When two of the biggest players in South Africa’s online shopping space say they have to merge to “survive and prosper”, while others are closing down or going into liquidation, one can’t help but wonder if the local e-commerce sector is ailing.
Sybaritic and Purple Fly Trading are in liquidation; Prophecy, Have2have, and a host of former Naspers properties have shut down their online shopping operations; and the Competition Commission recently approved the merger between Kalahari and Takealot.
When Kalahari and Takealot first announced plans to merge their operations, the two companies said they had to join forces or face being uncompetitive.
They argued that it was not the other players in South Africa’s e-commerce space that were the concern, but brick-and-mortar stores and international services such as Amazon and Alibaba.
Looking at all events, you can’t fault people for wondering if there is a crisis in South Africa’s e-commerce sector.
Prophecy co-founder Paul Johnston feels that “crisis” is the wrong word to describe what he said is more of a “tough transition”.
“Major investors, both local and international, have been taking a very long view of e-commerce in a South African (and African) context,” Johnston said.
The result was that big players such as Takealot and Kalahari have been operating at break-even or a loss, while essentially buying market share.
“This has put major price pressure on smaller e-commerce players, whose scale and amount of capital don’t allow them to follow the same strategy, resulting in businesses either closing down or changing direction as Prophecy did,” Johnston said.
It wasn’t an easy decision to make, Johnston continued, but at Prophecy they felt they had to move to a market with more room to differentiate themselves. In this case, IT hardware rentals.
“We see the future of e-commerce in SA being dominated by a few very large players that sell a wide variety of products,” Johnston said.
Other than the handful of big players, Johnston said smaller, “vertically integrated” businesses with their own branded products can still differentiate themselves enough to be successful.
“It’s interesting to note that internationally the stock market seems to be souring on Amazon’s strategy in recent months, which is the exact strategy as our big SA e-commerce players are following,” Johnston said.
“It’s never a good idea to bet against Amazon, but I do wonder what the long-term conclusion will be for this strategy in SA.”
How to win at e-commerce? Marketing, not tech.
Andy Higgins, managing director of uAfrica, has a similar opinion to Johnston.
“If a merchant tries to compete directly against these large, established, and well-funded players by selling highly commoditised type items with low margins – such as computers, games, books, DVDs, and electronics – they are going to find it extremely difficult,” said Higgins.
However, he believes that if they have their own brand or are able to target a niche or “long tail” type product set with decent margins, then they are far more likely to succeed.
Queried about the online store closures South Africa has seen lately, Higgins said that it was sad to see businesses close down that had been in e-commerce for many years – such as Prophecy and Sybaritic.
“If I was to advise anyone wanting to start an e-commerce business, the IT sector would be at the very bottom of my list of categories to tackle: unless you had hundreds of millions in funding and your aim was to become the dominant generalist player,” Higgins said.
“IT equipment tends to have the lowest margins and be the most competitive, and also has issues around warranties and returns,” Higgins added. “A horrible business to be in.”
Speaking more generally, Higgins said they have also seen a large number of less established players close up shop.
However, uAfrica is seeing far more opening than there are closing.
“From our perspective, the net number of online stores is increasing,” Higgins said.
He feels the reason the churn rate is so high is because prospective store owners are lured by the attractiveness of the business model without fully understanding what is involved in making such a business successful.
“This in particular relates to the marketing of their online store,” Higgins said. “With the technology available it is now easier than ever to set up an online store from a technical perspective, but the challenge then comes to ‘getting feet through the door’, so to speak, once the store is set up.”
Justin Drennan from Parcelninja and Wantitall agreed with Higgins.
“Previously you had to build the sites yourself. Now you just go to Shopify [for which uAfrica is the local partner],” Drennan said.
Services like Parcelninja, which Drennan co-founded, further removes barriers to entry by offering online shops outsourced logistics, he added.
Coming of age
Asked whether South Africa’s e-commerce market is in crisis, Higgins said it might be coming of age, but saying it was in crisis would be wrong.
“Inevitably, as e-commerce matures, there will be some fallout in the process,” Higgins said.
He said that from uAfrica’s perspective there is increased interest from smaller merchants and even more so from the larger, traditional bricks-and-mortar players as they realise they cannot ignore this space.
Higgins went on to say that his view is that e-commerce will come of age in South Africa once big, traditional offline retailers such as Edcon, Massmart, and Foschini truly embrace the online side of retail.
“South Africa is still at less than 1% of total retail that takes place online,” said Higgins. “Why should we be any different to other developed or emerging markets where the online part of retail is experiencing tremendous growth?”