Digital marketplaces in Africa: Opportunities and challenges
This article is an excerpt from Standard Bank’s Can Africa take the platform economy forward? report.
The burgeoning platform economy, which refers to value-creating interactions facilitated by digital intermediaries, represents an untapped opportunity for many traditional businesses to generate new revenue streams and deepen their client relationships. In this article, Sangeet Paul Choudary and Standard Bank’s Jonathan Lamb and Kent Marais analyse the opportunities and challenges of the platform economy for Africa’s retail sector.
The retail sector has been shaped by the internet and the platform economy since the 1990s.
The internet affords near-zero marginal costs of distribution, making ecommerce more cost effective than traditional commerce. In the US, the bookstore Borders was disrupted by Amazon’s online bookstore, and eventually by the Kindle publishing platform. Retailers around the world, including Sears and Macy’s, have been shutting physical stores as platforms including Amazon grow larger on the back of network effects.
Platforms in the retail industry have the advantage of strong consumer data flows, which help them to create greater value through personalisation and targeting.
They are also able to use consumer data to advise ecosystem partners further up the value chain. China’s Tmall collaborates with global brands to co-create new China-specific offerings based on consumer data on its platform. Even traditional retailers such as Zara are using data to respond to ‘fast fashion’ trends.
Since the early 2010s, traditional retailers have invested in digital infrastructure to effectively engage users across multiple channels. In doing so, they have developed a single view of the customer. The adoption of this consumer-centred business model is a good starting point for a transition to the platform economy.
In the years ahead, we expect many traditional retailers in Africa to go this route, as US-based firms such as Walmart have done.
Retail organisations that are moving in this direction are either creating platforms themselves or developing capabilities and digital infrastructure for other platform businesses.
Platform business models
There are several key platform positions that will create competitive advantages in Africa’s platform economy.
Ecommerce marketplaces and lifestyle super-apps
The most powerful platforms in retail are the horizontal marketplaces that span multiple categories. Leading global ecommerce marketplaces that deliver to and/ or source from Africa include eBay and Alibaba. The leading local platforms include Jumia, Konga and Kilimall.
Jumia is Africa’s best-known ecommerce platform, with operations across multiple countries. The group provides a marketplace with more than 80,000 sellers and has a logistics arm with a network of leased warehouses and drop-off stations. It also provides payments capabilities in the form of JumiaPay and has an affiliate programme that allows bloggers and other individuals to promote products on its marketplace for a commission.
Konga is a Nigeria-based ecommerce platform owned by Zinox Group, and Kilimall operates across Kenya, Uganda and Nigeria. Konga’s marketplace allows traditional offline retailers to sell their products via digital channels. Sellers deliver their products to a Konga drop-off centre, and Konga then manages the logistics. Like Jumia, Konga offers affiliate marketing and comparison-shopping capabilities.
Classifieds businesses connect buyers and sellers and build scale through network effects. While they lack many of the advantages of ecommerce marketplaces – particularly control over transactions – they are an important component of Africa’s platform economy. As with other operating models, payments and logistics continue to be a challenge.
Africa’s online classifieds space has become more concentrated over time. The three largest players in this segment – Norway-based Schibsted, South Africa-based Naspers, and Ukraine-based Genesis – have bolstered their positions through acquisitions.
Naspers’ OLX acquired Schibsted’s Tradestable, and in April 2019, Genesis’ Jiji acquired OLX’s operations in some African markets. The largest classifieds player on the continent, Jiji, dwarfs the classifieds offerings of leading marketplaces such as Jumia. It had 8 million monthly active users following the OLX deal. This makes Jiji one of the most important players in Africa’s platform economy, although the business still has much scope to improve its capabilities in identity management, payments integration and logistics if it is to capture a greater portion of the flow of goods, services and money through its ecosystem.
Global marketplaces connecting Africa to the world
Alongside the many successful intra-African ecommerce marketplaces, there are also those where either the buyer or the seller is based outside of the continent.
MallforAfrica, for example, enables the creation of platforms that connect African consumers to US- and UK-based retailers. The company’s DHL Africa eShop venture combines DHL’s logistics capabilities with MallforAfrica’s retailer relationships and ecommerce engine. MallforAfrica also allows African consumers to buy products from global sellers on eBay.
MallforAfrica also operates marketplaces that connect African retailers with global buyers. In 2018, DHL and MallforAfrica launched MarketplaceAFRICA.com, a platform that connects a curated portfolio of African artisans with global buyers residing in countries where DHL operates. Further, MallforAfrica connects artisans with buyers on eBay, providing them with a link to the global market. DHL is the logistics partner for these transactions.
