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Konga and Nigeria's e-commerce industry 19 Mar 2018

Chairman and CEO, Zinox Group, Leo Stan Ekeh

In my column of last month, I wrote about Nigeria's retail industry and its potential to become the country's next big industry. I also touched briefly on the gains made by the domestic e-commerce sector. Unfortunately, soon after the column was published, one of Nigeria's top e-commerce companies, Konga, was acquired by Zinox Technologies Limited, an integrated information and communication technology (ICT) solutions conglomerate.
    
The deal to purchase Konga was reportedly worth a paltry $10 million. Furthermore, OLX – a leading global online classified advertising platform owned by South Africa's Naspers, which also owned a majority stake in Konga – announced it was shutting down its Nigeria office. Nevertheless, OLX said its platform will continue to operate in Nigeria, although without an office.

I was jolted by these two news items. I also received a couple of emails from friends asking if I still believed the Nigerian e-commerce industry could survive the tough business environment.

Available details on the Konga deal indicate that Zinox Group, which is also an Original Equipment Manufacturer (OEM), would take over Konga.com, Konga's e-commerce platform; KOS-Express, the logistics arm of the company; and KongaPay, its integrated mobile money payment channel. Some industry watchers and analysts have flayed the acquisition fee for Konga as being too low.

Some people have claimed Konga was mismanaged. Others say there is a flaw in the e-commerce company's business model. Still, there are some who think e-commerce cannot thrive in the current Nigerian marketplace. While we cannot confirm the mismanagement charge, the issues regarding the business model and whether or not the Nigerian economy is ready for e-commerce are subjects for rigorous debates.

To put things in proper perspective, let's take a look at Konga's funding over the years. After its launch in 2012, the company raised $3.5 million in seed investment from Kinnevik AB, a Swedish investment company. In 2013 the company raised $10 million from another round of fundraising from Kinnevik AB and Naspers. Over a five-year period, Kinnevik AB reportedly invested a total of $36.1 million in Konga, while Naspers invested $91.2 million. All in all, Konga was estimated to be valued at $200 million.

If there is any veracity to the $10 million acquisition fee by Zinox, it would mean Konga lost 95% of its valuation. This is why some commentators have viewed the diminishing fortunes of Konga as a bad omen for Nigerian technology startups. How can a company, once referred to as a giant in the e-commerce sector, a few years ago be sold for a measly sum in 2018? There is a lot for industry watchers and technology entreprenuers to be concerned about.

Konga has been a beacon of hope in the Nigerian e-commerce ecosystem. Today, I can attribute my first e-commerce experience in Nigeria to Konga. Last year was the first time I shopped on Konga when our office furniture was ordered on the e-commerce platform. The transaction was seamless and the items were satisfactorily delivered.

Apart from the harsh operating environment in Nigeria, Konga's ever-changing policies could also have been responsible for its challenges. For instance, the stoppage of the company's pay-on-delivery system, among other frequent changes, could have irked many customers and merchants alike. Moreover, it was a surprising disclosure that Konga had an active customer base of 184,000, according to Kinnevik AB's 2016 second quarter report. This customer base is less than 1% of Nigeria's population. This is disappointing not just for Konga as an e-commerce company, but also for the Nigerian e-commerce market.

Like every other SME, Konga must have faced challenges. But some of the challenges peculiar to the e-commerce sector include poor road infrastructure, weak electronic payment infrastructure, inadequate power supply and broadband internet, inefficient postal service, and security challenges. Given all these factors that pose a definite growth challenge for technology startups in the country, internet businesses need to come up with solid business models that will stand the test of time. Such companies should also realize that financial success will not come immediately.

Just last year, Kinnevik AB said in its report that Konga was just on its way to profitability, after years of losses. Konga's rival, Jumia, posted a net loss of about $61 million during the same period. Meanwhile, Yudala, also a large e-commerce platform, doesn't see much profitability until 2020.

