Masoko, the plural form of market Swahili, will soon be a common word in Kenya’s retail sector, thanks to Safaricom.
Kenya’s leading mobile services operator plans to introduce an e-commerce platform in the next eight months targeting formal retail and informal online trading. The platform has already been branded Masoko, in line with the company’s culture of using local Swahili or slung names for its products and services.
Masoko will offer products ranging from electronics to beverages and cosmetics and will provide a tool for people to buy and sell goods on social-media platforms such as Facebook and Twitter. The portal has been undergoing in-house testing for the last six or so months and the management say it is almost ready to roll.
Safaricom’s director for enterprise business Rita Okuthe says the company’s goal is to become a little more than the African equivalent of Amazon’s Marketplace. “If you look at Facebook and Instagram, there’s a lot of online and offline selling that happens and one of the reasons they are popular in Kenya is because small-scale, middle-scale merchants use it as a sales tool,” Ms Okuthe said. “What we are going to be doing is formalising that. At least five in 10 Kenyans have bought something they first saw online.”
With that not-so-surprising move, Safaricom has got online retailers in Kenya panicking. The country has more than 10 online vendors, with the most established being Jumia, Kilimall, OLX and PigiaMe, among others. Masoko would easily have these retailers’ lunch and walk away undeterred if it succeeds, given its huge market budgets and ability to get top-notch technical expertise.
These online retailers have been having a roll, growing by huge margins as more Kenyans embrace online shopping. They often entice Kenyans with huge offers and discounts negotiated with manufactures, and have actually managed to divert a huge chunk of the shopping traffic especially for electronics and fashion brands from glitzy offline malls to their sites.
Closure of Jumia Marketplace
With Safaricom’s entry, they must now fight for survival in a market that will certainly swallow quite many of them.
Insiders say the platform could as well be used by Jumia, owned by Africa Internet Group, Kilimall and OLX, but that means they won’t have their cake and just eat it, as they could be required to part with some fees for using Safaricom infrastructure.
The decision of e-commerce giant Jumia to shut down its marketplace could have potentially created a launching pad for Masoko. Jumia said it closed its marketplace to boost its growth and strengthen the group’s presence in Kenya.
Mr Sam Chappatte, Jumia Kenya’s managing director, said by integrating Jumia Market into Jumia’s e-commerce operations, Jumia will be able to focus its attention on projects with the highest possible return on investment.
Safaricom is looking to build on the success of M-Pesa, its mobile-phone money transfer service that dominates the Kenyan economy and is used by subscribers to pay for everything from utility bills and other expenses. Another added advantage is the fact that the company accounts for 75% of the country’s 40.6 million internet users, while M-Pesa handled Sh432.5 billion of mobile trade transactions in the first quarter of 2017, more than half the Sh627.5 billion, according to data published by the Communication Commission of Kenya, the industry regulator.
Safaricom says it will be partnering with logistics companies and could use global positioning systems to make deliveries in the absence of a national addressing system. It is aiming to cut delivery times from the current two to three days to a matter of hours.
Challenge of logistics
Safaricom will need to improve on the services currently on offer in the market by making a major leap on the logistics side, if they will allow small businesspeople to sell on the site.
One of the reasons e-commerce adoption has been slow is the lack of supporting infrastructure like drop-off points in both small and large towns. While the likes of Kilimall can deliver a product to your doorstep, it is the first part of this chain that makes selling difficult: having the seller to deliver the product to the retailer in a cost effective way.
Like current operators, Masoko will link manufacturers and farmers with market directly and reduce supply-chain inefficiencies. “This offering will not be holding inventory and neither will it be an anyone-can-sell arena,” says Safaricom CEO Bob Collymore, who noted that Safaricom is carefully screening all the merchants before giving them access to the platform.
The expected Masoko launch has excited the market, with Safaricom shares touching an all-time high of Sh25 early August. The stock’s value has risen by about one-third this year, driven by what analysts attribute to good financial performance of the telecommunications firm and rallied as plans for Masoko began to take shape.
At Sh25, the stock has risen ten times since its level lowest in early 2009, when it traded at Sh2.55 — half of its 2008 initial public offering price of Sh5. This pushed Safaricom’s market capitalisation — which is the total value of investor funds – to more than Sh1 trillion, outstripping the combined capitalisation of the next 10 most valuable companies at the NSE among them East African Breweries Ltd (EABL) Equity Bank, BAT, Barclays, KCB, Co-operative, CfC Stanbic, Standard Chartered and Bamburi.
Diversifying its business
Boasting more than 28.1 million subscribers as at March this year, Safaricom has managed to attract and retain customers despite increased competition from Airtel and Telkom Kenya. The operator has raised its assault and is grabbing a large share of the data business, which will be key in its online market. As people shop on Masoko, most will likely be consuming Safaricom data bundles, which adds to its revenues as well.
M-Pesa will be among a number of payment methods including other online wallet services and cards by Visa Inc. and Mastercard Inc.
Safaricom plans to roll out Masoko by the end of March 2018, and later expand the platform beyond Kenya, Okuthe says, without specifying what other markets the company is considering.
E-commerce is big
E-commerce is huge business and the potential is unimaginable. Locally, Kilimall and Jumia are raking in millions from e-commerce, while OLX has established a brand through this online model. On the international scale, Amazon and Alibaba founders are examples of tycoons made from e-commerce. Jeff Bezos, the founder of Amazon, is the third richest person in the World with a net worth of $84.7 billion (Sh8.7 trillion).
