Jumia has a Total Domination Strategy for Africa CML

Today we add Jumia Technologies (JMIA) as a Spotlight Top Pick.

As a Spotlight Top Pick, this places Jumia the second circle of this logic diagram:

The add price for Jumia (JMIA) is the current price of $17.07.

Too long; Didn’t Read
This company, as an investment, will require a great deal of perspective as short-term gyrations could be abrupt and the news surrounding it could be equally uneven.

Jumia is an e-commerce, payment, fintech, and logistics company in Africa with a voracious appetite and ambitions.

We see Africa as an enormously underserved and underappreciated opportunity for a digital transformation at a scale no one has ever seen before.

We believe Jumia has a total domination strategy which could lead to truly massive technology company with so many sub segments among its big three (marketplace, logistics, pay) that it will be the Amazon/Shopify, FedEx/Ups, PayPal/Apple Pay/ Stripe, Bank of America/Visa, and DoorDash/Postmates/Uber Eats of Africa.

That is — it wants to be “everything.”

Given how large the market opportunity is, we just need it to be “something” to see a worthy investment.

In the section entitled “Jumia“, we discuss each element of the business. It is our view that if even just one of these three segments takes hold, the company could see substantial business appreciation.

As we will discuss at length, it has a clear total domination strategy with the intention of encircling the entirety of the continent in such a way that its very success will be synonymous with Africa’s success.

These are the early days, but if it works, Jumia will turn this total domination strategy into perhaps the most powerful technology and logistics company in the world.

The company partners with dozens of the world’s most powerful multi nationals, including Nike, Intel, Pepsico, Nestle, Johnson and Johnson, Unilever, and more.

Each of these companies are now, and will be, totally dependent on Jumia for success in reaching the most underserved and highest growth economy in the world.

An economy where the median age is 19 years old.

As always, we will start with the collision of thematics and the company.

Thematics
Jumia lives in the e-commerce, digital pay, and digital advertising business in the continent of Africa.

It is the leading pan African e-commerce platform.

That platform consists of a marketplace, which connects sellers with consumers, a logistics service, which enables the shipment and delivery of packages from sellers to consumers, a payment service, which facilitates transactions among participants active on our platform in selected markets, and within the e-commerce market place, the ability to “boost” listings, which is a fancy way of saying digital advertising.

Africa has 1.2 billion people with a median age of 19.4 years. Of these, there are about 450 million Internet users, mostly via mobile phones.

With respect to the mobile Internet version of the digital transformation, we can look at the most populous country as a guide.

In Nigeria, one of the countries with the biggest number of internet users worldwide, 74 percent of web traffic was generated via smartphones and only 24 percent via PC devices. This is connected to the fact that mobile connections are much cheaper and do not require the infrastructure that is needed for traditional desktop PCs with fixed-line internet connections.Source: Statista

Jumia is active across 11 countries in Africa that together counted more than 600 million of the 1.2 billion population which in turn account for more than 70% of Africa’s GDP of 2 trillion and almost 70% of Africa’s internet users.

But Africa cannot be looked at as one continent, as we do with North America or Europe, for example.

The continent’s progression into the digital age is still very much dictated on a country by country basis.

Here is our first chart from Statista, which displays the number of internet users in selected countries in Africa as of June 2019:

But even that chart misses another layer of the digital transformation, which is Internet penetration.

Here is our next chart that addresses this phenomenon.

While we could pour over the data for days, we can continue our focus on Nigeria, which only has an Internet penetration of 61%, even though it stands as the country with the most Internet users.

Even further, if we look at the countries (anywhere in the world) with the most Internet users we see this rank order:

After China, India, the United States, Indonesia, and Brazil comes Nigeria — with its 61% penetration rate.

And Nigeria is just one country in the entire continent.

As we go through this dossier and data one thing will be plainly clear, irrespective of Jumia, the digital transformation occurring in Africa is profound, and is still in its very (very) early stages.

We can look at GDP from 1995 to 2016 to start:

And now we can look at the growth from 2009 through 2021 (forecasts) for Sub-Saharan Africa, which is the area of the African continent south of the Sahara and includes almost all African countries.

Beyond GDP and Internet numbers we can look at spending.

There is $4.0 trillion in household and B2B spending in Africa — the vast majority of which is offline.

Jumia’s pan-African presence provides strong strategic benefits, including macroeconomic diversification and economies of scale.

So we have our thematics, and now we can go further into Jumia.

Jumia
Jumia is an e-commerce, payment, fintech, and logistics company with a voracious appetite and ambitions.

The company has a clear total domination strategy that is on its way to encircling the entirety of the continent in such a way that its very success will be synonymous with Africa’s success.

These are the early days, but if it works, Jumia will turn this total domination strategy into perhaps the most powerful technology and logistics company in the world.

The company partners with dozens of the world most powerful multi nationals, including Nike, Intel, Pepsico, Nestle, Johnson and Johnson, Unilever, and more.

Each of these companies are now and will be totally dependent on Jumia for success in reaching the most underserved and highest growth economy in the world.

Jumia breaks its business down into three categories, although each category in and of itself is an entire ecosystem of businesses.