Despite the Konga sale, the e-commerce sector in Nigeria is not bereft of great potential. According to Gabriella Mulligan, Co-founder of Disrupt Africa – an online portal providing news and information on Africa's tech start-up landscape – Nigeria's dominance of the African e-commerce landscape is one of the most exciting findings in its report, Afri-shopping: Exploring the African E-commerce Start-up Ecosystem 2017. According to Mulligan, “for the first time, we have clear evidence of the outstanding trajectory of the country's e-commerce space as being driven by entrepreneurs. While South Africa and Kenya have typically stolen the limelight hitherto in conversations about tech entrepreneurship, this research makes it clear Nigeria is on the brink of huge e-commerce success – and will become the first African country to truly take retail online at a similar scale to Western markets."

Just over a year ago, DealDey – another online business founded by Sim Shagaya who is also the founder of Konga – was acquired by Ringier Africa Deals Group, a joint venture between Swiss-owned Ringier Africa AG & South Africa-based Silvertree Internet Holdings. This is an indication that investors are still betting on Nigeria's online businesses.

What is evident from the foregoing is that the absence of a sound business model or the efficient execution thereof, doesn't equate to the absence of opportunity. Konga's predicament should be a wakeup call to the rest of the pack in the tech startup ecosystem. They need to review their business models, ensuring they are sound and sustainable. Each of them must eliminate waste and focus on their individual competitive advantage.

Another major challenge in the Nigerian emerging e-commerce sector is trust deficit. Customers are still not able to transact with online businesses, especially where they are required to provide their personal information such as credit or bank card details. Confidence and trust is an essential requirement for acceptance of electronic trading. Designers of online marketplaces have to tackle these challenges and find ways to build enough trust to facilitate transactions between strangers. Trust deficit is the reason over 90% of e-commerce transactions happen through pay-on-delivery.

Online businesses have an obligation to come together to find a solution to this common problem. Without a lasting solution, the online business community may take longer to realise expected success. One way to resolve this could be through regulation. A strong advocacy could begin for the establishment of a separate regulator for the online marketplace and other internet businesses. This regulator could help put in place mechanisms to promote trust among customers and businesses.

As for the new e-commerce startups warming up to hit the market, it must ensure that it has developed a long-term strategy, which will include alternative ways of raising financing pending when their businesses attain critical mass. If you cannot run warehouses and manage inventory, simply opt for an online marketplace that connects buyers and sellers. Ensure your business idea solves a problem; ensure it eases a pain; if it doesn't do either of these, it's not sustainable. Start with a moderate-scale model as you continue to finetune and perfect it from there.

From financial fraud, flawed business idea, bad execution of a good idea, and lack of capital, we have had hundreds of very costly startup failures. Some of these are Kozmo.com, which raised $256 million in funding; Boo.com, after raising $135million in funding; and many more. Some of Nigeria's failed startups include Easy taxi and efritin.com. While many of these companies failed totally, same cannot be said of Konga, given the lifeline it has received through the recent acquisition by Zinox.

It remains to be seen what Zinox will do with Konga. There have been insinuations that the acquisition could lead to the integration of Konga and Yudala, owned by the son of the founder of Zinox, Leo-Stan Ekeh. Regardless of how Konga might thrive as a subsidiary of Zinox, I am still very optimistic of Nigeria's e-commerce business landscape. The failures of Myspace, Orkut, Friendster, and Hi5 didn't stop the success of LinkedIn, Facebook, Instagram and Snapchat.

Financial experts have estimated that Nigeria's e-commerce industry could be valued at $50 billion over the next decade. With mobile telephone coverage currently at 77% of the 185 million Nigerians and internet penetration rate of 50%, the opportunities are enormous.

While it will be foolhardy to downplay the difficulties in creating a very successful e-commerce business, it will be unwise to overlook the enormous opportunities. Indeed, valuable lessons can be learnt from Konga's situation.

Olajide Olutuyi, a Financial Nigeria Guest Writer, is a graduate in Management from the University of Lethbridge, Canada. He is Founding Partner, Greentouch Consulting Inc. Canada, Co-Founder/CEO Top-Olax Energy Ltd. He is on the Board of Calgary Quest School, Canada. Email: Ola.olutuyi@greentouchconsulting.com. Twitter: @jideolutuyi

Editor's Note
This article is published under the series Finance and Technology, a new platform of Financial Nigeria magazine, promoted by Simplex Business Solutions Limited. Knowledge leaders in the interception of finance and technology are welcome to contribute to the industry platform. Editorial contributions should be submitted to editor@financialnigeria.com.