The Path to a Winning Ecommerce Business Model in Nigeria, Africa

Just making it out of a “cave” where I have been with a client working on strategy since Saturday. Yes, in this age of disruption, Nigerian companies just like their counterparts anywhere must evolve to compete locally and globally. It was a very wonderful session. But I need to quickly address a key point, as a follow-up to a recent post on ecommerce.

The main thing I am hearing is that they expect to have a dedicated space in these platforms which will be under their controls. In other words, they want a clearly defined and dedicated digital store, just as you have in physical malls. They will hold the digital key and can brand as they want in that space. Consider something like konga.com/brand-name where that page showcases exclusively what that brand offers with no other brand therein.

I have been reading comments and getting emails from founders telling me that they have the solutions. Apparently, they read the piece without noting this important line: “Yet, these companies do want to expand and are very ready to go online provided someone will handle the logistics while they drive the online sales.”

That you have a website where companies like Soulmate, Unilever or PZ can list their brands without a strategy on how they can ship the items does not solve their main pain points. The main pain point is logistics and shipping the items after the buyer has paid online. These firms can open their own websites and drive their ecommerce businesses themselves. But most are not ready to deal with logistics.  And you do not blame them because logistics in Nigeria is another business entirely. With no postal service, they will need to invest capital in non-core business areas thereby degrading the efficient utilization of capital. For them to get your respect, you need to do that for them. That you have a website where you expect them to open a brand page is nothing. Anyone can create a website today.

The FMCG Distribution Model

For years, fast moving consumer goods (FMCG) companies work with distributors. These distributors buy in bulk and then help the FMCG sell to retailers. The retailers then sell to end-users in their shops. The brands never sell directly to retailers or end-users, and they do not want to change that model. It has worked for them for years.

So, if you expect them to come to your site and host a page without you offering them a way on how they can ship the items, when bought online, you are not closing the loop. They want you to handle the logistics and you have to demonstrate that you have the capability to do so. So the value proposition must be thus: I will give you a page to list on my site and we will ship all the items when bought to end-customers.  You may need to have scale for them to trust you to store their goods in a case they do not want you to buy as a distributor upfront. Yes, they may handle the website page but they need you to ship, and that arrangement on where the goods are warehoused must be planned ahead to reduce delay in shipping to customers. Where you cannot afford to buy in bulk and they are not open to ship to you, the business model crashes. So, you must deal with that issue very well.

The Marginal Cost in Ecommerce Business

I have noted many times that a Nigerian ecommerce business marginal cost is high, and that cost is at the offline element of the business. The cost of adding a user online is close to zero but the cost of shipping to an additional user is non-zero. If you are operating in Lagos as an ecommerce company, you have a huge marginal cost to ship to someone in Opopo. To reduce that marginal cost, you can bound your geographical location of service as within Lagos State.  When you do that, you are no more a web business which is typically unconstrained and unbounded by geography. You have been limited by location driven by marginal cost. That means you are not really running a web business: your business is offline! You may have 60,000 users in your platform but only those in Lagos (say 40,000) can be easily addressed efficiently and profitably. If I am advising you, I will make it clear that you have only effective 40,000 potential buyers since you are focusing on servicing clients in Lagos. (You may think that you can ask customers to cover the shipping cost to Opopo. Sure that can work except that there are still shops and open markets where the user can buy. In other words, you are not the only alternative and when the cost of buying from you is high, the consumer looks for alternatives. So, you have an incentive to reduce the overall cost for buyers if you expect them to use your platform.)

That is the same challenge FMCG companies are facing: how can they have websites and then restrict who can shop on their sites, due to marginal costs dominated by distribution costs? To avoid that paralysis, they simply do not want to run online shops. They are open to promote the brands, but you still have to deal with retailers to buy these items across Nigeria. Sure, they welcome distributors who can place big orders online, but not end-users buying one pack of detergent or soap.

All Together

We have huge opportunities in ecommerce. Markets will move online, eventually. But we need to understand that our biggest cost element is not the website but the logistics of moving the items. As we develop businesses in the ecommerce sector, we need to work out how partners can overcome the distribution challenges. That is the key missing link in some of the models: the nice websites are not enough. Founders that can solve that distribution cost problem at scale, affordably and efficiently can open a new basis of competition in the Nigerian ecommerce sector.

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