* Jumia Logistics – This is an answer to Africa’s logistics challenges with a technology and data driven platform.

This segment provides home delivery and pick up stations for its e-commerce arm as well as storage, picking, packaging, delivery, and tracking.

Jumia has unique local market knowledge and the logistics network flows through that knowledge including warehouses where sellers ship their goods to Jumia, and then the company can sell value added services.

Delivery is executed through a wide range of local partners where Jumia is the platform for entrepreneurs offering a unique technology platform with constant data and operational support.

These partners are essentially small business owners themselves, much like the last mile delivery network created by Amazon Prime.

For now, Jumia sellers are given exclusive access to the technology platform, but the company has said that it will eventually open up this logistics and technology platform to third parties.

Jumia has created a world where every part of logistics in Africa will end up on its platform.

Last year, deliveries made by Jumia were 50% in big cities, 25% in secondary cities, and in 25% rural areas.

These are staggering numbers which point to Jumia’s actual (as opposed to hypothetical) success in coordinating a massive logistics operation successfully.

While there may be other e-commerce platforms, one way or the other, they will flow their business through Jumia, and…

… While there may be other shipping platforms, one way or the other, they will flow their business through Jumia.

This is a clear competitive landscape total domination strategy.

The logistics network consists of over 300 partners ranging from induvial entrepreneurs to large scale logistics providers.

The company has 1,300 seller drop-off / customer pick up stations with 23 warehousing facilities (in 11 countires).

The end-to-end logistics use these warehouses to handle over 20 million package deliveries, with over 100,000 Jumia sellers leaning on that infrastructure.

As of now, the company reports 97% delivery satisfaction even though it deals with the most difficult delivery and logistics exercise in the world.

As for the company line on its logistics business, it reads like this:

Our logistics service, Jumia Logistics, facilitates the delivery of goods in a convenient and reliable way.It consists of a large network of leased warehouses, pick up stations for consumers and drop-off locations for sellers and more than 200 local third-party logistics service providers.

All logistics partners and assets are seamlessly integrated and managed through our proprietary technology, data and processes.

Source: Jumia

* Jumia Marketplace – This is the e-commerce platform which spans not just goods, but also Jumia food, which is restaurant delivery like the United States has Postmates, Door Dash, Uber Eats, Grub Hub, and the like.

The marketplace naturally overlaps with logistics.

It also offers access to video games which has launched in 5 countries.

Marketplace charges commissions on sales (like Spotlight Top Pick Farfetch (FTCH)).

It also sells data to third parties so they can create their own go to market strategies all the while becoming totally and utterly dependent on Jumia.

This is another total domination strategy by Jumia — in a continent that is far spread and disparate, Jumia is the aggregator for digital goods, e-commerce, physical package delivery, and food delivery as well.

Further, the Jumia Marketplace allows sellers to boost products in the search results, which drives digital advertising.

Since shopping in Africa is notoriously difficult given how underdeveloped the retail industry is, Jumia acts as Africa’s aggregator again.

Here is the company line for Jumia Marketplace:

On our marketplace, a large and diverse group of sellers offer a wide range of goods including smartphones, consumer electronics, fashion and apparel, home and living, consumer packaged goods, beauty and perfumes etc.We also provide consumers with easy access to a number of services, such as restaurant food delivery, hotel and flight booking, classified advertising, airtime recharge and “instant delivery”.

In 2019, approximately 90% of the items sold on our marketplace were offered by third-party sellers.

Jumia Marketplace revenue grew 19% year over year in Q3 2020 while gross profit grew 22% in the same period.

Here are those words in a chart.

* JumiaPay – This is similar to the United States’ PayPal or Apple Pay, but it also includes a Jumia wallet which extends the services (and revenue) through Jumia lending.

Even further, JumiaPay handles household bills, pre-paid phone minutes, ticketing to sporting events, entertainment, and (video) gaming.

It offers credit scores, financing, a savings account, and even insurance.

JumiaPay has rolled out its pilot of a pre-paid debit card for JumiaPay in Egypt.

This too is a total domination strategy, where Jumia quietly appears to be positioning itself as the only cross border digital bank.

As for penetration, more than 50% of all transactions in Nigeria and Egypt were processed on Jumia pay.

Here is the company line for Jumia Pay:

Our payment service, JumiaPay, has been designed to offer a safe, fast and easy solution to facilitate online payments on our platform, with the intention of integrating additional financial services in the future. As of December 2019, JumiaPay is active in 6 countries.

Total payment volume (TPV)for JumiaPay rose 50% year over year in Q3 2020 while penetration rose by 110%. Here are those words in a chart:

COVID-19
COVID-19 has had a push and pull impact on Jumia.

We have written so often about our Top Picks in Europe and the Unites States when discussing the digital transformation (DX):

“While this virus is a tragedy, if it happened to us ten years ago, the death toll and economic impact would have been far (far) worse.”

Well, in Africa, we are in the “ten years ago” stage, which means that the obviously positive impact for U.S. DX companies is not so obvious for Jumia.

COVID-19 has had a combination of short term supply and logistic challenges with unique e-commerce adoption opportunities for Jumia — a push and pull.

