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The listing of JUMIA, an African E-commerce Unicorn

A look at JUMIA's journey to listing on the New York Stock Exchange

March 25, 2019

Category : ABP's insight

(A JUMIA Office in Egypt, photo by ABP)

In a much-anticipated move, JUMIA Technologies ("JUMIA"), Africa's largest e-commerce platform, has filed a registration statement to list on the New York Stock Exchange. With four million active users spanning 14 countries across the continent, JUMIA has become Africa's largest e-commerce platform, both in terms of geographic coverage and number of users.

JUMIA is one of only three to come out of Africa to-date that has reached a $1 billion valuation "unicorn" status. This listing will be closely watched as a potential investment exit model for various ventures and for its anticipated impact on the future business success of Africa's tech, mobile and distribution fields.

Africa Business Partners recently published an 18-page report on the JUMIA listing in the March 18 issue of the Africa Business Weekly. In that report, we analyses JUMIA's March 12 F-1 form with the SEC in the light of our sentinel survey on e-commerce conducted in Kenya, Nigeria and Côte d'Ivoire to assess the current state of the company's e-commerce business and the potential for further growth. Here, we have provided a summary of that report with excerpts.

※ Please include "Source: Africa Business Partners" when quoting from this article.


Outline of JUMIA as of the registration statement

JUMIA was launched in 2012 by two French ex-McKinsey consultants Sacha Poignonnec and Jeremy Hodara, who are both 38 years old. The company is registered in Germany, with operations headquartered in Dubai (UAE) and its technical development and data teams located in Portugal. 

The company runs e-commerce platform in 14 African countries (Nigeria, Egypt, Côte d'Ivoire, Kenya, Cameroon, Ghana, Senegal, Algeria, Morocco, Tunisia, Tanzania, Uganda, Rwanda, and South Africa), with gross merchandise value (GMV) highest in Nigeria, where it first began operating. Egypt is its second largest market. 

Sales are highest in West Africa, followed by North Africa. We have been conducting a sentinel survey on e-commerce in Nigeria, Côte d'Ivoire and Kenya since 2013, and as a part of this, we have regularly visited JUMIA's offices throughout the region, including Nigeria, Côte d'Ivoire, Kenya and Egypt. From the outset JUMIA's e-commerce business has been strongest in West Africa. 

Figure 1: African countries in which JUMIA has operations (including those with both e-commerce and classifieds, and those with classifieds only)
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Figure 2: JUMIA's sales by region (in '000 Euro)

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The table below shows JUMIA's shareholders as of December 2018. While Rocket Internet has been a majority shareholder since inception, Africa's largest mobile telecommunications provider MTN was now the largest shareholder. All three of JUMIA's largest shareholders have been investors since JUMIA was founded.

JUMIA reached the billion-dollar valuation mark in 2016, when a new group of investors came on board, including French insurance giant AXA, the UK governmental development institution CDC and US  Goldman Sachs. The registration statement revealed that NBA star Andre Iguodala of the Golden State Warriors has now joined the ranks of JUMIA's supervisory board members. 

Figure3: JUMIA's shareholders
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JUMIA's Business Model

The JUMIA's transaction has 3 models, direct-to-consumer sales, consignment sales, and drop shipping. Respectively, these comprise around 10%, 30% and 60% of GMV. Most profitable is the consignment sales model, whereby JUMIA will warehouse sellers' products and undertake fulfillment of orders. 

Figure 4: JUMIA's transaction model
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Initially, JUMIA focused on direct-to-consumer sales, and used its own distribution network. As it was difficult to get certain volume of stock and variety of products from sellers unaccustomed to e-commerce, and there were no local companies that could be relied on to provide distribution services. Consumers themselves were new to e-commerce, and it was not uncommon for issues to arise with mistaken orders, or customers not being at home when deliveries were scheduled. 

The company's registration statement contains a laundry-list of the many challenges JUMIA has faced since those early years. For example, after outsourced deliveries commenced in Kenya in 2016 there was a period when many cash-on-delivery payments failed to be collected, leading to losses of 720,000 Euro. Even today, some 14.4% of gross merchandise value (GMV) to be delivered or is returned.

In e-commerce, substantial investment is required before sales are raised. It takes time for GMV to reach the critical mass that is required to leverage the high fixed costs and provide a return for the platform. In the early years, JUMIA invested heavily in warehouses and delivery, but it has since pivoted to a strategy of spending fixed costs more on its development of technology and improving operations.

