Tech

How will Amazon win the hearts and wallets of African consumers?

How can Amazon win the hearts of African consumers?

By
Guest Author

Nov 28, 2022

Amazon South

Image source: Getty Images

This guest post was contributed to by Lavanya AnandPrincipal at VestedWorld, A manager of early-stage investment funds.

Each trip to Amazon, I pack a bag full of Amazon products. Somali companies in Kenya are working together to import Amazon products. Second-hand goods can be purchased and sold on both online and offline marketplaces. Are you wondering if Jumia and Jiji will deliver on their promises? Long lines at Carrefour and in traffic can lead to long waits. Many African middle- and top-income consumers live with this reality. 

As a result, we’ve been patiently waiting for the entrance of the e-commerce giant Amazon to disrupt the retail sector in Africa. They’ve already dipped their toes with their AWS data centre infrastructure in South Africa and the acquisition of the Souq online marketplace in Egypt over the past few years. They finally got there recently. Announced Their plans are to expand their core market offering into South Africa and Nigeria in 2023. It is important to ask whether it will succeed and, if so, how.

First, let’s share some market data about the e-commerce outlook in Africa. According to StatistaThe African e-commerce market was valued at $38B in 2021 and is expected to rise to $72B by 2025. This market is dominated (61%) by South Africa and Nigeria. Electronics are the most popular category within e-commerce. They are followed by fashion, toys, personal care, and fashion.

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Figure 2: Africa’s Average Retail Price per Unit (ARPU) according to Product Category

Jumia, Jiji and Konga in East Africa and West Africa respectively, as well as Takealot, Makro and Makro in South Africa, have been the leaders in the growing e-commerce marketplace. Jumia accounted for approximately $1B of platform sales in FY2021. It’s worth noting that Jumia has had its fair share of challenges since it launched in 2012, as they had to build logistics and payments infrastructure in addition to consumer education from the ground up. Amazon is one example of a company that can benefit from the second-mover advantage.

Let’s compare Africa to market trends in other emerging markets that Amazon has entered in the past decade. Latin America is a $100B market for e-commerce. Its largest markets are Brazil, which has $34B, and Mexico, which has $23B. In 2021. Amazon generated approximately $1.5B sales from Brazil and $1.4B from Mexico in 2021, where they’re behind competitors like Mercado Libre, with only a 4–6% market share. Amazon generated $2.6B in 2021, and the Indian ecommerce market is valued at $63B. For more background, see Amazon’s evolution in India Here Brazil Here.

Although Africa is a smaller market than South Asia and Latin America, macroeconomic trends suggest that e-commerce will grow rapidly in the next 10 year.

  • Nearly 1 billion people, or 70% of Africa’s population, are below the age 35. There are 650M people under the age 17.
  • The increase in smartphone and internet use is a result both of the youth bulge and technological adoption. According to StatistaAccording to the latest estimates, there are currently 570M internet customers on the continent. While trust in e-commerce is still low, it is becoming more popular.
  • Over the last decade, the technology industry has seen steady growth. Startups raised over $5B by 2022. Many of these innovations are in the infrastructure that allows for e-commerce to thrive, such as logistics and warehousing.

Now let’s break this down further into the key pieces of a successful B2C e-commerce marketplace and how Amazon can win in Africa.

1. Consumer trust

  • Consumer education and trust are the biggest barriers to success. Most Africans still shop at their local grocery store for their daily necessities. E-commerce is still relatively new. Many of the issues faced by those who have tried e-commerce include fraud, low quality products or counterfeit goods, late delivery, no return options, and lack of customer service. Covid-19 has also helped to accelerate digital commerce in Africa, just as it did elsewhere.
  • Existing options such as Jumia or Konga are not satisfying, which is a double-edged knife. On one hand, Amazon faces less direct competition (unlike in Latin America and India), but on the other hand, they have to prove they’ll actually be better instead of a replica. After Amazon acquired Souq Egypt, customers complained about long delivery times, poor packaging and poor customer service.
  • Recommendation — Amazon will have to ensure quality and affordable products and timely delivery to earn the trust of its customers. If the customer experience is not satisfactory, they should be able return the product to receive a credit or refund. They might also be able to benefit from investments in brand awareness (e.g. They could also benefit from billboards and brick-and-mortar customer service hubs.

2. Procurement

  • The next thing they’ll need to get right is their internal operations, starting with procurement. Amazon will need to decide whether it will launch using a first-party approach (Amazon-controlled inventory), or a third-party (supplier controlled inventory). For context, Jumia started with a third party marketplace which still dominates its overall platform sales, but they’ve recently been prioritizing a shift to first-party sales.
  • Amazon will have to build strong relationships with manufacturers, resellers, importers, distributors and manufacturers. Given the prevalence of counterfeit products in the market, they’ll need to find ways to verify sellers or the authenticity of products or go the private label route.
  • Amazon will also need information to determine which categories to launch. Jumia launched with electronics (higher margin, lower volume) and has since shifted to FMCG and Grocery (lower margin, lower AOV, higher volume). Amazon began in Brazil with Kindles, books, then expanded to electronic and household goods. Amazon Africa would benefit from offering a range of categories and items with higher AOV to justify delivery fees (unless they offer shipping free).
  • If Amazon takes a first party approach and imports supplies themselves, they can maintain a higher margin but they’ll need to manage FX risk either through hedging or country diversification, given the volatility and devaluation experienced by many African countries in recent years.
  • Recommendation — To control quality from the outset, Amazon should take a first-party approach across 2–3 key categories (electronics, fashion, personal care), working directly with manufacturers and importers. They can also consider a third party marketplace approach for the long tail of product categories. They will be able to keep higher margins and possibly subvention delivery costs.

