Jumia: Sink or Sail, Let’s Find Out
Let's talk about Jumia, the African ecommerce giant. What does the future hold for them?
Everyone knows Jumia. You see the ads on virtually every social media platform, and when you go outside to touch the grass, bam! A Jumia billboard is right across the road from you.
At the first glance, Jumia looks like a business that’s doing very well for itself. But industry insiders will tell you differently. Jumia IPOed in 2019, at a share price of $14.50, and right now they have 300 million euros in the bank. That number sounds impressive till you learn that their current share price is $10.72 and they’re currently burning 150 million euros a year. Wild.
The major question for the business right now is, “Can Jumia break even? And even go beyond that to becoming a profitable business.”
This post is going to explore those questions from two fronts:
How Jumia makes money
What Jumia is doing to turn around the business
How Jumia Makes Money
To know how Jumia makes money, we need to understand how revenue works with e-commerce brands. The formula for revenue here is traffic multiplied by average order value multiplied by the conversion rate. That's the formula we'll be using to analyse how Jumia makes money.
Each of the elements of this formula is essential, so we’re going to look at how each one influences Jumia’s growth and how they can be improved.
Jumia gets an estimated 100 million visitors every year. Most of this traffic is from organic search, paid ads, and brand awareness. On the Playstore, they have over 50 million app downloads, and on the App Store, they’re the no. 2 shopping app in Nigeria.
So, how can this traffic be increased?
Paying attention to other markets
In Nigeria, Jumia gets a lot of visitors to their other properties. But in other countries, this isn’t so. So, there's an opportunity for them to explore branding in other countries to attract traffic to their site. The more traffic they get, the more opportunities for them to monetize that traffic.
Attracting traffic from their adjacent services
They could also attract visitors to the e-commerce business from all the other ones e.g. Travel. Although, now that they're shedding the number of services in their portfolio, this will reduce. So, another way that they can increase the traffic to their e-commerce business is by finding adjacent services they can offer and with those, attract the right audience.
Average Order Value (AOV)
The average order value is the average revenue per user (ARPU) divided by the average number of customer orders. Jumia had 6.8 million customers in 2020, and this number is basically anyone who made 1 transaction on their marketplace, within the year. Their average revenue per user in 2020 was 123 euros, and considering that the average customer would use Jumia four times a year, that brings their average order value to 30 euros. Around 15,000 NGN per transaction.
In simple English, the average person in this market orders from Jumia four times a year and spends about 15,000 NGN each time.
The next question then becomes, how can the average order value be increased as well?
Buy Now Pay Later (BNPL)
Jumia currently is currently partnered with FCMB around this, but they need to be more bullish about this offering. Buy Now Pay Later (BNPL) is an interesting way to increase the AOV because consumers will always need to buy high ticket consumer goods, especially electronics, and price can be a deterrent. BNPL allows the to spread payment, making it a lot easier to get people to spend more at once. And at the same time, increasing how much users can spend on one order.
For most e-commerce websites, shipping fees are a part of revenue. But making this revenue source profitable depends on making people pay more for shipping without feeling it. That’s why Jumia Prime is interesting. It’s a customer loyalty program that entitles members to certain perks including free shipping, at a cost of 4,000 NGN per quarter.
But here’s the thing, the average number of orders per customer, per year, is four. That means one order per quarter, with each one costing 4,000 NGN. Considering that shipping on Jumia costs between 500 NGN - 700 per item, you might only spend 2,500 NGN per order. Leaving Jumia with a neat profit margin. You’re probably wondering about those perks. You get discounts from vendors, and better operational efficiency, which you should be getting anyway. All at little to no cost to Jumia.
So, Jumia Prime is an innovative way that’s already increasing the AOV, but they need to put more effort into increasing its adoption.
This element tells you how many users start the journey from the top of your funnel vs how many finish it. According to Jumia to finish the journey and be counted as a customer, you have to have made one purchase within a year. If 1000 users start the journey and 10 make a purchase, that's a 1% conversion rate.
Jumia got about 116 million web visitors in 2020 (excluding in-app impressions) and 6.8 million active customers, their conversion rate was 5.8% in 2020 assuming all conversions happen on the web. Not a bad number, but also not enough to make them break even and become profitable. So, how can they increase this?
Discounts or BNPL
Usually, to incentivise visitors to make a purchase, businesses give discounts or add a BNPL feature. That reduces the consideration barrier and increases conversions. However, Jumia is in a tight spot where the goal is to cut costs, not increase spending. So this solution isn’t very feasible.
