait for 3 weeks to receive the items from New York to Cape Town when you can pay and ask for FedEx international priority to deliver in 3 days. The cost has never been the main factor since those buying can absorb those fees. More so, we have looked at the fees and when all the aggregator fees are included, the saving is marginal.
Furthermore, this market cannot grow faster than the rate the middle class grows. So, the long-time playbook would be anchored on the premise that the middle class can grow really fast in the African markets. Historically, during economic turbulence, exchange rate perturbations emerge, with ancillary inflations which could depress the category growth, as most users will focus on local substitutes.
Summary: if investing, you must look at the time horizon when to exit.
Comment on LinkedIn Feed
Comment: Your time bound view and analysis on the aggregators’ market space for investment is profound.
Customers’ switching costs from the aggregators to direct purchase from the likes of Amazon for now is high.
However, looking at the Africa’s very slow economic development and middle class growth trajectories, I like to slightly posit that your clients’ ROI can still be guaranteed for the next 10 years.
This is because the middle class growth level will always determine the level of improvement on the payment infrastructure investment by potential players in that market.
Thank you Prof. Ndubuisi Ekekwe.
My Response: “However, looking at the Africa’s very slow economic development and middle class growth trajectories, ” – I do not see this as pure Africa ecommerce. I see this as simply trading across borders and the factors are not wholly endogenous. If payment and markets improve in Africa, why do you think Amazon, JC, ebay etc will not open shops in Africa directly? If that happens, how do do see the aggregators thriving?
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