3. Fulfilment

  • The next step is the actual fulfillment of delivery to customers. Amazon will have to make a decision about whether they want to purchase their own fleet, warehouses, or partner with (3PL) partners. It will ultimately depend on their commitment to Africa over the long-term as well as how fast their competitors move.
  • A central warehouse would be ideal for inventory storage, with smaller fulfilment centers located closer to customers. They’ll also need to cost-effectively deliver to the last-mile through a combination of trucks, 3-wheelers, and motorcycles. Amazon may have to pay delivery fees because customers are sensitive to these charges.
  • Sendy, Glovo and Max.ng are potential tech-enabled 3PL partner. Gokada is for transport, and Gobeba, Haul247, and Max.ng for micro-warehousing. There’s also more traditional 3PLs like Africa Logistics Properties. Amazon will ultimately need to compare these 3PLs with Fulfilment by Amazon’s (FBA) cost per square metre, delivery costs, delivery rates, and delivery speeds.
  • Jumia faced another challenge initially: ensuring that delivery was accurate and efficient. This is changing with the advent of Google Maps and startup OkHi that are being used by Bolt and Uber.
  • Africa is still a cash-based country. However, with the launch of MPesa and Flutterwave and a wave cross-border payments startups like Cross-Border Payments Startups, online payment acceptance (mobile and international money, crypto / stabilizecoin wallets), has been made much easier. This will reduce cart abandonment and fraud and increase the speed and conversion rate for transactions. Amazon may also be interested in creating a digital wallet that allows customers to pay.
  • The durability of the packaging, return processing and logistics are also important considerations in fulfilment.
  • Recommendation — To scale quickly, Amazon should initially partner with 3PLs like Sendy and Gobeba. If it proves to be cost-effective, then an acquisition could make sense to eventually become Amazon’s in-house FBA.

4. Talent and other operations

  • It is often overlooked that quality talent is essential to scale an e-commerce platform for B2C across multiple markets. This is often the biggest bottleneck for high growth startups in Africa. Many must pay extremely high salaries to be able to compete for local talent, or look for talent overseas.
  • Andela and other companies have helped build the local software engineering talent pool. Zindi is also creating strong data science talent. Tech startups often seek out Jumia’s marketing and operations talent.
  • Then there’s also customer experience talent, where existing call centre options like iSON and Dial Afrika exist.
  • Because it didn’t fit elsewhere, I also wanted to emphasise the importance of fair regulation and tax treatment for a thriving e-commerce market. Amazon may need to collaborate with regulators in order to develop more business-friendly laws depending on their market.
  • Recommendation — Amazon will likely need to recruit a mix of local and international talent, which will require poaching from other African marketplaces. For long-term sustainability, they should also create a strong in-house training program.

5. Customer retention and acquisition

  • Amazon’s sustainability in Africa will ultimately be determined by its unit economics, especially its LTV, AOV and CAC.
  • The AOV, as mentioned earlier, will make fulfilment more cost-efficient. Customers with high incomes and rising middle classes are the ones who can afford significant purchases at once. LipaLater, CredPal and others are focusing on BNPL offerings that enable instalment-based payment. Tushop, Sukhiba and Pricepally enable group-buying to increase AOV.
  • Mobile-first advertising is growing via channels such as Whatsapp, Instagram, and SMS. You’re even seeing a significant amount of commerce being done on these platforms via Whatsapp chatbots and the rising influencer community on Instagram and TikTok. This acquisition and retention is possible thanks to companies like Terragon and Beem. It will help decrease CAC.
  • Africa’s offline channels for customer acquisition continue to be a success. B2C ecommerce startups are not only able to use showrooms and billboards to increase brand trust, but also have community agents who receive a commission for each sale. This allows them to acquire customers and support last-mile delivery in remote areas. Examples include Kasha, Copia, and Jumia’s JForce.
  • Recommendation — The middle and high-income urban consumer is a highly sought after segment and Amazon will need to invest in truly understanding their behavior and needs through focus groups, consumer data analytics, and influencer marketing. To increase AOV they should also work with the relevant BNPL partner in each market.

6. Other business models

  • Amazon may have to adapt to frontier markets models if it is having trouble with its traditional B2C model.
  • Over the past 5 years, we’ve seen the rise of B2B e-commerce marketplaces like Sabi, TradeDepot, and Betastore in West Africa, Wasoko and Marketforce in East Africa, and Chari and MaxAB in North Africa. These companies enable small retailers and resellers to have reliable and easy access stock, credit, and better pricing.
  • Other supporters include Anka, Pivo and Pastel as well as Kippa and Bumpa. They help digitize these MSMEs through digital bookkeeping, working capital and social commerce.
  • Amazon could serve these informal retailers as well, or partner with them to be micro-fulfillment centers or pick-up locations. They’ve already taken this Approach In emerging markets such as India. They could also partner up with traditional retailers such as Naivas, Shoprite and Naivas to offer a hybrid offering, similar to Whole Foods in the US. This is how WalMart approached South Africa with its MassMart acquisitions and the subsequent OneCart, Wumdrop, and Wumdrop acquisitions.
  • Recommendation — I expect Amazon to launch with its bread and butter B2C marketplace approach in key markets like Nigeria and South Africa. A hybrid approach to serving customers and/or partnering in retail is a good option for smaller, less developed countries.

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Figure 3: Examples of e-commerce companies that are active in Africa

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Figure 4: Examples of ecommerce alternatives in Africa

Many questions remain about the approach Amazon will take in Africa but I’m excited to see what happens with their initial launch in 2023 and their evolution over the subsequent months and years. With more competition in the market, the consumer will win with better quality products, better customer services, lower prices and greater access. This analysis was helpful. Please leave your comments, suggestions and questions below to keep the conversation going.

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