Opportunities and challenges for African e-commerce
The restrictions imposed as a result of the coronavirus pandemic have thrown e-commerce and online retail into the spotlight across the globe. Compared with well-established digital retail markets such as those in the USA, markets in Africa are still fairly nascent; in 2019, investment into the e-commerce and online retail sector in Africa totalled $116 million USD across 37 deals. While challenges to broad adoption still exist, both in terms of customer preferences and inefficiencies in the market, e-commerce is beginning to generate traction, both because of necessity and the presence of enabling technologies.
African e-commerce overview
It is far from business as usual for the many e-commerce retailers spread across Africa. A recent report published by Reuters describes how the e-commerce sector has been placed under severe strain in South Africa as retailers struggle to cope with hugely increased demand. Existing market inefficiencies, such as informal address systems, are being compounded by the need to introduce physical distancing measures into order fulfilment centres.
In a report published by the UN Conference on Trade and Development (UNCTAD), these market inefficiencies are quantified as an E-Commerce Readiness Index. They cite four main factors required for adoption of e-commerce; the percentage of the population with access to the internet, the percentage of the population with access to a bank account, the availability and security of web-servers, and the reliability of postal services. Mauritius, Tunisia, Nigeria, and South Africa scored highest (with scores of 68.4, 58.1, 54.4 and 53.2, respectively); however, many countries in Africa are still struggling.
The informal address systems used outside of many major towns and cities, and customer preferences such as a preference to pay on receipt of goods, or a mistrust of online retail create barriers for the broader adoption of e-commerce. However, these barriers are fuelling innovation. With lock-down restrictions forcing customers to look online, necessity, as they say, is the mother of invention. For instance, in 2017 the Nigerian post service adopted a service provided by What3Words, a mapping tool which turns approximate addresses into a GPS coordinate. Likewise, e-commerce giant Jumia has long relied on local partnerships to help meet customer needs, while balancing the challenges of multiple distribution partners with its inhouse technology tools.
Given the local challenges to expanding e-commerce in Africa, it is perhaps unsurprising that the e-commerce sector is still very much in its infancy. E-commerce accounted for only 1.6%, or $1.2 billion of South African retail sales in 2019, according to London-based market research firm, Euromonitor International. In the United States, the figure is 14.8%. Despite this, the e-commerce sector has long been extremely active. In 2017, there were 35 companies launched, with a further 29 launched in 2018 and 21 in 2019. While food and grocery services and general retail services are common, there has also been an increase in the number of specialist services such as automobile and online pharmacy services. 78% of the e-commerce companies Baobab analysed provided a B2C service, whereas 13% provided a C2C model and 9% operated a B2B model.
Is now the time for e-commerce in Africa?
While short-term trends have indicated increased investor appetite for the e-commerce space in Africa, it is still a fairly nascent industry. Despite the headline grabbing progress made by Jumia in 2019, it is worth reflecting that they also announced that they are pulling out of certain geographies (such as Côte d’Ivoire) in Q1 2020.
E-commerce, particularly B2C online retail, relies on the repeat services of tech-savvy customers. Challenges with infrastructure such as congestion will have an impact on the service provided to online retail customers, but perhaps the real challenge to wholesale adoption is how to service more rural customers in a cost-effective way. This is where the e-commerce and online retail sector has an opportunity to innovate and perhaps partner with companies offering supply chain-management and smart delivery services.
The coronavirus (COVID-19) pandemic is forcing us to rethink our habits and preferences, and perhaps out of necessity is causing consumers to seek out retail options that they previously have not considered. It is too soon to tell if any change in customer behaviour is permanent, but e-commerce companies currently have an ideal opportunity to capitalise upon this change.
The Baobab Network
Based in Nairobi, The Baobab Network is Africa’s leading start-up accelerator, providing early stage technology companies across the African continent with funding, support and a global, platform to scale their businesses. In the last three years, VCs in Europe, Asia, the US, and Africa have invested follow-on capital into Baobab portfolio companies. Baobab also works closely with corporate partners around the world that partner with their accelerator for research, innovation, and access to new technologies in Africa.
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