Amazon, Alibaba, Mercado Libre, SEA Limited. If only I had bought these e-commerce companies in their early days, I would be swimming in cash. It all seems so obvious in hindsight; the rise of e-commerce was inevitable. Now, what if I told you that it is not too late. There is still a relatively nascent and untapped ecommerce opportunity out there, in Africa.
Aided by technological advances, increasing internet penetration rate, and a young mobile savy labour force, the African e-commerce landscape is projected to grow rapidly. Statista estimates that the total value of e-commerce transactions in Africa will grow from $16.5bn in 2017 to $29bn in 2022. For comparison, the total value of e-commerce transactions in the year 2019 was $343bn in America, $84bn in Latin America, and an astounding $862bn in China. (Source: Statista)
The infant e-commerce scene in Africa offers a compelling opportunity for early investors to dip their feet into. However, it is fraught with numerous challenges such as the lack of proper infrastructure to fulfil orders, a culture of distrust stemming from fraudulent transactions, and a high proportion of unbanked Africans.
My interest got piqued when I realized that Jumia, the leading pan-African e-commerce platform trades only at a market cap of < $3bn (time of research). It was unbelievable that the largest e-commerce platform had such a small market cap relative to the likes of Amazon, Alibaba, Mercado Libre etc… I was so tempted to jump the gun and invest immediately. Ultimately, I held back, rationalizing that there must be reasons as to why Jumia commanded such a small market cap. But if my research showed otherwise, it will be an incredible opportunity.
What does Jumia do?
Jumia is active in 11 countries in Africa. These 11 countries account for approximately 70% of Africa’s GDP of EUR 2.2tn in 2019. Jumia’s platform consists of four main pillars.
The marketplace connects a large diverse group of sellers with individual buyers. It offers a wide range of products such as fashion and apparel, smartphones, home and living items, fast-moving consumer goods, beauty and perfumes, and other electronic items. They also provide restaurant food delivery service.
- Jumia Logistics
The logistic business covers the entire spectrum of the fulfilment chain, from warehousing, packing, deliveries, tracking, and returns. It consists of a network of leased warehouse, pick-up, and drop-off locations. In certain countries, Jumia logistics also partners with third party logistics providers for last mile delivery (Jumia currently operates 6 warehouses and 1 sorting centre)
- Jumia Pay / Jumia One
Given the high proportion of unbanked Africans and low card penetration rate, Jumia Pay was developed with the intention to facilitate online transactions between sellers and buyers on the marketplace. In 2019, the Jumia One app was developed to allow users to access a broad range of third-party digital services such as airtime recharge (topping up credits for prepaid phones), and payment of outstanding bills.
- Seller payment and Financial Services
Jumia Lending aims to provide micro financing to sellers. In Africa, it is difficult to gain access to credit due to the underdeveloped financial infrastructure. Given the proprietary data on their sellers, Jumia believes that it has an advantage here over the incumbents when it comes to the provision of credit. Traditional financial institutions on the other hand, lack of credit scoring data.
Jumia generates revenues primarily from the marketplace activities and first party goods.
First party revenues represent the revenue earned from transactions where Jumia acts as the seller of the goods.
Marketplace revenue consists of the following:
- Commissions from third party sellers – Calculated as a pre-agreed percentage of the selling price
- Fulfilment services – A delivery fee charged to buyers
- Marketing & advertising – Marketing and advertising services such as advertising campaigns from non-vendors
- Value added services – Includes logistics services for sellers such as warehousing and packing, marketing campaigns for third party sellers
It is important to note that first-party revenues includes the full sale price.
Hence even though 2019 revenue mix was roughly 50-50 between Marketplace revenues and First-party revenues, this split is not representative of the composition of first-party and third-party goods sold on the marketplace. Nonetheless, the increasing relevance of marketplace revenue is a favourable transition that allows Jumia to reduce inventory risks and improve gross margins.
Jumia’s Growth and Financials
The basic numbers can be sourced easily from Jumia’s financials or sites like macrotrends, so I will not run through them. (Check out my resource page if you have not!)
I would just like to point out that looking at Jumia’s revenue headline number can be misleading. Gross profit will be a better representation of Jumia’s performance due to the disparity in revenue recognition between first-party and marketplace activities. Consider the excerpt from Jumia’s financials.
Improving Unit Economics on E-commerce
Previously, Jumia has embarked on ambitious expansion plans that brought about strong YoY growth rates in their order volume and GMV (Gross Merchandize Volume). Such expansion plans however, consumed significant resources and with losses mounting, Jumia decided to scale back, recalibrating their priority towards becoming profitable. As of the 9months ending 30 Sep 2020, the improvements are shown below (all figures are as a % of gross profit):
- Fulfilment expenses down from 103% to 77%
- Sales and advertising expenses down from 79% to 34.3%, mostly due to reduction in sales and advertising campaigns
- G&A expenses down from 200% to 129%
|Q3 2020||Q3 2019|
|Order Volume (A)||6,600,000||7,000,000|
|Cancellation Rate (B)||14%||23%|
|Successful Orders (C) = [A*(1-B)]||5,676,000||5,390,000|
|Operating Loss (D) in EUR||-EUR 27,955,000||– EUR 56,611,000|
|Operating Loss per Successful Order (D/C)||– EUR 4.93||– EUR 10.13|
For every successful order that Jumia made in Q3 2020, Jumia made an operating loss of ~ EUR 4.93. This represents a 51% improvement compared to a year ago where Jumia was losing EUR10.13. A great sign that Jumia is making great improvement in unit economics.
