Konga, who along with Jumia, is one of the two online retail leaders in Nigeria, has made a bold claim: it aims to be profitable in its 2021 financial year and from then on, according to C0-CEO Nick Imudia, will deliver a “huge profit”. We think it’s a pretty obvious bluff. But why?
Konga was acquired in February 2018, two months after laying off 60% of its staff and stopping pay on delivery for its online customers. The company was acquired by Zinox Group, a Nigerian manufacturer and distributor of computers. Neither Zinox Group nor Konga revealed the deal value, widely reported as being in the $10m-$15m region, although some analysts believe it is significantly higher. In April 2018, after a management restructure, Konga merged with Yudala, another Nigerian online retailer.
Co-CEO Nick Imudia made another bold claim: since its acquisition by Zinox, the company had grown by 750%. This normally means revenues. To put this in context: if Konga recorded just $10m revenues before acquisition a 750% increase would mean revenues of $75m now. Last year, rival Jumia’s losses widened to $195.2m on revenues of $149.6m. Jumia operates in 14 countries. Bear in mind that in 2016, Konga had 184,000 active customers while Jumia currently has over 4m.
Both claims about Konga – profitability and growth – look extremely aspirational. We’ve heard talk of profitability before: back in February 2017, there was speculation Konga would soon be profitable. The reverse was true. The claim Konga is close to profitability is especially tenuous given what we know about the continued challenges online retailers faced in 2018 driving revenue growth.
Konga has not raised any capital from investors since acquisition and through its restructuring phase.
It wants to expand into other West African markets – an activity that will burn cash for at least two years. Konga is, apparently, in no rush to seek investment, although Imudia claims it has received several offers from potential investors. Previous investors Kinnevik and Naspers have already been badly burnt. In total, Naspers invested around $91m, while Kinnevik invested $36m. Both significantly wrote down their investments. If the widely circulated sale value for Konga of $10m is true, both companies lost more than 90% of their investment.
Konga’s profitability and growth story is almost certainly a bluff in our opinion. Why?
Firstly, Konga must be worried. Flush with investment after a successful IPO, Jumia will place much of its focus on its largest, most important and highest opportunity market: Nigeria. Konga already looks vulnerable. Before the Zinox acquisition Konga was unprofitable, burning huge amounts of cash to acquire and service its customers. It claims to have improved profitability while accelerating customer acquisition beyond the wildest dreams of any potential investor. It doesn’t stack up.
We think perhaps Konga’s management may be attempting to raise its profile while so much attention is focused on African online retail because of Jumia’s New York IPO later this year, which is set to value Jumia at around $1.2bn. It is positioning itself as the market leader in Nigeria – which it isn’t – and a strong next best option for a risk-taking investor who wants to bet on Jumia lifting the whole Nigerian online retail sector.
Without getting an independent look at Konga’s financials it is impossible to say what the true picture is. But we know this much: there is no magic bullet for acquisition of online customers in Nigeria. Cash burn for operators like Konga and Jumia will remain high because demand is extremely immature, volatile and costly to service. Even if Zinox is pouring cash into Konga – and it’s not clear it is – Konga desperately needs major investment to compete on level terms.
