Nigeria's e-commerce is growing: How profitable is it?

Nigeria's e-commerce sector is currently experiencing a remarkable growth rate estimated at 25% annually, according to CNBC Africa and the United States report. However, the big question on everyone's mind is how profitable the industry actually is and what operational model is best suited for formal retail in Nigeria. The Global Retail Development Index revealed that in 2016, global retail spending amounted to a staggering $23 trillion, with e-commerce contributing 9% to that figure. Contrastingly, Nigeria's retail sector generated up to $125 billion during the same period, with a mere 1% coming from formal retail. Despite this relatively small portion, when converted to USD, it still boasts an impressive $450 billion, indicating the vast potential of the Nigerian market. The challenge lies in transforming this potential into tangible profits. E-commerce operates on a long-term investment basis, where growth takes precedence over immediate profitability. Many industry players emphasize the importance of patient capital in navigating the evolving sector. While profit margins remain low, there is a shared belief that the industry is still in its nascent stage and requires time to mature. One key aspect that differentiates the Nigerian market from others is the dominance of informal retail, which accounts for over 90% of consumer transactions in the country. Unlike more developed markets like the US, where retail chains are abundant, Nigeria poses a unique landscape with limited options for consumers. In such a scenario, e-commerce emerges as a critical bridge, offering a platform to reach a wider audience and address the void left by traditional retail chains. Currently, e-commerce's market share in Nigeria stands below 3%, but its rapid growth trajectory signals immense opportunities for expansion. Challenges hindering the profitability of the e-commerce sector revolve around consumer trust and infrastructure inadequacies. To instill confidence among Nigerian consumers, retail analysts suggest integrating offline stores into the e-commerce mix, creating a seamless shopping experience that combines the advantages of both platforms. Although online transactions offer efficiency and convenience, the physical presence of stores plays a crucial role in establishing trust and bridging the gap between virtual and tangible retail experiences. Industry giants like Jumia have recalibrated their strategies by downsizing staff and consolidating their platforms to adapt to the evolving landscape. By focusing on providing enhanced tools and technology to empower merchants, these players aim to drive profitability and enhance customer engagement. Yudala, another key player in the market, has adopted a hybrid model that incorporates both online and offline stores across Nigeria. This integration of technology has enabled them to synchronize their platforms and leverage consumer behavior insights to build trust and ensure a seamless shopping journey. Despite facing profitability challenges, the e-commerce sector in Nigeria remains optimistic about its prospects, especially considering the country's 30 million active bank accounts. To bolster profits, industry experts unanimously agree on the significance of establishing an offline presence to complement online operations. While the road to profitability may pose obstacles, the collective vision of industry stakeholders is focused on unlocking the immense potential of Nigeria's e-commerce market.