London headquartered developing financial institution, Tellimer, has introduced a proprietary metric called the Cash Sustainability Index (CSI) to assess the viability of e-commerce companies.
The index attach ratings on E-commerce companies that have got what it takes to succeed, and which do not.
Nirgunan Tiruchelvam, Head of Consumers Equity Research at the firm however observed that explosion in e-commerce in emerging markets has created a new class of players.
According to him, in 2018, emerging market Baby Amazons generated US$30 billion in gross merchandise value (GMV).
Tellimer’s Tiruchelvam in a review hinted that Jumia, among other baby amazons would be cash flow negative in the next three years.
He revealed that Jumia has lost US$946 million since inception. Though, he also reckoned that the baby amazons have been able to weather storms in some key areas.
According to him, E-commerce is in the ascendancy in emerging markets, having grown by an estimated 18% per annum over the past five years.
The Head of Consumers Equity Research stated that the so-called ‘Baby Amazons’, such as Jumia, SEA, Flipkart and Ozon, are generating exceptional revenue growth.
He reckoned that the drivers of this are threefold include the fact that internet penetration has galloped forwards in the Emerging Market world, powered by cheap data.
Also, that smartphones have become the principal means of e-commerce, as cheaper accessible models have flooded the market; and unlike in developing markets, e-commerce is the first step for millions of emerging market consumers to access retailing.
“This explosion in e-commerce in emerging markets has created a new class of players. In 2018, emerging market Baby Amazons generated US$30 billion in gross merchandise value (GMV).
“Although their combined market cap is just 7% of Amazon’s US$980 billion, we think the gap could close a lot more quickly than the market expects.
“For instance, Amazon’s international GMV rose by 12% in the second quarter this year; Baby Amazons averaged 19%”, he said.
The Consumers’ equity research analyst lists features that Baby Amazons share to include adverse markets, poor infrastructure, third-party sales dominant and cash bleed.
The Baby Amazons have adapted to difficult markets, he said. For example, Walmart withdrew from Brazil in 2018, with the American giant unable to handle the massive wall of protectionism.
However, Walmart’s exit opened the door for local players to thrive.
According to him, Baby Amazons deal with poor infrastructure. He cited that case of Jumia, which has been billed as Africa’s Amazon, that many of its customers do not have a proper address.
Directions for delivery workers are complex and Jumia has had to develop its own delivery infrastructure; Amazon, by contrast, was able to rely on the US postal service in its infancy, he stated.
Likewise, in Indonesia, Shopee, Tokopedia and Lazada have co-called ‘last mile’ delivery issues; with local merchants assisting with deliveries to some of the country’s dispersed islands.
Similarly, payment networks are at a very nascent stage in emerging markets; hence, the Baby Amazons must build their own, and MercadoLibre, Souk and Jumia, among others, have all done so.
MercadoLibre’s in fact enables customers to secure micro loans and make investments, and is now a fully-fledged rival to the established financial system in Latin America.
“In addition, over one-third of Amazon’s revenue is derived from its own products, but, unlike developed market e-commerce players, EM e-commerce players do not hold much of their own inventory – Baby Amazons tend to operate principally as third-party vendors.
“Jumia, Shopee and MercadoLibre have negligible sales from their own products. And Flipkart, India’s e-commerce giant, has faced regulatory pressure because it has been undercutting vendors.
“Most worryingly, Baby Amazons are all intensely cash flow negative. Their balance sheets are in constant need of replenishment.
“For instance, Jumia and Shopee are not expected to be cash flow positive for another three years and it will take even longer for them to become profitable.
“Jumia has lost US$946 million since inception. We are positive on the sector overall, but it is clear that cash-flow management will be the key to the sustainability of these enterprises”, Tiruchelvam.
By Oluwafemi Michael