Today, JUMIA limits its direct-to-consumer product business to items required for merchandising purposes, leaving most of the distribution and delivery to third parties. Instead, JUMIA focuses on earning commissions and fulfillment fee revenue from sellers. This is precisely the kind of "copy & paste VC" for which Rocket Internet has become well-known - replicating the business model of successful global companies in a developing country setting, achieving high valuations and attracting further investment from deep-pocketed capital sources.

Our research shows that the main products that JUMIA sells on its platform are mobile phones and electronics. These products have the advantage of being easily warehoused without concern over expiry dates, so this product lineup is a good match for high-margin consignment sales. In the early years, the primary products were foreign imported goods and the platform appealed to consumers for the access it provided items which could not be obtained Today, however, the focus is more on offering a platform for local sellers and the appeal is primarily the price point. 


JUMIA's Business Performance

The following primary indicators were collated from JUMIA's registration statement and Rocket Internet's annual report. Both GMV and the number of active users have risen significantly in these 5 years. However, looking at adjusted EBITDA, annual losses are also increasing and do not appear to have yet peaked out. 

Figure 5: Primary Indicators' trend

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Figure 6: Adjusted EBITDA (Euro, in millions)

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The most important performance indicator for JUMIA set in the registration statement is "platform contribution" or the marginal profit after deducting paid distribution, delivery costs and non-platform sales (technology service fees, etc.) from gross profit. This indicator monitors how much gross profit is derived from the e-commerce business and can be used to manage whether the business is breaking even on a gross profit basis. It is currently slightly into positive territory and even increased YoY in 2018. 

However, the recent registration statement shows that platform profit contribution was zero in the company's largest market of Nigeria, which constitutes 28.6% of GMV, so clearly there is some way to go before it can be said to be making a gross profit.

Fixed costs, which includes items such as advertising expenses, technology and content expenses, and general and administrative expense, are increasing, and the cash flow statement and balance sheet show that funds continue to be injected to cover these costs. 

Figure 7: Consolidated P/L and Primary Indicators

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While sales, GMV, gross profit and platform profit contribution are improving, these current figures suggest the business has not yet reached the point where it can independently achieve profitability. Moreover, GMV and platform profit contribution are both increasing at about the same rate, which suggests that it has also not yet reached the stage where increasing sales generates a larger profit by leverage.

These numbers also suggest that JUMIA's commission rate and fulfillment fee rate of its consignment sales and drop shopping are at the somewhat low level of excess two to three percent and about one Euro per product respectively.

At these margins, the business will not generate a profit without significant transaction volumes, on the other hand, the reason of low margin is because JUMIA is still at the stage where it must increase the ranks of sellers who use the platform, and continue to win new customers on price appeal. Based on our research, JUMIA is recognized as a place where items can be purchased more cheaply than real local markets in its operational countries, and since earning this reputation, it has greatly increased its active user base.

Looking at purchasing behavior, JUMIA's customers in Africa often tend to first visit the JUMIA platform, confirm the specs and price of a product they wish to purchase, then actually go to their local market to confirm the price of the same item, and after confirmation that the item is indeed cheaper on JUMIA, they buy it on JUMIA.

That's why the purchased products on JUMIA are such as mobile phones and electronics have similar specs and can be easily compared on price. JUMIA promotes local sellers to upload their products by reducing its own profit in order to provide a good product range cheaply at an attractive price and this activity achieves the growth of its active user base.

Technological development and refining of operations are areas where JUMIA is expected to have a solid advantage, and progress can indeed be seen here. In JUMIA's early years of 2013 to 2016, when interviewed in our research, often had many complaints about delivery, taking too long, receiving the wrong item, or not being able to make a return.

However, such complaints have fallen markedly each year, with customers sometimes now commenting on the reliability and speed of delivery, or even that they can trust JUMIA. Customers are also beginning to comment on convenience of e- customers didn't say in early years, of home delivery and not having to go out to make a purchase. At the very least, it would appear that JUMIA has reached the point where it understands what works and how to achieve it. This is a solid starting point from which to grow its e-commerce services in Africa.

Our research shows delivery has been the most persistent source of complaints from customers. As JUMIA outsources delivery, it is difficult to control. Because cash-on-delivery is the primary method of payment, it is also a constant source of losses due to fraud. Refining its management of the delivery process, improving efficiency of handling and reducing or preventing fraud where possible will be a critical key to JUMIA's future growth and profitability. 

