March 28, 2022

Feelers indicate that Amazon may now be ready to explore what the continent has to offer on the e-commerce front but the nous and experience of indigenous giants such as Konga will come in handy if it is not to stumble heavily in Africa’s biggest market

 It is no longer news that global e-commerce giant, Amazon is all but set to extend its tentacles to Africa. Earlier this month, a South African court ordered a halt on the construction of Amazon’s new African headquarters, a massive 70,000 square metres (17.3 acres) structure. The ruling came after some descendants of the country’s earliest inhabitants said the land it would be built on was sacred.

As reported by Reuters, the Western Cape division of the High Court interdicted the project developer from continuing with works at the Cape Town site until there had been meaningful engagement and consultation with affected indigenous peoples.  Among these are the Khoi and the San, two of the earliest inhabitants of South Africa, some of whose descendants had objected to the River Club development, arguing that it lies at the confluence of two rivers considered sacred, the Black and Liesbeek Rivers.

It is important to state, at this juncture, that Amazon has retained a presence in Africa for years. The e-commerce giant has several employees on its payroll working in data hubs located across Cape Town. Notably, the origin of Amazon’s current expansion into Africa began in 2004 when it set up a development centre in Cape Town. Incidentally, that centre eventually went on to build Amazon’s first cloud platform, known as the Amazon Elastic Compute Cloud which heralded its hugely successful cloud computing arm – Amazon Web Services (AWS). Today, AWS is responsible for the lion share of Amazon’s global operating income.

The firm’s adventure in Africa is thus intrinsically tied to its long-standing relationship with the South African city of Cape Town, the oldest and second largest city in that country after Johannesburg. As reported by fDi Intelligence, Amazon, in 2000, had gone ahead with plans to hire 3000 customer support staff in Cape Town. In addition, AWS, its cloud business, had plumped for Cape Town to host its first cloud region in Africa. Furthermore, nine of Amazon’s 19 projects in Africa are located in Cape Town, with five others in Johannesburg. The rest are split between Kenya, Morocco and Egypt.

The foregoing shows Amazon has established its cloud business in parts of the continent. But is it now ready to join the e-commerce race in Africa?

Although still a growing industry, the e-commerce space in Africa has begun to capture the attention and imagination of international investors. Research from Statista indicates that revenue generated via e-commerce in Africa was estimated to be around 27.97 billion U.S dollars in 2020, representing an increase of over $6bn since 2019. Correspondingly, e-commerce revenue in Africa is expected to keep up an upward curve, with estimates projecting the entire e-commerce sector in Africa to reach a value of over $46.1 billion by 2025.

Historically, Amazon is reputed to consider significant expansion into a region only when it becomes commercially viable for its line of business. But despite the fact that the promise of Africa still lies within the realms of potential rather than actuality, e-commerce watchers and analysts are of the view that a budding $46bn market in the next three years or thereabouts is more than enough justification for Amazon to throw its hat into the e-commerce ring.

Stanley Ugboaja, a Ph.D. student and e-commerce enthusiast, captures the prevailing mindset succinctly.

‘‘Africa’s population dynamics naturally makes it a frontier for e-commerce to explode in the next few years. The continent is home to the world’s youngest and second largest population. Digital literacy and numeracy is also on the rise here, same as internet penetration. Many young Africans are gaining useful exposure, either from flocking abroad for further studies or even from working remotely here for foreign firms or multinationals. When you throw in the rise in the number of fintech platforms further expanding the net of the unbanked and under-banked on the continent, you can see that the trends all tilt towards favourable conditions for e-commerce or online shopping to grow.’’

So far, on the e-commerce front, Amazon is only present in a solitary African country. That country is Egypt where Souq, an Amazon subsidiary acquired in 2017 for $580m, operates. Souq, initially founded in Dubai, UAE in 2005, was the largest e-commerce platform in the Arab world. With the acquisition by Amazon, the Egyptian site turned into Amazon.eg on September 1, 2021, officially marking the end of Souq.com.

But if, as anticipated, Amazon’s African adventure will now accommodate playing in the continent’s major e-commerce markets, Nigeria will be uppermost in its reckoning.

In addition to being Africa’s most populous nation, Nigeria remains the leading African economy in terms of nominal GDP in 2021, making up 18.4 per cent of the continent’s $2.7 trillion economy. According to the International Centre for Investigative Reporting (ICIR), Nigeria’s GDP, which measures how much a country produces in financial terms within a year, grew by 11.89 per cent from 2020 to 2021. Likewise, data from the International Monetary Fund (IMF) revealed that Nigeria’s GDP went from $429.423 billion in 2020 to $480.482 billion in 2021, making the country the highest contributor to Africa’s economic output/ GDP and the 29th in the world.

However, cutting it in Nigeria, Africa’s biggest market, will test the might and resilience of Amazon.