While Jumia experienced a 23% YoY growth in annual active customers, decreased marketing spend translated to lesser orders and GMV. On a YoY basis, Q3 2020 orders and GMV shrank by 5% and 28% respectively. GMV shrinking more significantly compared to order numbers is reflective of Jumia’s decision to diversify from phones & electronics goods towards every-day items.
Jumia Pay – Transactions
While the lion share of revenue is generated from the e-commerce platform, I consider Jumia Pay to be an imperative component of Jumia’s future growth.
- Jumia Pay drives the adoption of e-commerce by mitigating existing challenges of a) low card penetration, and b) high cancellation rates due to no-show upon cash-on-delivery instances.
- With 66% of adult Africans unbanked, it offers an extraordinary opportunity for Jumia Pay / Jumia One app to drive financial inclusion outside of traditional banking institutions.
- Jumia Pay along with Jumia’s marketplace form an ecosystem where participants are able to send and receive money with ease. A great example is Mercado Pago – the payments solution offered by Mercado Libre in Latin America. (If you’re interested, listen to this sharing by Marcos Galperin, founder of Mercado Libre)
Over the past year, Jumia Pay has witnessed higher utilization relative to a total value basis and a total orders basis. The following diagrams from Jumia’s Q3 investor presentation illustrate clearly.
TPV (Total Payment Volume) corresponds to the total value of orders for products and services processed using Jumia Pay
Jumia Pay Transactions corresponds to the total orders for products and services processed using Jumia Pay
Liquidity and Solvency
As of Q3 2020, Jumia has EUR 147mn in Cash and equivalents. Jumia also boast healthy leverage levels with total lease liabilities of EUR 9.4mn and roughly EUR 9mn in borrowings. Despite a relatively comfortable sum of cash on hand, Jumia is still operating at a loss and burnt through EUR 21mn of FCF (Operating CF + Capex) in Q3 2020. At this rate, Jumia is likely to run out of cash in 6 quarters or less which probably explains the management decision to pull the brakes on expansion plans and focus on profitability instead.
Nonetheless, investors must be prepared for future shareholder dilution as Jumia is unlikely to turn profitable anytime soon. It will be important to keep a close eye on Jumia’s progress towards profitability.
Jumia, a Fraud?!
Back in May 2019, Andrew Left of Citron Research published a report slamming Jumia as a Fraud. It cited discrepancies in financials between investor presentations and SEC filings, fraudulent orders, and numerous instances of inefficiencies within the company. This marked the beginning of a tumultuous period for Jumia.
- The JForce scandal, where sellers colluded with sales agents to artificially inflate transaction volumes.
- Jumia announced a series of downsizing and exits. Most recently, it exited Rwanda, Tanzania, and Cameroon.
- The validity of Jumia as a native African start-up came under intense scrutiny, igniting a movement of #JumianotAfrican. Jumia’s headquarter is located in Dubai, senior management are mostly European, and the Tech team is based in Portugal.
However, it seems that the worst might be behind for Jumia. Jumia has displayed progress in charting its path to profitability. While exiting certain geographies translated to a decline in transaction volumes, it is the right strategy for sustainable growth. Resources can be channeled to scaling in cities where infrastructure and GDP make unit economics viable.
In a surprising and kind of iffy move, Citron research also did a 180-degree turn, announcing on twitter that they were going long on Jumia. In fact, they published a full report citing an inexorable e-commerce wave, massive opportunities for fintech adoption, and renewed focus on profitability.
The narrative of fast-growing e-commerce, increasing mobile penetration rate, high proportion of unbanked African, digital savvy and young labour force just seem so compelling. The image of Jumia becoming the leading (and profitable) e-commerce, payments, and logistics provider in Africa makes me giddy with excitement.
However, I simply cannot ignore the glaring challenges that Jumia has to overcome before becoming the Amazon of Africa. For starters, a network of well-connected infrastructure is necessary for a functional e-commerce business model. In Africa, especially outside of major cities, they do not have an address system! With infrastructure so severely lacking, how can deliveries be made effectively?
External issues aside, I have some doubts with regards to the management and direction of the company.
- Lack of Transparency in Company
There is clearly a lack of best practice disclosures. The JForce scandal showed a misalignment of incentives and inadequate controls within the company. I also cannot phantom why the management decided against disclosing compensation figures for each member of the management board. That is just a fishy move.
- No Skin the game
Cofounders of Jumia, Sacha Poignonnec and Jeremy Hodara, only own 1.4% of the company each. This a relatively low ownership rate compared to cofounders that have stayed on as CEOs. Moreover, how can we expect a senior management comprising of Europeans, a tech team located in Portugal to natively understand what is happening on the ground, in Africa? Do you think it is a good idea to have a group of foreigners run your country? I wouldn’t want that.
- Movement is not Progress
Jumia wants to do everything. Food delivery, payments, logistics, e-commerce. In fact, they used to offer travel and hotel booking services until recently. From my tiny understanding of the world, most successful companies start out by focusing on a niche market before expanding into complimentary verticals. Amazon started out with books, Mercado Libre started with pure E-commerce, Nike started with shoes. Scaling all these businesses simultaneously not only consumes a ginormous amount of resources, it also dilutes the focus of a company.
This was a tough decision. The way I look at it, the upside could be 10x or more if Jumia’s management gets it right. The downside is floored at the amount of capital that I invest. I would consider the risk to reward attractive. With that said, I will take on a small ownership and pray that when I look back 10 years down the road, I was excessively paranoid about the challenges Jumia faces today.
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