Is Jumia the Amazon of Africa or the Overstock?

Almost every growth stock wants to be known as the Amazon (NASDAQ: AMZN) of its sector.

After all, Amazon has been one of the best-performing stocks of the last generation, and that growth came largely when the company wasn't even profitable. Drawing comparisons to Amazon is a way for management to say that its company has big growth potential but isn't yet profitable, because it's investing in that growth opportunity.

Uber, for example, called itself the Amazon of transportation several times in the run-up to its IPO. Another company that has been granted the Amazon halo is Jumia Technologies (NYSE: JMIA), often referred to in the financial press as the "Amazon of Africa." In some ways, the comparison makes sense. Jumia is Africa's largest e-commerce company, operating both as a direct seller and a third-party marketplace, and it has its own logistics and delivery network. In addition to its core in e-commerce, the company has a number of other parallel businesses, including food delivery, travel bookings, and Groupon-like deals. However, beyond the basic similarities, Jumia differs from Amazon in several important ways.

A Jumia warehouse on the street in Morocco

Image source: Jumia Technologies.

Early history

Like Amazon, Jumia is still led by its founders, but Amazon and Jumia had different approaches in their early days. Founder Jeff Bezos started Amazon as an online bookseller, thinking that books would be an advantageous category for the newly emerging World Wide Web. From books, the company expanded into music and video, and then other categories like electronics and home goods, using the same strategy that had driven its success and rapid growth selling books.

Jumia, on the other hand, seemed to launch in 2012 with a blanket approach to the internet. Jumia debuted in Nigeria, and moved into countries like Egypt, Morocco, and South Africa shortly after. The following year it launched Jumia Travel, a hotel-booking platform, and Jumia Food, a food-delivery business.

Despite launching in multiple geographic markets and business categories, Jumia is still much smaller today than Amazon was when it was eight years old. In 2019, Jumia finished with 160.4 million euros in revenue, and that figure looks set to decline this year, as the company has shifted its focus to growing third-party marketplace sales, which bring in less revenue than direct sales. In contrast, in 2002, when Amazon was the same age, it had $3.9 billion in sales. By 1997, its second full year of operations, Amazon had roughly the same amount of revenue as Jumia has now.

Jumia has also had a number of false starts in its business. Last year, it pulled out of three markets, Rwanda, Cameroon, and Tanzania, so it could allocate more resources to higher-growth opportunities. It also entered into an agreement with Travelstart, another online travel agency, to redirect Jumia Travel traffic to Travelstart.

Market share versus profitability

One of the defining characteristics throughout Amazon's history has been its focus on market share over profitability. The company seeks to build out a customer base before worrying about profitability, as Bezos believes market power comes from owning the customer base.

While many other companies claim a similar strategy, enacting it is a tall order, especially when financial statements show wide losses.

Jumia, for instance, professed in its IPO prospectus to "build for the long term," but recently the company seems more concerned about profitability than growing the top line and gaining market share. In the third quarter, its gross merchandise volume fell 28% to 187.3 million euros, as the company shifts away from one-time purchases (like smartphones) and toward repeatable categories (such as beauty, fashion, and personal care) in order to support its path to profitability.

That strategy may eventually pay off, but right now Jumia simply doesn't have the scale to deliver meaningful profits. Even as it's trimmed its losses this year, it posted an operating loss of 109.3 million euros through the first three quarters of 2020, exceeding its revenue.

Not all e-commerce companies are created equal

E-commerce has been a consistent growth market in the world since its inception a generation ago, and will continue to expand for the foreseeable future. However, that doesn't mean that every e-commerce stock will be a winner. Some legacy e-commerce stocks like, for example, have historically lagged the market.

Amazon is the best-known and most successful e-commerce company in the U.S., but e-commerce isn't the only reason for its success. Its most profitable business is cloud computing, while programs like Amazon Prime and Fulfillment by Amazon have been the engine for profits in North American e-commerce. However, online retail has never been an easy way to make money, and Amazon's own results bear that out. Amazon's international e-commerce business was losing money as recently as last year, when it posted an operating loss of $1.7 billion.

That may be evidence that Jumia can have profitability or growth, but both will be very difficult to achieve, and will likely take several years. The company is operating in a part of the world where many of its customers don't have addresses or bank accounts, showing the challenges in building out e-commerce networks when little of the necessary infrastructure is in place. The opportunity is appealing as the company is the leader in African e-commerce, but given the obstacles in front of it, success is far from guaranteed.

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