2019-08-03_The_Economist

The EconomistAugust 3rd 2019 Business 53

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1

The companies share four characteris-

tics. First, they were born adapted to tricky

local markets. Walmart pulled out of Brazil

in 2018, when it became clear that, partly as

a function of Brazil’s long-standing protec-

tionism, the giant American retailer could

not easily access global supply chains it re-

lies on to offer low prices in other places.

Red tape related to tax, shipping and pay-

ments proved too much hassle for foreign

behemoths to bother with, says Mr Sum-

mers. In their absence, the local companies

can thrive.

Build it and they will buy

Before that could happen, though, they of-

ten had to build their own infrastructure in

places where payment and delivery sys-

tems are rudimentary or non-existent.

This is the second shared feature. Many of

Jumia’s customers do not have an address,

so delivery men phone ahead for direc-

tions. The company works with over 100 lo-

gistics providers and, in cities like Lagos,

runs its own last-mile fleet of motorbikes

and lorries. In Indonesia, a booming mar-

ket of 265m people dispersed across 15,000

islands with few decent roads or, as in Ni-

geria, precise addresses, Shopee and its re-

gional rivals, Tokopedia and Lazeda, enlist

local shopkeepers who know the area to di-

rect deliveries to the right recipients.

Jumia, Souq (an Emirati firm bought by

Amazon in 2017) and MercadoLibre have all

built their own sophisticated payment net-

works. MercadoLibre’s has turned into a

fully fledged money-management system,

complete with payments to friends, invest-

ment options and small loans.

The third similarity is that the emerging

e-merchants tend not to hold and sell mer-

chandise themselves. Some 40% of Ama-

zon’s sales come from products it stocks

rather than from third parties. In the case

of MercadoLibre and Shopee that number

is close to zero. The need to build and

maintain payment and delivery systems

leaves little energy—or resources—to run a

shop. Regulators in developing countries

have also been tougher on anticompetitive

behaviour than their counterparts in

America and Europe. India’s competition

authority recently ordered Flipkart to stop

selling wares in its marketplace, where it

could undercut third-party sellers.

The mini e-marts are different from

Amazon in one last crucial way—they do

not make much money at the moment.

Many are burning through cash. Jumia lost

€170m ($188m) last year and has lost a cum-

ulative €862m since being founded in 2012.

Shopee does not yet make a profit, though

analysts expect that it will do so before

2023. Last year MercadoLibre made no
      money for the first time since it broke even
      in 2006. Mr Summers says the firm is now
      investing everything it can in growth.
      Investors will need patience—and deep
      pockets. Eghosa Omoigui of EchovcPart-
      ners, a venture-capital fund in Lagos, is
      convinced that e-commerce will one day
      succeed in Africa. In the meantime, “you
      have to keep shoving coal into the engine.”
      In Russia, Mr Virin predicts, the race will
      also come down to fuel. “The winner will
      be the one who doesn’t run out of money.”
      For the time being, there appears to be
      no risk of that. Shopee’s parent raised
      $884m when it listed in New York two years
      ago. Besides reinvesting profits, Mercado-
      Libre raised $2bn in March, partly by offer-
      ing shares on the secondary market, and in
      part by selling a stake to Paypal. Tokopedia
      picked up $1.1bn from SoftBank, a Japanese
      tech holding company, in December. Jumia
      has about €380m in cash, enough for about
      two years at the rate the firm is currently
      burning through it.
      The companies are hoping that their
      markets will expand fast enough to gener-
      ate profits before the capital taps run dry.
      There is room to grow. Fewer than 1% of re-
      tail sales in Jumia’s markets currently take
      place online. By 2025 that figure may reach
      10% in Africa’s biggest economies, consul-
      tants at McKinsey reckon. The consumer
      class is growing fast, says Jeremy Hodara,
      one of Jumia’s co-founders. “They come to
      us and say, ‘Look, it’s the Africa Cup of Na-
      tions [football tournament] and my coun-
      try’s qualified. I need my first tv.’”
      Shopee’s revenues are rising even as it
      spends less on marketing and promotions.
      Last year it had 50m active buyers, up from

21.7m the year before. In 2017 Google and

Temasek, a Singaporean sovereign-wealth

fund, predicted that the south-east Asian

internet economy will be worth $200bn by

2025. Last year they revised their forecast
      up by a fifth, to $240bn. Marcel Motta of
      Euromonitor International expects e-com-
      merce’s share of total retail in Brazil to dou-
      ble to 10% by 2023. In Russia annual online
      sales of physical goods could reach €50bn
      by then, from €22bn in 2019.
      The e-commerce hopefuls see a route to
      riches by closing the gap between online
      retail’s penetration in their markets and
      that enjoyed by Amazon in America, which
      remains three times larger. The sale of
      goods is not their only path to profits. Some
      will sell themselves to the giants, as Souq
      and Flipkart have done. Others will contin-
      ue on their own. MercadoLibre wants to be
      something close to a fully fledged digital
      bank. All show that, having built their own
      infrastructure, they can sell access to it. In
      this respect, at least, they may give their
      American role model a run for its money. 7

Minimarts

Sources:Companyreports;pressreports;DatastreamfromRefinitiv;IMF;eMarketer *ExcludingNorthAmerica

Selectede-commercefirms

2018 orlatest

Company

Alibaba China

Amazon Europe/Asia

MercadoLibre Latin America

Shopee (Sea) South-East Asia

Flipkart India

Jumia Africa

Ozon Russia

Gross

merchandise

volume,$bn

Market cap/

valuation

July31st2019,$bn

Revenues

$bn

Addressable

market

Population,bn

Regional

e-commerce

growth,2019, %

277

12.5

10.3

6.2

0.9

0.7

65.9*

1.4

1.0

3.8

0.1

939

31.3

9.3

22.0

1.4

0.8

853 56.2 453 1.4

3.4*

0.6

0.6

1.3

0.7

0.1

27.3

10-25*

21.3

25.0

31.9

21.3

na 18.7

M

asayoshi son, the founder of Soft-

Bank, a Japanese telecoms firm

turned tech investor, will not have had

many more momentous days than July

26th. First came the announcement of

plans for a second Vision Fund, whose ex-

pected capital contributions of $108bn will

make it the largest private technology fund

ever, surpassing even the almost $100bn

ploughed into its predecessor. Later came

news that America’s Department of Justice

will not block the merger of t-Mobile and

Sprint, the country’s third- and fourth-

largest mobile operators. SoftBank owns

84% of Sprint; it would still own 27% of the

combined entity, but the deal nonetheless

promises to spruce up its balance-sheet.

Start with news of the second fund. The

first one has already upended the assump-

tions of early-stage investing. Its scale is

unprecedented: the next-largest venture-

capital vehicles marshal pots in the mere

single-digit billions. Its speed has been

striking; the Vision Fund has splurged

$70bn in under three years on stakes in

Uber, WeWork, Arm and others. Investors

have done well enough thus far: Mr Son

claimed returns of 29% as of March 2019.

That record now seems set to unlock an-

other gargantuan pile of capital. Giants of

the technology industry such as Microsoft,

SoftBank’s transformation into an

investment powerhouse continues

Investing in technology

Double vision