Another favourite conversion rate optimization tactic is to make changes to the conversion flow and touchpoints. Jumia has been in this business for about 9 years now, and have probably made a lot of these changes already. My favourite of which is the sales call that you get when you abandon cart, rather than just an email. So, making technical changes isn’t going to make much of a difference to their conversion rate.
Expansion into more markets
Another way that they can increase the conversion rate is if they launch in more countries with a higher affinity for online shopping. Places where the consideration barrier is as low as possible. But, again, the blocker here is the need to burn less cash.
Part 2: What Jumia is Doing to Turn Around the Business
Now, that we’ve explained how Jumia makes money, i.e. the factors involved in generating revenue, let’s see what they’re doing currently that can turn around the business. To get the full picture, here are the revenue sources at Jumia.
The e-commerce marketplace. From there they get about 10% in commission from items sold by vendors.
Order fulfilment, i.e. when a user pays for shipping or Jumia Prime.
Marketing and advertising on their marketplace. They get a lot of traffic, so that's a lot of opportunities for brands to advertise and for merchants to pay for better placement.
Value-added services, like Jumia Pay, i.e. the fee on each transaction that would have gone to external payment gateways.
Retailing items on their marketplace themselves. E.g. They can buy an iPhone and resell it at a profit.
These are all sources of revenue, but with some changes, they can further monetise these revenue generators. Let's talk about some of these changes.
The Ecommerce Marketplace
Jumia makes money from this source because merchants list on their site and make sales. Thus, as long as traffic is coming in and vendors are selling, revenue from this source will keep increasing.
There's still so much more Jumia can do with this revenue source. If they build a more sophisticated tech stack dedicated to advertising on their platform, brands would be able to bid on each niche/category.
Vendors should also be able to bid on different keywords, like on Amazon. E.g. if a merchant sells electronics, including speakers, they could bid on that keyword. That way, the vendor can get the most impressions when users search for that keyword. And Jumia can extract more value from the merchants.
Last year, they made 7.7 million euros from advertising alone, and that was mostly from brands. Imagine how much this would be if vendors get the tool for that as well.
From 2019 to 2020, we saw a reduction of about 50% in the revenue generated by reselling. It went from 81 million euros to about 44.2 million euros. At the same time, there was an increase in their commissions from the marketplace. An indicator that they're trying to cut down on business lines that burn through a lot of cash–like retail.
Instead, they're trying to become more software-intensive and focus on getting more commissions from merchants on their marketplace. Rather than stripping this away completely, Jumia can just concentrate on items where the profit margins are high and can turn around cash fast enough.
Beyond getting the transaction fees, Jumia Pay now also drives revenue from microtransactions. Including giving loans, serving as a payment merchant for electricity bills, airtime, etc.
Those microtransactions can go on to generate significant revenue, but so far, the product strategy has mostly been "if you use Jumia, you should use Jumia Pay." It doesn't feel like a lot of thought has been given to how the product can be made a standalone one.
We talked about Jumia Prime already, and their current strategy around that means the business is getting significant margins from that source. If they can dedicate their energies to upselling more customers on getting Jumia Prime, it would significantly boost revenue.
Expansion and replication
As a bonus revenue growth tip, Jumia can also try expanding at little cost. Within Nigeria, Jumia has gone through enough to have an exhaustive playbook on how to run a marketplace. They just need to replicate it across the different countries they're in, especially countries with a high affinity for online shopping. This time, without the cost they paid to build in Nigeria.
At the end of this teardown, the most important question remains, “will this company eventually be profitable?”
At the rate they're currently going, profitability isn’t likely. However, Jumia as a business is fine. They just need to pivot to a more software-intensive, marketing-intensive, and asset-light place. A place where they can keep bringing in a lot of customers and retaining them. If they go that route, eventually, they'll attain profitability.
For more long-term plans, they need to replicate their e-commerce business in other countries. Their learnings and years of experience is their upper hand.
With respect to their burn rate of 150 million a year, Jumia can stay alive longer by generating an extra 150 million in revenue per year. Or by making Jumia Pay a crypto exchange. (That is not investment advice)
At the end of the day, it looks like Jumia is turning around the business. There’s room to grow, so they'll break even and be profitable. We have faith in the business, not the market they're in.
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You can also listen to the podcast episode where we talked about Jumia here