Why are online businesses in Nigeria struggling?

Barely seven years after launch, DealDey, Nigeria’s leading e-commerce discount and shopping store founded by Nigeria’s entrepreneur and Tech Mogul Sim Shagaya has reportedly closed its business. The company closed shop around December and has let go of its workers. The news comes about a year after Konga also founded by Shagaya, was acquired by the owners of Yudala for an undisclosed amount.

This shows that the several efforts by investors to re-position the platform failed. It would be recalled that the company founded in 2011 remained the leading go-to website for deals until 2015 when it started having issues. In 2015, the company raised $5 million in a Series B funding from Kinnevik which was its original investor. After raising funds, the company laid off almost 60 percent of its workers in a drive which was perceived to be a way of cutting cost. During this period, Merchants on its platform also complained about DealDey owing them proceeds from their sales. In order to save DealDey which was already losing its grip, Ringier Africa Deals Group a joint venture (JV) company between Swiss Ringier Africa AG and South African Silvertree Internet Holdings  Ltd acquired the company for an undisclosed amount in 2016. However, in 2017, Ringier exited the JV to focus more on classifieds, publishing and marketing while Silvertree took full control of the company.

Apart from DealDey’s closure, Nigeria also witnessed the exit of a number of classified websites, including olx.com and efritin.com, both citing the high cost of doing business in the country as the reason for their exit. One of the leading job portals in Nigeria Careers24 on Monday also announced that it is closing down its operations in Nigeria effective 1 March 2019. The company which opened shop in 2014 is closing because it failed to gain the expected traction in that market.

Looking at the trend of some online platforms shutting down businesses in Nigeria and the ups and downs faced by others, it raises the question of what goes wrong in the space. Is there an issue with the business model currently adopted by players in the industry? It also begs the question of the country’s readiness for online commerce, which increasingly seems to be in its early stage of development after almost a decade.

All these are happening at a time of the fourth industrial revolution, an age driven by the digital space which includes online business, transactions, activities and interactions.

Why are online businesses shutting down in Nigeria?

When we talk about online businesses the first company that comes to mind is Amazon, which has positioned itself as the most valuable public company in the world. The 24-year-old company valued at $800 billion accounted for roughly half of all eCommerce sales in the U.S.  and about 90 percent of Amazon’s revenue comes from retail sales.

The success story of Amazon over the years has been a major driver of the evolution of online business in Nigeria and Africa as a whole. However, the closure of these companies indicate there are deep issues that players in the industry might be overlooking. One such may be the business model. The business models of the Classifieds and e-tailing industry has been affected by several challenges such as acceptable and viable means of transaction, trust, as well as the mode of payment. A lot of Nigerians still prefer payment on delivery and buying at a physical store. According to a research done by the Fletcher School and Mastercard Center for Inclusive Growth, out of the $301 billion of funds flows from consumers to businesses in Nigeria, 98 percent is still cash-based.

The closure of these platforms can also be blamed on the recent rise of social media vendors such as Instagram and WhatsApp businesses.  A lot of Nigerians now prefer to deal directly with the vendors rather than through these platforms which serve as a market for the vendors and the customers. People now have the option of comparing prices between the platforms and the social media vendors as well as damaging the reputation of a vendor who sells fake products online. Most of these vendors also prefer this seemingly easier and cheaper way of selling. This is a huge loss to the companies after spending so much money on salaries, office and warehouse rent.

A lot of eCommerce platforms have also incurred huge losses from damages due to the country’s poor infrastructure. It is worthy to note that good infrastructure has been critical in the growth of the countries where eCommerce have thrived.

Restructuring of the Nigerian Postal Service is also another way of making eCommerce viable in the country. This is because the agency could help solve the problem of logistics, one of the myriads faced by eCommerce businesses in the country.

In what looked like a validation of the school of thought that Nigeria wasn’t ready for eCommerce and classifieds when it started in the country, Shagaya, in his recent tweet referred to Konga, the eCommerce company he founded in 2012, as a distraction.

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For eCommerce, phygital may be the solution

Customers of eCommerce businesses are phygital (physical plus digital). They do not want their interaction to start and almost end virtually. Consumers who have smartphones are already accustomed to supplementing normal life experiences with digital content and vice-versa. Hence, eCommerce businesses need to be ready to meet their consumers where they are most comfortable with buying — in the phygital.

Although, that eCommerce is growing and robustly at that across Africa, physical stores still account for a substantial portion of total retail sales. As things stand, multi-channel retailers may be the winners if they perfectly harmonize the best of eCommerce and physical retail. They can easily fend off e-only retailers.

A perfect phygital strategy can help eCommerce businesses personalise customer experiences and induce return to stores, increase loyalty and better engage customers. Of course, it ends with such businesses getting a bigger share of wallets of consumers.

Konga seems to have adopted this strategy following its acquisition by Zinox, but it still looks a bit difficult for consumers to connect their digital and physical experiences of the brand. If they get things right, Konga may be the biggest winner in the eCommerce space. Time will tell.