Jumia has tripled in value within one week. We look at why

Apr 17, 2019

Jumia logo
Jumia’s IPO saw its share price rose by 75% on Day 1. Shares were priced at $14.50 before the IPO. Five days later they are trading at $43, valuing the business at more than $3bn. What are the company’s prospects and how should we think about its growth trajectory?

Founded in 2012, it’s been called the Amazon of Africa (Amazon does actually operate in Africa, as Souq in Egypt). Its press kit says it has 1 transaction or lead every 2 seconds. It has 4m customers, handled 13.4m packages in 2018, has 81,000 partner merchants, covers 14 countries and is by far and away the #1 online retailer in Africa.

Gross merchandise volume in 2018 was €828.2m ($938.0m), up from €507.1 m ($572m) the previous year. Its actual revenue for the year was €130.6m ($147.9m), up from €94.0m the year before. As of Dec. 31 2018, the filings show the company has accumulated losses of nearly $1bn. In fairness, in the risk factors section of the company’s IPO filing, it did say that there was no guarantee that it will “achieve or sustain profitability” or “pay any cash dividends” in the foreseeable future.

It is also a company that divides opinions. While Jumia is undoubtedly a pioneer in African markets, many have taken issue with its credentials as a “100% African” business. Jumia’s founders are French (although it called early country MDs “founders”). The company was funded and is registered in Germany. The HQ is in Dubai. The developers are based in Portugal. It is listed on the New York Stock Exchange.

Does that matter? Not really, if you only look at Jumia’s focus and target market. It doesn’t seem like Jumia’s customers or partners care. It may matter in the future given the growing unrest from domestic retailers and manufacturers about the power of foreign retailers (this has been aimed at supermarket chains like Auchan in Senegal and Carrefour in Cameroon so far).

The goal: domination

Jumia’s stratospheric valuation is based on one principle. In order for an online business to thrive in the immature sub-Saharan African retail market it needs to dominate. There is no real place for a #2 online general merchandise retailer because – as we have seen with Amazon – they won’t be able to compete on pricing, stock levels, distribution, efficiency, economies of scale.

That’s the idea. The bet is that Jumia can keep scaling the business even if it burns through cash. As long as investors are happy with that, Jumia is fine. The moment they aren’t, it’s in trouble.

For reference, Amazon was founded in 1994 and first turned an annual profit in 2003. Amazon’s net profit in Q4 2017 – $1.86bn – was higher than the total net profit of the 58 quarters Amazon had had since its 1997 IPO. What does this tell us? Investors are prepared to be patient if the prize is big enough.

Leapfrogging – the future?

The big difference between Amazon and Jumia is the prospect of leapfrogging. I.e. that African consumers may bypass traditional spending channels like department stores or supermarkets and spend online instead. It’s a decent bet. Smartphone penetration across Africa is around 33% and rising. According to Trendtype data, the market share of modern grocery retail across Africa is just 21%, including the much more developed north African markets and South Africa. It’s below 10% in Nigeria, Africa’s largest market.

The opportunity for Jumia is that it can tap into hundreds of millions of consumers in Africa and sell them goods (like mobile phones or groceries), services (like hotels, travel and insurance) and even financial services (Jumia’s own payments system, JumiaPay, accounts for 54% of its transactions).

Another key growth area is the role of Jumia as a logistics company, modelling itself on Amazon. Around 90% of the items Jumia sold in 2018 came from third-party sellers. This reduces the issue of importing and paying for stock. But it comes with its own risks: Jumia has faced substantial problems with customers complaining about the poor quality of goods bought through the platform.

For all the talk of leapfrogging, bricks and mortar retailers aren’t rolling over. Last year, Auchan’s sales in Senegal, its core market in Africa, leapt by 152%. Carrefour’s partner, Majid Al Futtaim, reported sales growth of 71% in Kenya. For many consumers, shopping in modern supermarkets and modern malls is an exciting experience and they’re not going to casually leapfrog over to online shopping even if they did trust the online retail process (which they often don’t).

It’s not a zero sum game – several African countries are forecast for high economic growth over the next five years and there is still plenty of mileage for online and modern retailers converting consumers away from independent and traditional retailers. At any rate, Jumia and Carrefour are already collaborating.

The cost of distribution and the challenges of coverage

Distribution is expensive. If you don’t believe us, look at the Logistics Performance Index. the top ranked country at #33 is South Africa. The next African country is Côte d’Ivoire at #50. Kenya, which has one of the most developed developed supply chains in Africa, is ranked #67. Nigeria is ranked below the Kyrgyz Republic at #110.

