Since 2021, Catherine Emenike has relied on business-to-business (B2B) e-commerce startups to restock inventory for her mom-and-pop shop in the Lagos mainland. She typically sources products like noodles, beverages, and kegs of groundnut oil for up to 30% less than market price from platforms like Omnibiz and Wabi, and sells them at a profit. Lately, however, Emenike has been worried about restocking costs as the discounts offered by the B2B platforms have started to disappear.
In Africa, B2B e-commerce startups bridge the gap between manufacturers and customers, allowing informal street vendors and small-store owners to restock via mobile apps, WhatsApp, and text messages. These companies offer products at steep discounts, and help merchants with logistics by deploying their own fleets of delivery vehicles or outsourcing fulfillment to third-party firms.
Once the darlings of venture capital investors, these startups have been struggling amid the global funding crunch, and many have had to scale back operations. In March 2023, Zumi, a Kenyan B2B e-commerce startup, shut down due to its inability to raise capital. In January, Wabi, an e-commerce platform backed by Coca-Cola, announced it was shutting down operations in five African markets, including Nigeria, Kenya, and Egypt. Before its closure, the business had heavily discounted its products to drive customer growth. Late last year, MarketForce, a Kenyan B2B startup, had a round of layoffs six months after raising $40 million in funding, citing harsh market conditions.
This is a sharp U-turn from how the B2B e-commerce sector performed in Africa until last year. According to market intelligence platform Briter Bridges, 28 African B2B commerce startups had collectively raised more than $470 million since 2008, and at least 90% of this capital was raised between 2021 and 2022. In March 2022, Kenya’s Wasoko raised $125 million in a round led by Tiger Global.
Flush with VC funds, over the past few years, B2B e-commerce startups positioned themselves as replacements for traditional middlemen who charged high markups. To edge out competitors, these companies entered a price war of sorts, with customers spoiled for choice. “I looked at different platforms to compare offers, and [would] go for the best ones,” shop owner Patrick Audu told Rest of World. Audu, who mainly sells cartons of noodles, had started using Omnibiz and Wabi after a friend told him about their discounted prices. “That’s what everybody was doing,” he said. But with startups struggling, discounts are now much harder to find, small sellers in Nigeria told Rest of World.
The discount strategy has come back to bite e-commerce companies. “VCs are now looking less into growth and more into unit economics, which is abundantly lacking in this space,” Anil Atma, CEO of Lagos-based business consultancy firm Kreem, told Rest of World. “Therefore, it will continue to get more challenging, particularly for FMCG [fast-moving consumer goods] B2B companies because of their high cost of capital expenditure.”
The lack of existing infrastructure had led some of these startups to develop their own warehouses and delivery systems, which made their businesses asset-heavy and capital-intensive. “Many of these startups are forced to utilize their own logistics infrastructure to ensure consistent, timely deliveries. But it’s simply too cash-heavy to scale with such models, given the type of funding African startups receive,” Stephen Deng, general partner at investment firm DFS Lab, told Rest of World.
In March, Nigerian B2B e-commerce startup Alerzo shut down 14 warehouses and fired 400 employees in its second round of layoffs in seven months. The company said it had taken these steps to cut costs and boost its chances of profitability.
Every B2B e-commerce startup that operates an asset-heavy model will suffer, because the cost of maintaining these assets will always eat into its margins, Edidiong Ekong, former head of marketing at Alerzo, told Rest of World. “Additionally, while the discounted promo had worked in acquiring lots of vendors, it’s not really sustainable for businesses in this period of drying treasuries. As you can see, companies now seldom run discount promos,” he said.
“There’s currently a lot of experimentation going on in this space,” Emeka Ajene, an independent tech analyst, told Rest of World. “But there’s a significant race-to-the-bottom risk right now as retailers cycle through multiple platforms in search of the best offers.”
According to Deng, B2B e-commerce companies will look to become more asset-light in the long run. “You have to reduce burn or increase profitability, and almost always both,” he said.
Accounts from merchants indicate these startups aren’t just dealing with a cash-hemorrhaging business model but also a market where brand loyalty is evasive. This means that even if companies manage to cut costs, it is unlikely to result in profits.
“Reducing cost is less difficult; it mainly involves reducing head count or reversing expansion or both, which is already commonplace,” Ismael Belkhayat, co-founder and CEO of Morocco’s Chari, told Rest of World. “Increasing profitability, however, is a different game. You will have to either overhaul your entire business model or go back to the manufacturers to negotiate for more margins or expand into more verticals.”
Chari, for instance, only works with a few rented warehouses that act as dark stores, where customers can walk in to pick up goods. It outsources delivery to vehicle owners who wish to earn extra money dispatching goods to Chari’s retail customers. Nigeria’s Omnibiz also operates an asset-light model, owning no warehouses or delivery vehicles. Instead, it connects retailers with different distributors based on their location, while its logistic partners fulfill orders.
“The best founders will pivot towards paths of least resistance, but it’s currently extremely hard operating models that require a lot of cash to grow,” Deng said.
Some startups in the sector are already trying to venture into categories like fintech, either by completely pivoting or adding a new revenue stream. They are extending working capital to their merchants; providing them with buy now, pay later options; and giving them point-of-sale terminals to receive payments and serve as banking agents. “All of these are ways companies in this sector are using to build customer retention and increase income margin,” Deepankar Rustagi, co-founder and CEO of Omnibiz, told Rest of World.
Ajene said many startups have raised outsize sums, and are capitalized enough to not be at risk of an imminent shutdown, despite fundamental business model flaws. “But as investors become increasingly discerning, there’s an increased risk that these firms become zombie startups: VC-backed companies that are now orphaned by their investors but still operating, despite the limited potential for future growth and no real path to venture-scale success,” he said.
Source: Rest of World