Jack Ma, Alibaba’s founder is Asia’s richest person with a net worth of $37.8 billion (Sh3.9 trillion) and 14th richest person in the world. Globally, the e-commerce market is worth around $22.1 trillion (Sh2, 210 trillion), according to the United Nations Conference on Trade and Development (UNCTAD) 2016 estimates.
Competitive pricing for Masoko will provide an attraction for people currently buying and selling goods on social-media platforms such as Facebook. “We see Masoko as being an ideal platform to connect people to new markets using technology. You will be able to source quality products at competitive prices and we will also offer reliable customer service,” Safaricom’s corporate affairs director, Stephen Chege is quoted as saying by the Financial Standard.
Masoko will leverage M-Pesa as a payment platform but, as it were, will also incorporate other payment options such as MasterCard and Visa.
With revenues growing, Safaricom can afford to splash huge discounts to attract shoppers. Safaricom posted a 27% growth in net profit to Sh48.4 billion in the year to March 2017. Total revenue grew by 8.8% to Sh212.9 billion. M-Pesa revenues grew from Sh41.5 billion to Sh55.08 billion while data revenues jumped 38.6% to Sh29.29 billion. With these figures, rivals in e-commerce segment will have to work extra hard to compete in marketing and execution.
Offline retailers in trouble
Offline retailers such as Uchumi and Nakumatt should be a worried lot as Masoko plans to roll out. Retailing is facing traditional and e-commerce competition, management and strategic woes and is likely to lose out on shoppers if Masoko proves a viable alternative. Already, mobile phone dealers in Nairobi have recorded a drop in sales as more city residents resort to shopping online.
Game changer?
Kenya’s retail is still challenged in terms of logistics and deeply inventory-warehoused, according to Omondi Joel Owino, an energy & infrastructure social advisor in East Africa. “Retailers buy stock on cash or credit and pray for customer to walk-in, see, buy, pay and carry-out,” he says. “This internalises major inventory-related spiraling costs like rents, logistics and staff.”
Mr Owino says the retail sector also has relatively poor consumer behaviour data, worsened by a change in impact of media advertising. “Imports have turned Kenya into a supermarket,” he says. “The benefits of a fast improving, diversified and convenient payment systems have not added value. Even warehouse-inventory players like Jumia are feeling the pinch. Masoko added to the M-Pesa platform, Safaricom wants to take advantage of the payment system, back it up with better, larger customer data-intelligence.”
But Masoko should come up with a disruptive offering to be able to claim a larger share of Sh1.8 trillion Kenyan retail market. For investors in Safaricom, this is certainly great news since it could potentially provide a means of further expanding the top and bottom line.
But investment expert Edwin Ngarari says this could be one of the riskiest moves the company has made to date. M-Pesa, which is perhaps the company’s crown jewel, has been largely successful due to its innovative nature and first mover advantage, qualities that would be lacking in Masoko, he says.
“The country already has a number of well-known e-commerce sites such as Jumia, Kilimall and OlX and with Masoko being the fourth, there will be little to differentiate these entities,” he argues. “For those who would argue that M-Pesa will be the key differentiating factor, I would like to point out that both Jumia and Kilimall have integrated this payment method on their sites via paybill.”
Which way for Masoko?
So how can Masoko effectively compete with its peers? One possible way to do this could be to remove transaction costs for both customers and merchants, but Mr Ngarari says while this could make Masoko more attractive, it would not be enough to be a game-changer.
To illustrate the challenging nature of the e-commerce 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% drop in 2016 sales to Sh9.4 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: e-commerce business isn’t as rosy as it is portrayed.
Gloomy picture of ecommerce
A report published by the Oxford Business Group on Kenya’s retail sector paints an even grimmer picture of e-commerce. According to the Communications Authority of Kenya, the e-commerce segment was worth Sh4.3 billion and a June 2015 survey of Kenyan consumers published by Consumer Insight found that only 7% 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% to Sh1.8 trillion in 2016, supermarkets accounted for 30% of the total spending while traditional retail still dominated, accounting for 67% of total spending. Traditional retailers include kiosks, over the counter shops and market stalls.
Data from the P&G report further revealed that Kenyans spend about 60% of their income on food and beverages and 23% on personal and household care products. “Taking this information into account and assuming that Safaricom’s Masoko could capture a generous 30% of Kenya’s e-commerce sales in the first year, this would be nowhere near enough to move the needle in terms of shareholder value,” Mr Ngarari says.
E-commerce is generally a low margin business with the likes of Amazon having to contend with under 2% in terms of revenues. While Alibaba enjoys much higher margins of about 27% this can be explained by its business model which differs from Amazon.
Alibaba 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 such as inventory, which is stored in its own warehouses and then sold at a small markup and ships to the customer. This puts it in direct competition with traditional brick-and-mortar retailers hence the lower margins.
Mr Collymore says they will not be holding inventory, which sounds like a strategic positioning. “On paper, this seems like the ultimate middle ground as it would give Masoko the advantages of both Alibaba and Amazon,” Mr Ngarari notes, adding that investors would however have to ask themselves what the cost of this new line of business would be to them.