It is relatively expensive to ship products into sub Saharan African markets. It brings a whole new range of risks warehousing and moving products towards the end consumer. For online retailers, the distribution challenge is even greater: delivering products to an actual named address for the consumer. It is a key reason, along with soft middle class demand, for why so many African internet retailers have failed.

There is a middle way and Jumia is already exploring it – establishing 380 drop off/pick up points to centralise distribution so far. We can also see systems like those Copia uses – appointing Western union-style agents to act as shopfronts.

But still. Distribution will continue to be relatively expensive in some of Jumia’s key target markets like Nigeria and even Kenya. Jumia is building an entire distribution network from scratch and that’s expensive. Investors have been warned: Jumia intends on burning cash for the foreseeable future.

Other major risks

Jumia’s investor prospectus is big on the opportunities presented by the untapped, high growth African market. It heralds what we can safely call “Africa Rising v2.0”. The middle class will grow by 80% between 2020 and 2030. 45% of Africans will live in urban areas. Africa’s GDP growth will comfortably outstrip every other region bar East Asia.

So what happened with Africa Rising v1.0, which came to a crashing end in 2014?

Oil and commodity prices sank, taking with them big, oil dependent economies like Nigeria, Angola and Algeria. It is no coincidence that confidence in African markets returns as oil prices are heading up.

The big lessons from Africa Rising v1.0 were:

  • Most definitions/sizing of the middle class in Africa are rubbish. Even if the inflated numbers were true, those consumers are not securely middle class and not necessarily given to spending (rather than saving) their income.
  • When the currency devalues businesses can’t always get their cash out. Ask Shoprite in Angola, which is trading well but being hit hard by fx issues. The availability of fx is an issue still in Nigeria. It’s an issue in Ethiopia, Sudan, Algeria, Zimbabwe. It’s a fundamental, often overlooked risk.

Those “Africa Rising v1.0” risks are still risks for Jumia , whose main market is Nigeria and for whom coverage across 14 countries adds cost, complexity but little upsides from hedging. Caveat emptor.

The less spoken about opportunities

Jumia has 4m customers – mostly drawn from higher income brackets. Its business is diversified in areas where its scale really works well and some of the major problems around distribution matter less. These current and future areas include recruitment, real estate sales, hotel and travel bookings, financial services, classifieds, payment processing, fast food delivery, data analytics and marketing.

Jumia’s investment marketing mentions its range of platforms and the value of single sign on. Its central role in the growing consumer economy as vehicle to reach hard to reach consumers is core to its value. Jumia’s value will be driven by its customer capture and retention. You can see this with a couple of pre-IPO investments: Pernod Ricard, interested in Jumia’s customer data; Mastercard,  eyeing its role in digital transactions.

Arguably Jumia is too diversified.

Certainly Trendtype believes it is in too many small country markets it can enter at a later date without costing it any real first mover advantage. Is it really worth Jumia devoting resources to Senegal or Cameroon right now that could be better used in Nigeria, for example? Our experience of bricks and mortar retailers is that wide, shallow country coverage is expensive and counterproductive.

On a sector level, Jumia’s challenge is managing its costs, growth profile and all these different streams of business competing for investment and management focus. Although it perhaps feels Jumia has been given a licence by investors to scale without worrying too much about profitability, it hasn’t. It has a tailwind of economic growth to support it but we caution that many African markets remain volatile to a wide range of political, economic, natural risks (like ebola) that can sabotage the plans of any retailer that may have overextended itself.

Summary

It’s exciting times for Jumia, which has succeeded in turning global investor attention firmly back onto African consumer markets. For better or worse, it heralds the return of the Africa rising argument, in much the same form.

The acid test for whether Jumia is overvalued: would Amazon (market cap $920bn) pay $3bn for Jumia today? Yes, we think so.

Will Jumia dominate online? Yes, at least outside Egypt and South Africa where the dynamics are a bit different. However, expect major supermarket chains like Shoprite and Carrefour to respond, initially with click and collect propositions.

Do we think the underlying assumption of ‘leapfrogging’ holds water? Yes, in lots of areas like travel bookings or insurance. Less so in areas of retail where experience matters.

What about bricks and mortar retail? Still growing quickly in many of the prime African markets. It remains important as an experience as much as a sales channel. Don’t write it off.

 

 

 

 

 

Loading...

Looking for more trends and insight on FMCG in Africa?

Join Trendtype's mailing list for news, events and more.

Thank you for joining us. Speak to a member of our team today on +44 333 567 9995

Looking for more trends and insight on FMCG in Africa?

Join Trendtype's mailing list for news, events and more.

Thank you for joining us. Speak to a member of our team today on +44 333 567 9995