The short-term supply and logistics challenges have reduced assortment availability.

Cross-border business disruptions have arisen with local sellers ability (or inability) to import due to negatively impacted cargo disruption.

There have been confinement measures that have restricted sellers’ ability to drop off their packages for delivery and restaurant kitchens have seen shutdowns in a number of countries, including large QSR chains.

Logistics challenges have limited Jumia’s capacity to fulfill consumer demand due to curfews and reduced warehouse order processing capacity due to safety measures.

However, e-commerce & payment adoption opportunities have accelerated.

There has been increased demand from brands and sellers to sell on Jumia and a clear brands and sellers eagerness to join the Jumia marketplace.

There has been strong demand from offline convenience retailers to join the Jumia on-demand platform.

Jumia has seen increasing advertisers’ interest for online channels.

There has been a surge in online demand for essentials starting in the second half of March.

All of this demand strength supports Jumia’s new found focus on sales & advertising expense efficiencies yielding an opportunity to accelerate consumption shift towards online and
contactless delivery.

This further promotes usage of JumiaPay and provides an opportunity to drive payment adoption.

So, while the financial media focuses on the disruption due to COVID-19, we choose to focus on the permanent changes and accelerants to Africa’s digital transformation, and therefore Jumia’s DX.

Moving Forward — and Financials
The company has pivoted its selling strategy to less electronics (phones) and more daily household goods in an effort to pull profitability closer.

As for the “why,” we need look no further than worldwide prejudicial views of Africa.

With the investment community’s incredulity that “it can work in Africa,” Jumia’s hand has been forced.

The company will focus on profitability first, as opposed to American companies which have the privilege of focusing on revenue growth at nearly any cost while still being applauded for those efforts.

Jumia’s market cap stands at $1.38 billion on $147 million in revenue in the trailing twelve months (TTM).

Analysts estimates have Jumia reaching $164.5 million revenue for all of 2020, then $219 million for 2021, and finally $280 million for 2022.

Those 2021 and 2022 numbers would represent 33% growth and 28% growth, respectively.

We believe that Jumia will substantially outperform the 2022 revenue estimates of $280 million and we have no strong opinion about 2021 other than, we are bullish.

Jumia has a gross margin % of 61% but also a net income margin (TTM) of -120.7%.

That net income number is a blended number of the last four quarters.

Profitability has been markedly improved with the new focus as Q3 has shown us.

Jumia’s gross profit after fulfillment and selling and administrative expenses has gone from -$15.5 million to positive $400,000.

Here is a chart of those words:

The company has (purposefully) seen its average order value drop 24% year-over-year while gross profit per order has risen 29%.

Yes, that’s right — the company is looking for more smaller transactions and larger earnings margins for each one.

* Selling and administrative (S&A) expense per order has dropped 53%.

* Technology and G&A expenses (combined) per order have dropped 17%.

* The annual S&A per active consumer has dropped 43%.

* Active customers increased 23% year-over-year.

* These expense reductions and gross profit increases are called operating leverage and the net results has been a reduction in EBITDA losses by 47% in just one year.

Good for Jumia.

Now we need to see the growth return while this operating leverage proves to stick.

Risk
There are many, many risks for Jumia.

Even if the idea is right, Africa is like no other place in the world in many ways.

This logistics network is brilliant, but its not easy and we really don’t know what happens if it has to scale up.

Can Jumia handle $500 million in sales? $1 billion? $10 billion?

These are reasonable questions and we have no obvious answer.

Is the total domination strategy really as clever as we see it, or will it create backlash? Will there be an “anti Jumia” movement if the company becomes too powerful?

Will this impact margins?

These are also reasonable questions.

Will Jumia do the hard part and build out a digital Africa only to see a massive American or (more likely) Chinese firm take that market once its made and crush the Jumia business?

After all, China is essentially in “colonization” mode over Africa as it builds out its infrastructure (water, electricity, roads) with a likely boomerang quid pro quo — “we built it, we own it.”

What does Jumia do in that regard? What does Africa do?

There are many more risks for Jumia but most of those fall under the purview of “normal technology company risks” so we will just leave the last bit as a catch-all.

Conclusion
Today we announce Jumia Technologies (JMIA) as a Spotlight Top Pick.

We see Africa as an enormously underserved and underappreciated opportunity for a digital transformation at a scale no one has ever seen before.

We believe Jumia has a total domination strategy which could lead to truly massive technology company with so many sub segments among its big three (marketplace, logistics, pay) that it will be the Amazon/Shopify, FedEx/Ups, PayPal/Apple Pay/ Stripe, Bank of America/Visa, and DoorDash/Postmates/Uber Eats of Africa.

That is — it wants to be “everything.”

Given how large the market opportunity is, we just need it to be “something” to see a worthy investment.

Thanks for reading, friends.

The author is long shares of Jumia (JMIA) at the time of this writing with a position initiation date of 10-12-2020, fully more than one-month prior to this publication.

The author is long calls and short puts in Jumia (JMIA) at the time of this writing as well, with a position initiation date of 10-14-2020, also fully more than one-month prior to this publication.

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