How E-Commerce Can Succeed in Tanzania and Other Parts of Africa

It has been several years since MNO (mobile network operator) wallets and digital payments in general have caught on across large swaths of Africa. At the same time, we have not seen similar uptake in e-commerce. Africa has become a veritable graveyard for e-commerce operators. Konga, one of the pioneers for such efforts in Nigeria, was recently sold at most likely a loss to investors after taking more than $70 million USD in investment. Gloo.ng, an online supermarket, recently pivoted away from e-commerce. Jumia, the continents biggest e-commerce operator, is currently sustaining annual losses of over $140 million USD. In the long run, e-commerce holds significant promise for Africa, however as of now, few have figured out the right value proposition.

I believe there are four primary challenges that need to be overcome for e-commerce to take root in a bigger way in Tanzania (and these points maybe relevant for other parts of East Africa as well):

1.      Smartphone penetration has not reached critical mass among end consumers for widespread e-commerce. While the rate of growth is increasing as more inexpensive, decent quality phones hit the market, the average consumer remains far more comfortable with feature phones. While latest reports place data users at 43% of all mobile accounts in Tanzania, I suspect a large percentage of these users limit their data consumption to whatsapp or a limited set of similar communication apps. Access to data is not enough, users must be capable of manipulating and understanding app menus and user interfaces. Mass market digital payments right now are primarily USSD-based, a format neither flexible nor feature-rich enough to support a full e-commerce experience. This is a problem that will work itself out with time. Demographic change will rapidly result in a population that has only known life with smartphones. I expect in the next 5 to 10 years we will see smartphone adoption and usage rising above 70%, reaching a critical mass where e-commerce operations make more sense.

2.      Total Addressable Market – The number of middle to upper class consumers with the financial resources to purchase online in Tanzania and many other parts of sub-Saharan Africa remains limited and highly fragmented across major cities. E-commerce operators face an uphill climb with respect to economies of scale required to manage logistics, inventory and produce profits given relatively smaller, localized customer bases. This can be both a challenge and an opportunity. Ultimately as African economies continue to grow we will reach a tipping point where the addressable market achieves the required scale and operators start to see value in recovering costs associated with servicing customers. In the immediate to medium term, e-commerce operators will either sustain losses or have to be creative about how they address the customer base while keeping transaction costs low. 

3.      Logistics and Last Mile Delivery – Reaching the end consumer with products is a complicated task. If you look at e-commerce providers who achieved scale in developed markets, they did so on the backs of existing third party logistics carriers. For example Amazon for, the first 20 years of operation, shipped all its products through the US Post Office, UPS or FedEx – all highly mature, cost effective and reliable options. Furthermore, the range of options allowed Amazon to negotiate lower rates across all three providers, passing savings on to consumers while keeping costs low. For Amazon, the problem of getting the product to the consumer was not something they had to solve internally to reach scale. Outsourcing logistics to proven third party providers with adequate service level agreements and guaranteed delivery confirmations means Amazon could focus on the business of selling and distributing without concern for last-mile delivery. For Tanzanian and other African e-commerce operators, the entire logistics and last-mile delivery process must be taken in house. There are no scalable, reliable third party logistics providers available to ensure timely service and follow up. On top of this, addresses are not even available for many consumers. The failure of reliable third party delivery and logistics operations to the end consumer make the underlying cost of e-commerce prohibitive for many looking to get into the business. Any successful e-commerce play must build out a robust, efficient and low-cost logistics network for any chance at overall success, or third party providers will have to step up and meet expected service delivery standards.

4.      Trust – Without trust there is no e-commerce. If the customer doubts whether the product they ordered is the one they will receive at the price they agreed to, no transactions will take place. Trust is a difficult thing to acquire, but an easy thing to lose. Service level requirements, delivery confirmations, return policies, transparent pricing, escrow payment mechanisms, quality products and other factors all contribute to whether or not consumers will be open to using e-commerce to purchase goods and services through their phones. One bad experience can lose a customer for years. For e-commerce in particular, a customer-service oriented approach to sales, marketing and delivery are critical. For African markets, trust will have to be the primary driver of behavior change.

Resolution to these four factors must all coalesce to produce a value proposition for the customer that meaningfully exceeds what is currently available to them. Keep in mind when Amazon was building its business, it only had to deal with the issue of trust. Everything else discussed above was already in place. As a result, African operators must be more creative, more agile and more nimble in how they understand and approach the market. The cut-and-paste approach from western markets will not work, as we have seen a number of e-commerce operators try and fail.

E-commerce works in many parts of the world because it is a convenient, cost effective way of distributing products to consumers without building expensive brick and mortar storefronts and stocking inventories that may or may not move based on localized customer demand. While Amazon demonstrated how business can be fundamentally changed by effective e-commerce platforms, the opportunity in Africa may be even more disruptive. In developed markets most products purchased online can be found in local shops or stores, perhaps at different prices, but nonetheless they are available. In this case, e-commerce is driven by convenience and value.

In Africa, e-commerce can make available products that would otherwise never be introduced into the supply chain due to a lack of critical mass of consumers in any given area. E-commerce allows consumer demand to be aggregated across a much wider swath of consumers, creating the economic rationale for stocking inventory that was previously not there. In this case e-commerce is driving not only convenience and value, but also access. This last factor of access has the potential to turbo-charge e-commerce in Africa well beyond what we see in the USA or Europe. The future of e-commerce is Africa is bright once some underlying factors that prevent its establishment are resolved.