Innovation

Consolidation best bet for profitable e-commerce businesses in Africa

takahari-logoThe year 2014 for South African e-commerce platform Takealot adequately sums up all that is good and all that is bad for the online retail industry in Africa, with e-commerce’s attractiveness to investors there for all to see but the restraints on the industry also demonstrated. – Tom Jackson

In May, Takealot, which was founded in 2010 and sells products such as books, music, electronics and sports equipment, raised US$100 million in funding from Tiger Global Management, which the company said was to be used for further expansion in South Africa.

“We are very excited about Tiger Global’s continued support of the business. This will allow us to accelerate growth and drive scale while continuing to delight our customers. We have tremendous potential in a large sustainable market and we are excited to keep investing for the long-term,” said Kim Reid, Takealot chief executive officer (CEO).

However, over the next few months it became clear what Takealot meant about building this “large sustainable market” – consolidation and merging with the competition. In August the company announced the acquisition of online design retailer Superbalist.com, which had also been launched in 2010.

Reid said Takelot was “super excited” about the acquisition. The millennial generation is deemed to be the most powerful and relevant market on the planet and we have managed to acquire a business run by millennials, focused on millennials. They have a great team and we are going to have fun building the business together,” he said.

But the company saved its biggest and best surprise until last, in October stunning observers by announcing it was merging with its biggest rival, Kalahari.com. And it was here that the downside to e-commerce in Africa was revealed. Though undoubtedly it is a popular sector for investors, who see an opportunity, the market that e-commerce platforms have to fight over is still very small and there are numerous problems limiting e-commerce’s growth, notably delivery logistics.

Takealot admitted as such when announcing the Kalahari merger.“The move was driven by the fact that, without scale, South African e-tailers simply can’t compete successfully against the local brick and mortar retailers and foreign companies such as Amazon and Alibaba,” the company said.



“After many years of losses on Kalahari and four years on Takealot, we realise we have to work together if we are to survive and prosper,” said Oliver Rippel, senior executive responsible for Kalahari. “If you also take into account an uneven playing field against foreign operators who do not pay tax in South Africa, and the fact that high broadband costs are impeding the speed of growth in local online shoppers, combining forces gives us a better chance of success.”

The market is simply too small. Online retail accounts for approximately 1.3 per cent of the total market for consumer goods in South Africa. The potential investors see is in the growth – the channel has great upside potential if you consider in developed markets like the United States (US) and United Kingdom (UK) online retail accounts for as much as 14 per cent of total retail of consumer goods.

But the suggestion from Kalahari and Takealot is that together, online retailers are stronger. They don’t have to fight each other over a tiny market, and can pool their considerable resources to overcome logistical problems. In spite of their perceived individual power, Kalarahi and Takealot together still only constitute around 20 per cent of South Africa’s e-commerce market, with a host of other players battling over the still relatively small number of buyers.

With Amazon also having a large share of the e-book market in South Africa, local players have identified the need to work together to take on increased competition from international players and brick and mortar stores. Naspers, which owns Kalahari through its subsidiary MIH Internet Africa (MIHIA), realised the need to remove some competition from the market as early as February, closing e-commerce sites SACamera, 5rooms, Kinderelo, Style 36 and 5Ounces to focus on Kalahari.

“Kalahari had a very strong Christmas and has just introduced an advanced platform successfully,” said Meloy Horn, head of investor relations at Naspers. “The restructuring will allow the group to dedicate more resources to this exciting area of growth, building out stronger platforms and offering better services.”

“Some small businesses which are no longer core, namely Style36, 5Rooms, Kinderelo, SA Camera and 5Ounces, will be closed down, after consultation with staff and reviewing all options. This decision is based purely on a shift in strategy and was not performance related.”

With these mergers, acquisitions and closures all take together, the way ahead for e-commerce in South Africa seems clear. At least while the market remains so small, fewer, but bigger e-commerce platforms are better placed to move towards profitability by removing unhelpful competition and pooling their resources for the greater good of the market.

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