Economic Update

Recent investments demonstrate sustained investor interest in e-commerce platforms in Nigeria, which boasts the continent’s largest population and economy.

Ombola Johnson, the former minister of communications technology, predicted Nigeria’s e-commerce industry will reach a valuation of $10bn in the years ahead, with some 300,000 online orders expected each day.

This growth would be in line with trends throughout the wider continent, with consultancy McKinsey estimating that the African e-commerce market is on track to reach $75bn in revenues per annum by 2025.

Acquisition activity

Recent acquisition activity suggests international investors are similarly bullish on the country’s online retail prospects.

In March Nigerian e-commerce outfit Jumia raised $325m in capital from new and existing investors, including French insurance firm AXA, US investment bank Goldman Sachs and German start-up incubator Rocket Internet, which already holds a stake in Jumia.

One month earlier, Rocket Internet’s Africa Internet Group, the parent company of Jumia, became the continent’s first “unicorn” – a start-up valued at over $1bn – after receiving a €75m investment for an 8% stake in the company from AXA.

DealDey, another Nigerian online shopping start-up – which aggregates and advertises promotions on goods and services, similar to US-based Groupon – was acquired by the African subsidiary of Swiss media and e-commerce platform Ringier in April for an undisclosed sum.

Demographics drive demand

Nigeria’s emerging middle class represents a large market for e-commerce platforms to capture.

In March consultancy PwC released a report on retail prospects in Africa, which said Nigeria’s middle class  – defined as households that earn between $8500 and $42,000 per annum – grew by 600% between 2000 and 2014.

By 2030, the number of middle-class households is expected to nearly triple, from 4m in 2014 to 11m, although this still remains a small fraction of the country’s 170m-person population.

The expanding base of households that have access to discretionary income has increased demand for retail trade, but e-commerce firms are also benefiting from the still-rising rates of connectivity.

As of February, more than 93m Nigerians had mobile internet subscriptions, according the telecoms regulator, the Nigerian Communications Commission (NCC). Meanwhile, a 2015 survey from PayPal found that 65% of internet users in Nigeria already shop online and a further 24% are expected to do so in the future.

Increased access to 4G LTE services, which were rolled out across the country over the past few years, and promises of internet speeds of up to 230 Mbps should also help facilitate the uptake of e-commerce.

Adapting to the local context

To achieve widespread success, however, e-commerce platforms will need to overcome some structural hurdles. While successful ventures, such as Amazon in the US, provide a paradigm, doing business in Africa presents a unique set of challenges.

One major obstacle is the payment process for online purchases. Unlike e-commerce users in Western countries, who prefer online payments, many customers in Nigeria prefer to pay cash on delivery.

The relatively low penetration of credit and debit needed for online payment – only about 25m cards are currently in circulation ­– and lack of security certificates on retail websites could also slow uptake.

Indeed, according to the PayPal survey, 31% of Nigerians who do not shop online cited concerns over the security of payments as a reason for not doing so.

In some cases, purchases are returned because buyers spend the money they had allocated for the online purchase on another item before their order arrives.

In addition to a high return rate, the country’s road networks, lack of railways and congested ports each add to the time for delivery and the cost of doing business.

Closely linked is the complex and bureaucratic import process, with a large number of agencies involved in the Customs process. Ports in the country can also be overwhelmed due to the sheer volume of goods entering the country.

The lack of an effective nationwide address system also presents issues for timely distribution. While certain neighbourhoods in Lagos are well marked, many others lack proper addresses, which increases delivery time and the possibility for delivery errors.

Up to 40% of e-commerce orders are returned due to these kinds of obstacles, Chidinma Iheme, managing director of Tranex, a domestic logistics firm that provides distribution services for e-commerce companies, told OBG.

However, according to Nicolas Martin, CEO of Jumia, these challenges and logistics costs also apply to offline retail and are central to the value proposition of e-commerce. 

While these issues continue to present a barrier to growth, e-commerce firms are working to explore solutions. Jumia, for example, often contracts local courier services to carry out the actual delivery of goods, as they are more familiar with the local context.

Jumia, as well as other local e-commerce outlets, will be looking for similar solutions to lead the Nigerian e-commerce model going forward.

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