Offline-to-online commerce platforms
Offline-to-online platforms allow users to discover products offline and buy them online. This enables a seamless customer journey, where the buyer simply scans a QR code on their smartphone or receives a one-time password to place an order. The model has been highly successful in China. In Africa, WeChat has been among the first platforms to bring this model to market.
South Africa’s JD Group, a leading traditional retailer with brands including Incredible Connection and Russells, runs a virtual store in partnership with WeChat.
In a campaign run in 2016, WeChat allowed readers of Stuff Magazine to buy goods directly from the publication’s pages, with the orders fulfilled by JD’s stores.
Offline-to-online commerce is a compelling opportunity for traditional retailers in Africa to benefit from the growing levels of consumer engagement on digital platforms.
Digital retail platforms require a host of capabilities in order to be successful. In the US, ecommerce giants such as Amazon and eBay have relied on existing capabilities and infrastructural layers, including credit card networks, standardised mapping and addressing systems, and logistics services including the US Postal Service. But as discussed, many of these capabilities are not yet mature enough in Africa to support the continent’s platform economy.
Unsurprisingly, most major African ecommerce players – such as Jumia, Kilimall and Konga – have invested heavily in developing these capabilities themselves. They are now well positioned to start licensing these capabilities to third parties as well.
There remain opportunities to develop five broad categories of capabilities needed to support Africa’s platform economy:
1. Transaction-management capabilities, which facilitate payment collections.
2. Logistics and order-fulfilment capabilities.
3. Front-office capabilities, which assist merchants with their marketing and promotion efforts, and allow them to communicate with customers.
4. Co-innovation capabilities – those that enable merchants to create new products in conjunction with platforms.
5. Business-management capabilities for merchants.
On consumer ecommerce platforms, payment facilitators such as PayPal and Stripe fulfil a crucial role.
Some retailers and ecommerce players in Africa have built their own payment capabilities. In fact, proprietary payment capabilities are often a necessity. Most of Africa’s major ecommerce platforms still rely heavily on cash-on-delivery models, which involve additional costs and raise the likelihood of product returns. As a result, this model is less profitable. Jumia’s initial public offering (IPO) filing highlights many of these issues, alongside the company’s efforts to move transactions away from cash and towards its proprietary payment system.
To encourage the shift, Jumia and Konga offer cash back when customers use their payment systems, JumiaPay and KongaPay respectively.
Both payment services allow customers with registered phone numbers and linked bank accounts to securely make payments from their bank accounts, without requiring online banking access. A code sent to the customer’s phone acts as the equivalent of a one-click payment.
Foreign services, including WeChat Pay and Alipay, are used as payment options in East Africa, particularly in Kenya, Uganda, Tanzania and Rwanda, in partnership with regional financial services company Equity Bank.
Considering the importance of payment capabilities in the platform economy, ownership of these services allows platform companies to move into new segments of the market, as shown by WeChat’s evolution from a communications platform. In Southeast Asia, Grab started as a ride-hailing app but has moved into media, ecommerce and financial services thanks to the success of its payments arm.
Logistics as a service
Logistics remains one of the biggest hurdles to the rise of ecommerce in Africa. Jumia, Konga and Kilimall have built proprietary logistics services and also offer these to third parties. Traditional logistics groups such as DHL are also improving their ability to service ecommerce players. Telecommunications companies such as Safaricom, as well as national postal service operators, are playing an important role in this space too, leveraging their massive agent networks.
Last-mile delivery in particular remains a significant challenge in Africa. The lack of structured national address systems, combined with poor road infrastructure, increases the complexity of deliveries.
Jumia Logistics has responded by using machine learning to map out addresses using coordinates logged on deliveries, and routes used. As more deliveries are made, the mapping coverage improves, and delivery routes are optimised.
Moreover, unconventional modes of transport are being used for last-mile delivery. Jumia Logistics, for example, uses motorcycles, in addition to other vehicles.
Other innovative last-mile delivery models could transform the industry. Zipline in Rwanda and Astral Aerial Solutions in Kenya have worked on commercial drone deliveries, which could eventually be extended to last-mile ecommerce deliveries as well.
Kilimall has taken a leaf out of China’s logistics playbook. The company uses aggregated statistics from online shopping activity to determine specific demand regions within a city. It then partners with local businesses that serve as pickup centres. This reduces complexities, while consumers benefit from not having to pay delivery fees.