On the payments front, while cash-on-delivery remains the most popular method of payment, in some areas such as Lagos in Nigeria and Abidjan in Côte d'Ivoire there has been an increase in the use of POS settlements via debit card, online banking (in Nigeria) or mobile payment (in Côte d'Ivoire) instead of cash-on-delivery payment, which should reduce the incidence of fraud.

In its registration statement, JUMIA stated that in the fourth quarter of 2018, around half of orders placed on its platform in Nigeria and Egypt were completed using JUMIAPay. It is a payment gateway that connects to bank accounts, etc. (not mobile money that can itself be used for payment). Based on our research, that figure appears a little high and was likely a result of temporary campaigns or other short-term measures. Nevertheless, the situation has improved since the early years of 2013 to 2016, when West Africans were mostly skeptical of mobile money and online banking systems. 

In Kenya, where mobile money known M-pesa has already become popular, our research shows that around 60% of users choose to pre-pay using M-pesa. It was not that long ago when it was commonly said that prepayment would not work in Africa due to widespread skepticism towards e-commerce and fear that would not arrive despite payment. Perceptions have changed significantly in that short time, with consumers now becoming more comfortable using both digital payment systems and e-commerce, which should contribute to further efficiency improvements JUMIA's model. 

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(A JUMIA's truck used for delivering, at Lagos Nigeria, photo by ABP)

JUMIA's Listing Strategy

JUMIA's objective of listing is at least in part motivated by its largest shareholder MTN wanting to recover some of its investments in the company in order to meet its own debt and capital raising needs. JUMIA's second largest shareholder, Rocket Internet, has been invested in JUMIA for seven years since first investing in 2012,  should exit soon by its venture capital nature.

It is not unusual recently to see tech companies being listed in the US while still unprofitable, and with JUMIA's need to list despite negative profit, this may be behind the choice of using the New York Stock Exchange to list a German company that its development in Portugal and its business in Africa. As a result of this listing, MTN is expected to sell at least its 40% shares in JUMIA.

According to JUMIA's registration statement, the company will be classified as an EGC company under the JOBS Act, and it has been able to take advantage of a confidential filing system introduced in the US in 2017, which means it must meet a less stringent disclosure requirement its SEC registration statement. As a result, the public offering price and number of shares has not yet been made public.

Media reports suggest that the company is targeting a total rise of around $250 million. Based on the $1 billion valuation at the time of JUMIA's 2016 capital rising, and MTN's need to repay debts of around $600 million, a market cap of around $1.5 billion is anticipated. The registration statement filed with the SEC clearly states that the company has no plans to pay dividends in the near future. 


JUMIA: Looking Ahead

On the business side, JUMIA will need to make a big push to increase its base of active users in terms of both number of users and buying frequency, in order to raise GMV (gross merchandise value) while maintaining attractive prices with low commissions and fulfillment fees. JUMIA currently has four million active users, which is a relatively small number on which to base an e-commerce platform and user numbers have not really kept growth. Amazon, for example, has 40 million users in Japan alone. 

For JUMIA to achieve a drastic J-curve of profit improvement  it will really need to see fixed costs level off quickly as technology and operations are refined and fulfillment and distribution stabilizes, after which the company can redirect funds towards the kind of marketing efforts that will be needed to increase GMV.

JUMIA's operation spreads in the 14 countries in Africa; it is likely ease of fund raising and to maintain its competitive position. Our research shows that there is a large difference in e-commerce demand and usage preferences between countries within Africa. This diversity of markets could be a hurdle to overcome before JUMIA can successfully increase its active user base.

Our research also shows that JUMIA's users tend to be concentrated in the largest cities within each country; with brand awareness and usage dropping rapidly the further away one goes into regional cities and away from city centers. As like mobile money usage spread throughout Kenya thanks to physical small shops that have enabled deposits and remittances, some real access points might be necessary for the e-commerce platform.

There is also an over-reliance on sales of mobile phones and consumer electronics. JUMIA is seen by many as purely an online discount electronics store. In order to increase the frequency of user purchases, it may need to broaden its scope to include furniture and household goods. In any case, some new approaches may be needed in order to increase the company's current active user base.

JUMIA's registration statement states that it is considering opening up JUMIAPay and its logistics systems and other business tools to third parties as a source of new revenue. JUMIA remains an e-commerce leader in Africa, but other competitors begin to emerge. There is also a potential for the company to pursue growth through acquisitions of other e-commerce companies in Africa.

List of Japanese Enterprises Doing Business with African Continent and Countries

Japanese companies' list doing business in Africa, edited by ABP[Detail]

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