According to Insider Magazine, Amazon (AMZN 1.49%) is planning a massive international expansion next year. This will give the e-commerce giant a bigger presence in Africa -- and that's Jumia Technologies' (JMIA 5.58%) stomping ground. Let's dig deeper into what this new competition could mean for the struggling start-up.
Amazon could dramatically outcompete Jumia
As the self-styled "Amazon of Africa," Jumia Technologies seeks to replicate the success of its U.S.-based counterpart as a third-party e-commerce marketplace that connects sellers with interested buyers. The company's key markets include Nigeria and South Africa. But unfortunately for Jumia, Amazon plans to establish a bigger presence in both countries early next year.
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The rollout is expected to include such features as Fulfillment by Amazon (allowing sellers to outsource shipping to the company) and Amazon Prime, which includes faster shipping options, streaming, and other perks Jumia will struggle to replicate. As the fifth-largest company in the world by market cap, Amazon has much deeper pockets than Jumia.
The size advantage could allow Amazon to scale up faster and introduce loss leaders, or unprofitable offerings designed to make the platform more appealing to customers. One key loss leader could be Amazon Prime streaming. The company is reportedly investing heavily in the African side of the business, hiring Nigerian advertising agencies to push for subscribers and signing licensing agreements with filmmakers and studios in the country.
These strategies could give Amazon's Africa business a massive economic moat against its competition.
Jumia's business is already struggling
Amazon's entrance into African e-commerce is a big vote of confidence in the market -- and perhaps proof that Jumia was onto something when it pioneered the opportunity in 2012. That said, the massive new rival could turn a bad situation worse for the embattled start-up because Jumia already faces challenging metrics and spiraling losses.
While Jumia's first-quarter revenue jumped 44% year over year to $48 million, the average dollar value of its orders dropped 10% to roughly $27 in the period. This decline is part of a multi-year trend as consumers shift away from big-ticket items like electronics to lower-margin, everyday items like toiletries. The company's operating loss also widened from $40.6 million to $66.4 million at a time when rising interest rates are expected to increase the cost of capital, hurting companies that are not yet profitable.
All these challenges have sent Jumia's stock price down roughly 50% year to date.
Is there a silver lining for Jumia?
Already battered by growing losses and deteriorating business metrics, Jumia will likely struggle to compete with a well-capitalized rival like Amazon in the African e-commerce market. But its modest market cap of just $600 million could be a silver lining. According to Citron Research's Andrew Left, Amazon may acquire Jumia this year.
While this claim is speculative, it would make sense considering Amazon's deep pockets and planned expansion into Jumia's home turf. For Jumia investors, a buyout would be a welcome alternative to a seemingly unwinnable competition with the king of e-commerce.