Meanwhile, Konga has developed its own logistics capabilities but also offers a self-fulfilment model – whereby sellers manage the delivery process by leveraging Konga’s KExpress service and its bulk shipping agreements with courier partners. It also allows merchants to receive payments directly from buyers when deliveries are made, rather than relying on the more centralised delivery model where merchant inventory is first aggregated centrally and then shipped by the marketplace owner.
With ecommerce growing, many start-ups have been formed to provide specialised logistics services. Sendy, for instance, provides an on-demand delivery network, while Fargo Courier provides a warehousing and fulfilment solution for online businesses, allowing them to track their stock as it moves in and out of warehouses and is delivered to customers.
Kenyan mobile network operator Safaricom partners with Fargo and Sendy to access many of these back-office capabilities as a service.
In addition to servicing merchants, many logistics-as-a-service players target consumers as well. Pargo has created a network of over 2,500 pick-up points across South Africa, where users can accept delivery. This capability is provided to ecommerce platforms, which offer this option at checkout. DSV has a similar locker system and Takealot delivers items to a number of pick-up points. Some traditional logistics providers, which are also moving into the logistics-as-a-service space, are leveraging their expertise and asset bases to vertically integrate into ecommerce. DHL is one of them.
Finally, there is scope for Africa’s national postal networks to provide logistics services to ecommerce platforms – as has been done in the US and other developed markets.
The Nigerian Postal Service is tackling the addressing issue using an alternative mapping and addressing service called What3words. In the absence of structured address-naming conventions, What3words divides map surfaces into squares of three metres by three metres, and assigns three words to each square, which then serves as a geo-located identifier for that location. Konga uses the Nigerian Postal Service’s capability as a service to solve its logistics and delivery challenges.
Similarly, Kilimall partners with the Postal Corporation of Kenya to allow customers to collect goods and place orders at post offices.
Salesforce as a service: Since internet penetration remains low in sub-Saharan Africa, potential customers may not always have access to e-commerce platforms. Some platforms are trying to solve this problem by setting up ‘feet on street’ salesforces. Jumia’s JumiaForce is a network of agents, equipped with WiFi tablets, who go from door to door to take orders on behalf of customers.
This capability can, again, be licensed to third-party ecommerce platforms, particularly those that are non-competitors. It could also be licensed to financial services and healthcare platforms, if the agents are specifically trained for those sectors.
Omnichannel capabilities: In the platform economy, brands and merchants need to have a single view of the customer across all their marketing channels. This is a prerequisite to creating a seamless customer journey across multiple touchpoints and is of particular importance to the retail industry. Companies such as OneView Commerce provide this service and let retailers engage customers across multiple channels.
Loyalty as a service: Customer loyalty is an important success factor for platform companies. Safaricom’s Bonga loyalty programme lets customers earn points for service usage. The telecommunications group is now extending the programme to ecommerce platforms. For instance, it lets users earn points for purchases made on Kilimall.
Communications as a service: Local markets have thrived in Africa without the internet, relying on face-to-face communication and negotiation. Communication will be an important capability for online marketplaces as well. Konga, for example, has a proprietary messaging tool integrated onto its platform. The K-Talk tool enables real-time communication between buyers and sellers. In the African context, such a communication capability could even be licensed to non-competitor platforms. These tools also benefit from machine learning – the platform can correlate communication patterns with fraudulent transactions to better predict instances of fraud over time. This is a valuable capability considering the time it takes for new entrants to develop similar tools.
Brands are increasingly partnering with platforms to co-innovate and develop new offerings. With the wealth of consumer data that platforms have, they are well positioned to do this.
This partnership model has been highly successful in China, where Alibaba’s Tmall Innovation Center is a key player. International brands such as Pepsi, Johnson & Johnson, Snickers, and L’Oréal have partnered with Tmall to co-develop products, which are initially launched and tested exclusively on the platform. Alibaba also gains co-ownership of these new brands.
Given Africa’s unique consumption patterns, large platforms such as Jumia and Konga may be well positioned to partner with international brands. Considering its presence in Africa, Alibaba itself may bring the Tmall Innovation Center model to the continent at some point.
Business-management capabilities for merchants
Shop in a box: A ‘shop in a box’ refers to the provision of the underlying infrastructure and tools required to run an end-to-end online store. These platforms essentially provide the tools and services a merchant needs to set up an online shop. Shopify is the leading player, employing this business model globally. Several merchants in Africa have also set up shops on Shopify.
