Opinion; Why Investors should be skeptical of Safaricom’s ecommerce business

By Edwin Ngarari

Safaricom (NSE: SCOM) has announced that it would be launching its own ecommerce site dubbed Masoko sometime in the near future. By leveraging it M-pesa platform and extensive customer base, the plan would be to offer small and medium sized enterprises a local market on the web and according to CEO Robert Collymore. The platform would be a mixture between Alibaba and Amazon.

For investors in Kenya’s largest publicly traded company, this would certainly seem like great news since it could potentially provide a means of further expanding the top and bottom line, both of which have been growing in the double digits.

However, I wouldn’t break out the bubbly just yet as this could be one of the riskiest moves the company has made to date. M-pesa which is perhaps the company’s crown jewel was largely successful due to its innovative nature and first mover advantage, qualities which would be lacking in this latest venture of Masoko.

The country already has a number of well-known ecommerce sites such as Jumia, Killimall and Olx and with Masoko being the fourth, there will be little to differentiate these entities. For those who would argue that M-pesa will be the key differentiating factor, I would like to point out that both Jumia and Killimall have integrated this payment method on their sites via paybill.

So how can Masoko effectively compete with its peers? One possible way to do this could be to remove transaction costs from both the customer’s and merchant’s side and while this could make Masoko more attractive to both sides, I’m still not convinced that this move would be enough to be a game changer.

To illustrate the challenging nature of the ecommerce business, Jumia Group composed of Jumia Kenya and others serves as a notable example. Jumia Group has operations in 23 African countries including Kenya and recorded a 41.6 percent drop in FY2016 sales to Ksh. 9.4 billion while active customers reduced by 100,000 to 1.5 million.

Although Jumia Group partially attributed the revenue decline to a slowdown in the Nigerian economy and currency devaluation, the broader picture remains clear. The ecommerce business isn’t as rosy as we have been led to believe.

Data paints a gloomy picture of ecommerce

Narrowing down to Kenya, a report published by the Oxford Business Group on Kenya’s retail sector paints an even grimmer picture of ecommerce in the country. The report states that according to the Communications Authority of Kenya, the ecommerce segment was worth Ksh. 4.3 billion and a June 2015 survey of Kenyan consumers published by Consumer Insight found that only 7 percent of respondents had ever shopped online.

In another survey by Proctor & Gamble released earlier in the year, it was revealed that although Kenya’s retail spending increased by 13 percent to Ksh. 1.8 trillion in 2016, supermarkets accounted for 30 percent of the total spending while traditional retail still dominated accounting for 67 percent of total spending. Traditional retailers include kiosks, over the counter shops and market stalls.

Data from the P&G report further revealed that Kenyan’s spend about 60 percent of their income on food and beverages and 23 percent on personal and household care products. Taking this information into account and assuming that Safaricom’s Masoko could capture a generous 30 percent of Kenya’s ecommerce sales in the first year, this would be nowhere near enough to move the needle in terms of shareholder value.

What’s worse is that ecommerce is generally a low margin business with the likes of Amazon having to contend with razor thin margins of under 2 percent. While Alibaba enjoys much higher margins of about 27 percent this can be explained by its business model which differs from Amazon in the following way.

Alibaba is a platform which connects merchants and customers for free. It derives revenue from merchants who want to rank higher in its search engine (like Google ads) and from AliPay which is the biggest payment platform boasting of over 600 million active users. It doesn’t own the supplies, warehouse storage or the logistics to transport to the end user.

On the other hand Amazon owns everything in the supply chain i.e. it owns inventory which is stored in its own warehouses which is then sold at a small markup and ships to the customer, which puts it in direct competition with traditional brick and mortar retailers hence the lower margins. It also has a platform business.

A recent Bloomberg article gave more insight into the structure of Masoko which according to Collymore would not be holding inventory nor would it be a platform for anyone to sell on and they would be screening all merchants.

On paper, this seems like the ultimate middle ground as it would give Masoko the advantages of both Alibaba and Amazon but another question investors need to ask themselves is what the cost of this new line of business would be to them.

We have already seen how small the ecommerce scene in Kenya is so the next logical question should be how much Safaricom would be willing to spend to become the dominant player here and whether the risk is worth the reward. Jumia Group posted a Ksh.12.4 billion loss even after a capital injection of Ksh. 3 billion in 2016 highlighting just how risky a bet on ecommerce has the potential to be.

Additionally, when factoring in Kenya’s lack of an addressing system the challenges of an ecommerce business further increase. Overall, I believe that investors should view this venture with skepticism as it is likely to drive up operational costs with no near term benefits in terms of shareholder value.

Edwin Ngarari

Email; ngararied@gmail.com