Currently dominated by Konga and Jumia, the Nigerian e-commerce market is a challenging ecosystem that has signaled the death knell of many promising players. Although Amazon – especially considering its roaring success in other advanced markets – cannot be placed in the same bracket as some of the startups that have quietly exited the market after finding the Nigerian e-commerce space a mountain too hard to climb, it is fitting to call to mind the instructive words of a globally renowned tech leader and Africa Chair for IEEE World Internet of Things (WIoT), Chris Uwaje.

Uwaje, who is widely hailed as the Oracle of the Nigerian IT Industry, had pinpointed the challenge in cracking the Nigerian e-commerce market as one that lies heavily in the approach or business strategy adopted by most players, many of whom fail to situate foreign business models, ideas and strategies within the culture of the people and Nigeria’s existential realities.

“Nigeria remains a fertile business environment, especially for online-focused ventures such as e-commerce companies. It is also a country with peculiar challenges and a very strong traditional approach to retail which requires a deep sense of local know-how and understanding by players. This is one of the biggest hurdles faced by e-commerce start-ups here. Many e-commerce ventures run with foreign concepts and strategies more suited to foreign climes, making it harder for them to survive the difficult terrain that is the Nigerian business space.”

But beyond the foregoing, the challenge of making a success out of e-commerce in Nigeria is one that is fraught with huge infrastructural and institutional bottlenecks.

The combination of a frustratingly underdeveloped public transport infrastructure network, absence of a proper addressing system across cities, the still-largely traditional shopping predilection of the average Nigerian and the mega-hurdle of logistics, among others, are not issues that having deep pockets alone or a popular name will solve. During the height of the COVID-19 enforced lockdown, the activities of overzealous state actors saw delivery vans conveying essential items to Nigerians delayed needlessly for days on end, or even sent back in some cases – a debacle which almost eroded the gains that accrued from the increased dependence by many Nigerians on e-commerce for safe, contactless shipping during the pandemic and which epitomised the sheer scale of some of the institutional obstacles e-commerce companies may encounter in Nigeria.

Konga, acquired by the Zinox Group from erstwhile majority owners, Naspers and AB Kinnevik, and which has become the first e-commerce company to hit profitability on the continent, may represent a fitting playbook for Amazon to study.

Considering its technology-driven status (a factor that would resonate with Amazon); a revolutionary composite fusion of online and offline which it pioneered and subsequently adopted by other players (including Amazon); the way and manner it has resolved the thorny obstacle of logistics; its massive physical assets strategically located across Nigeria (warehousing, delivery, nationwide physical stores/pick-up locations); penchant for customer service and the confidence it enjoys in the minds of shoppers, among others, Konga stands apart. However, it is in the magic of how it found a way to break the cycle of unprofitability which continues to dog other e-commerce players in Nigeria and Africa – transitioning from a business that once posted monthly losses of over N400m to emerging the first profitable African e-commerce venture – that Amazon would most admire Konga.

Most importantly, under its new owners, the current management of Konga boasts that keen understanding of successfully navigating the difficult terrain that Africa’s biggest market represents. It is a strength which has come to weigh heavily in its advantage, making the Konga template arguably the one to beat. Backed by entrepreneurs with over three decades of consistent success in the Sub-Saharan African technology space, Konga has not only thrived where others have failed or are struggling, but the business is now set, as feelers indicate, for a run across other African markets and a much-anticipated listing on major global exchanges, with a glut of external investors waiting.

Succeeding in the continent’s biggest market, even for a big name like Amazon, may mean seriously considering a partnership with Konga or at least, borrowing a leaf from its strategies.

Amazon would also have to decide if some of the unethical practices it has been accused of would unearth more dire consequences if they were exported to Africa. The e-commerce giant was recently accused of anti-competitive behavior by preventing third-party sellers from offering lower prices for their products on other platforms, including their own websites. The foregoing formed the crux of an antitrust lawsuit filed against Amazon by District of Columbia Attorney General Karl Racine, which was thrown out in court last Friday, according to a report by The New York Times. However, the suit was thrown out partly because Amazon faces a nearly identical lawsuit, in this case, a class action complaint that claims the company pressures sellers into selling products for an equal or lower price than what they offer elsewhere.

Also staring it in the face are allegations of tax avoidance which may land the e-commerce behemoth in hot waters here in Nigeria and elsewhere in Africa. Research reveals that Amazon’s tax behaviours have been investigated in China, Germany, Poland, South Korea, France, Japan, Ireland, Singapore, Luxembourg, Italy, Spain, United Kingdom, multiple states in the United States, and Portugal. According to a report released by Fair Tax Mark in 2019, Amazon is the best actor of tax avoidance, having paid a 12% effective tax rate between 2010-2018, in contrast with 35% corporate tax rate in the US during the same period. Amazon countered that it had an 24% effective tax rate during the same period.

Africa’s budding e-commerce lustre may represent an allure too difficult for Amazon to ignore. Nevertheless, it would discover that this ecosystem will tax its wits, determination, and sheer ability to adapt to their very limits.

But in Konga, Amazon can learn from a proven success story.

Author: Tarila Ben-White (Ph.D.), an e-commerce researcher, writes from Bayelsa