Shopify provides access to an ecosystem of third-party services that the merchants can use. In Nigeria, payment service provider Paystack lets merchants in the country set up outlets on Shopify and accept payments through Paystack itself.
Kenya’s Sky.Garden is a similar shop-in-a-box solution that additionally provides distribution capabilities by creating its own marketplace destination. Once they have set up shop, a merchant can also sell through third-party platforms including WhatsApp, Facebook and Instagram by posting a link to their online store.
Marketplace in a box: A marketplace-in-a-box solution allows any business to easily set up an ecommerce marketplace. Over and above the technology and logistics capabilities that come with a shop-in-a-box solution, a marketplace in a box provides the third-party merchant network required to set up a marketplace. A business adopting this solution can sell products from these third-party merchants to its customers. It is important to note that the third-party merchant ecosystem continues to be owned by the marketplace-in-a-box provider.
In Africa, Link Commerce is the leading provider of marketplace-in-a-box solutions. Link Commerce provides a third-party merchant ecosystem comprising more than 200 retailers from the US and UK, which sell more than 5 billion products. The solution is whitelabelled, allowing a client to brand the marketplace for their customer base. The solution can be used by logistics players, banks, telecommunications companies and even retailers.
Retail back-end in a box: Given Africa’s unique logistics, warehousing and fulfilment challenges, the provision of entire retail back-end services is a compelling business proposition. In this business model, the end-to-end management of the physical movement of goods for online merchants is provided.
South Africa’s Parcelninja provides retail-backend-in-a-box solutions, combining warehousing and fulfilment services for ecommerce businesses.
These tools integrate with an ecommerce merchant or marketplace’s front-end store, and provide an integrated solution across order management, warehousing, packaging and logistics. Parcelninja combines integrated real-time tracking and analytics capabilities with a proprietary logistics network of partner couriers.
Digital trade infrastructure: Digital trade infrastructure providers supply the operational capabilities and tools required for merchants to run their businesses. Alibaba’s Electronic World Trade Platform (eWTP) is the most significant player in this space in Africa. The eWTP solution provides small- and medium-sized enterprises with back-end capabilities, including logistics as a service, cloud computing, mobile payments and skills training.
But unlike Link Commerce or Parcelninja, eWTP is just one element of the digital infrastructure that Alibaba can provide. Once businesses start using eWTP, their data can be used to obtain bank finance, with the credit-scoring process done by Alibaba’s Ant Financial. Further, the eWTP solution allows merchants to sell directly to Chinese consumers. More importantly, as other African countries follow Rwanda’s lead and join eWTP, the platform could serve as a common backend, effectively creating a standard for cross-border trade on the continent.
Because of Alibaba’s unique ability to serve merchants across the spectrum of commerce, financing and logistics, we expect that the group will be the most comprehensive provider of digital trade infrastructure in coming years.
Digital infrastructure and the road ahead
While ecommerce continues to gain momentum in Africa, its growth is being tempered by numerous obstacles. There remains a long way to go to develop ubiquitous and robust payments and logistics infrastructure, for instance.
The reliance on cash-on-delivery payments is another challenge that needs to be addressed, considering the additional costs involved and delivery failures. More than 14.4% of Jumia’s gross merchandise value in 2018 involved failed deliveries or product returns. Meanwhile, Jumia’s IPO prospectus revealed that more than $800,000 of cash payments for 2016 remained uncollected in 2018. Cash collection also brings with it the risk of fraud. In response to these challenges, Konga has moved to a prepay-only model.
In some countries, Jumia’s delivery fleet is larger than that of major logistics firms such as UPS, FedEx and DHL. But with high logistics and delivery infrastructure costs, Africa’s ecommerce platforms also demonstrate high burn rates. Jumia incurred nearly $1 billion in total losses by the end of 2018 due to its ongoing investments in building the required infrastructure.
These challenges notwithstanding, ecommerce platforms are poised for strong growth across Africa. Better access to credit, thanks largely to fintech platforms, will enable new merchants to set up shop more easily. The payment mix is also shifting towards mobile money-based solutions, and interoperability between mobile-money players will accelerate this shift. Developments in the financial services and telecommunications industries will spur the growth of platforms in the retail industry.
Measures being taken to curb the spread of COVID-19 could accelerate the adoption of ecommerce in Africa. Telecommunications groups are encouraging the use of mobile money, and the avoidance of physical cash, by scrapping transfer fees, for instance. They are also providing faster internet speeds to customers as more people work from home. In general, social-distancing measures are raising internet usage and more people are turning to online deliveries for the first time.