Online retail sector struggles to expand as industry banks on growing middle-class

Kenya’s growing middle-class will help in determining the future of the online retail industry, a study by Uqalo Research has revealed. The October 2016 study, titled ‘An Overview of the Online Retail Space in sub-Saharan Africa’, has found that online retail or e-commerce is evolving across Sub-Saharan Africa (SSA).

“The rhetoric of ‘Africa rising’ with its burgeoning African middle class and consumer market has been slightly deflated since the beginning of 2016 with average GDP growth across Africa sinking below 5 per cent,” reads part of the analysis, which was released just days ago.

Based on the research, perceptions of the size and growth trajectory of the consumer sector also vary with some forecasts claiming that online retail sales in South Africa, will rise to US$770m by 20183 whilst others suggest the market will be worth $50 billion (Sh5 trillion) by then. Growth of the consumer market in SSA is still set expand as the “young and connected middle class is growing fast and still deciding on its favourite brands. In short it’s brimming with potential”.

In this context, online retail remains relevant as African consumers turn to new and innovative ways to transact. The optimism of the expansion of the online retail sector has been tempered by limited broadband exposure and slow changes in consumers’ shopping cultures and as it stands today, online retail, even in the more developed markets of South Africa and Nigeria, largely remains in its infancy.

“While 1 per cent represents a very small proportion of overall retail, it is also a psychological barrier for investment in e-commerce initiatives by physical retailers,” explains Arthur Goldstuck, Managing Director of World Wide Worx, a South Africa-based business research company.

Given these limitations, measured optimism and extensive potential, the e-commerce space presents a unique value proposition for investors, retailers and consumers in SSA, says the study. Most of the online retail space in SSA remains unchartered with potential lying in innovative ways to encourge African consumers to move towards transacting online. Several dominant players have emerged across the region, attempting to apply the e-commerce models of e-commerce giants such as Amazon and eBay and China’s answer to eBay, Alibaba. The sector continues to be dominated by African Internet Group, now known as Jumia Group, whose suite of online platforms continues to gain traction across various markets, especially its two retail sites Jumia and Kaymu. The other platforms include Konga, MallforAfrica and Kilimall which are seeking to apply traditional e-commerce models in the African context in order to capture consumers to the online retail space.

Jumia Group, previously known as African Internet Holdings, is the largest e-commerce company in Africa with eleven digital ventures, ranging from food delivery, classified advertising sites, hotel bookings and the e-retailer Jumia.com (Jumia). Since its establishment in 2012, through an initial investment by the Berlin-based start-up incubator Rocket Internet, Jumia Group has shown double-digit growth month-on-month since. In March 2016, Jumia Group received more than$300 million (Sh30 billion) in funding from new and existing investors, including a previously announced funding commitment from AXA, the global insurance and asset management company.

Based on Uqalo’s research, various obstacles to e-commerce exist across the region including unreliable internet connections, logistical challenges, low bank card penetration as well as a general distrust of transacting online. Internet access poses as the most inhibiting limitation for the sector across SSA as this remains inadequate and expensive with restricted broadband across the region and home internet access constrained to a small wealthy elite. Internet usage across the continent is predicted at only 26.8 per cent of the population making use of the internet, with only a 7.231 per cent increase in internet penetration from 2000 to 2015.

Infrastructural issues have also affected online retailing in the same way as formal retail has been affected in the region. Non-functioning postal services and poor logistics networks negatively affect lead times. Some online businesses such as Jumia and Konga in Nigeria and Kilimall in Kenya have turned to the use of delivery motorbikes to reduce lead times and thus the cost of doing business.

Coupled with these limitations is the need to change consumer mindsets, states the study. The growth of online retail worldwide has been hindered by the need to adjust consumers’ perceptions to trusting online payment methods. This includes trusting that they will receive the correct product that they ordered, in a timely manner and in an acceptable state.

 

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