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Friday, January 27, 2023

Jumia lays out 5 steps plan to dig out of $1.5 billion in accumulated losses

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African e-commerce Group, Jumia has laid out 5 strategic steps the business will be taking as it moves to return to profitability.

Jumia carries an accumulated loss of $1.5 billion as of the third quarter of this year. The losses have racked up over the years as the company continues to spend on advertising, fulfillment, and technology expenses.

The losses continued in the third quarter of 2022 after the African e-commerce giant reported an Ebtida margin of $45.5 million with a guidance of $220 million for the year 2022.

Pressure for profits: As inflation forces global central banks to raise rates, pressure has mounted on tech companies to start turning in profits, especially after years of zero interest rates that valued loss-making companies not on profits but on volume growth.

  • Jumia is one of those companies under pressure to deliver on profits, forcing the co-founders to resign recently.
  • The company’s valuation has fallen by 60% year to date, costing the company its unicorn status.
  • Jumia is now worth just $457 million which is still 2.5x its 2021 revenue of about $178 million.
  • To return the profitability, Jumia needs to focus on reducing overheads and focusing on business models that are profitable.

From discontinuing its free delivery programme, Jumia Prime, to creating a leaner organisation and stopping the increase in commission, the company has commenced actions aimed at returning to profitability.

It identified, 5 steps are targeted at cutting costs across the spectrum of its operations and focusing on more profitable segments of its business.

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Enhanced business focus: The first step, according to the company, is to enhance its business focus by doing less in better ways. Through this, Jumia says it would allocate its resources to projects that bring proven value to consumers, sellers, and broader ecosystem participants and cease projects that do not meet such criteria.

  • Based on the first step, the company said it is discontinuing its membership programme offering free delivery, Jumia Prime. According to the company, it is too early in the adoption curve to push such a product and it would instead focus on enhancing the basics of the customer value proposition to drive repurchase rates.
  • Similarly, Jumia is also scaling back its first-party grocery e-commerce in geographies where the category remains subscale to support unit economics, it is also suspending its logistics-as-a-service offering “in countries where logistics infrastructure is not ready yet to support third-party volumes.”

Enhanced e-commerce: In its second strategic step, Jumia said it will be driving sustainable growth through enhanced e-commerce fundamentals and moving away from subsidizing growth with consumer incentives and marketing spending. Instead, the company will be enhancing its e-commerce fundamentals to improve the consumer value proposition

  • Actions to be taken with this step include mastering the basics of e-commerce through selection, price, and convenience across core categories; focusing on core categories such as phones and consumer electronics, home appliances, fashion, and beauty; building stronger relationships with suppliers; and increasing customer centricity and improving the experience.

Cost discipline: The third step, Jumia says, is to enforce stronger cost discipline by taking more deliberate actions to cut costs and drive efficiencies across the full cost structure. In enforcing this, the company will be scaling back on product categories with inefficient delivery economics (grocery in selected geographies) and renegotiating delivery rates with relevant third-party logistics partners.

  • Jumia says it will also focus investments on the most relevant marketing channels with higher returns on investments; prioritize its development roadmap on products and features that deliver proven benefits to the platform; and reduce staff costs through a leaner, more simplified organization.
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Monetization: On the fourth step, Jumia will be building a balanced, diversified monetization model as it moves away from monetization shortcuts that can have a detrimental impact on the platform growth e.g. excessive commission rate increases or fee escalation for sellers’ services.

  • The company says there will be no further commission increases in the near term as it continues to develop advertising through more effective ad solutions to increase sellers’ take-up of its ad solutions.

Focus on JumiaPay: While cutting other areas of its business deemed unprofitable, Jumia says it would now focus more on its fintech business, JumiaPay.

  • Specifically, the company said it will be expanding this business in Nigeria and Egypt, where it had previously obtained license.
  • “JumiaPay remains a core priority for us, and we will work on making it an even more effective enabler of our eCommerce business, focusing on a more targeted number of critical products and ventures. We will retain a disciplined approach to driving on-platform payment penetration, with disciplined marketing and consumer incentives spend,” the company stated.

Will this work? Surely these are the right steps that could have been taken years ago but better late than never.

  • However, the jury is out for Jumia to achieve profitability starting Q1 2023. The company will need a miracle to reverse the entire $1.5 billion losses incurred over the years.
  • Turning a quarterly profit which it has never done before will require. drastic cost-cutting that could hurt revenue growth if it is not handled carefully.

CREDIT: NAIRAMETRICS

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