South Africa’s biggest digital retailer faces major challenges

One of the biggest challenges that retailers are currently trying to address is catering for the needs of the customer of tomorrow. Gen Z consumers have specific shopping habits and are very technologically driven when it comes to how they research their product, purchase their product and access their product (having it delivered). This model has been present in the US for a while. The growth of the digital retailer in South Africa has really been accelerated by Covid.

At the beginning of the Pandemic, economists and futurists spoke a lot about the rise of the digital retailer and singled out Takealot as South Africa’s pioneer in this space. In this article, we will discuss Takealot’s rise and how it is not facing significant disruption form Amazon who is looking to significantly spread its wings into the South African market.

Subheadings were inserted by Turnaround Talk.

The digital retailer of the future

A Business Day article points out that the head of technology firm Naspers, which operates the largest e-commerce platform in SA, continues to believe that Takealot can effectively defend its place against US giant Amazon, which, according to a leaked report, is expected to launch locally in the coming months.

While Naspers, valued at about R1.1-trillion on the JSE, is primarily focused on its international investments, the group maintains two units in SA — publisher and news outlet Media24 and Takealot.

An article by Moneyweb points out that the Takealot Group, comprising Takealot.com, Superbalist and Mr D Food, is now 81% of the size of Massmart’s Game when comparing revenue only.

In the year to the end of March, Takealot reported revenue of $827 million, which equates to R12.3 billion at the average exchange rate of those 12 months. By contrast, Game reported 52-week sales to the end of December of R15.3 billion.

Gross merchandise value of South Africa’s massive digital retailer

The Moneyweb article points out that far more impressive is the growth of gross merchandise value (GMV) across the group. In 2022, this is up by 46% to $1.493 billion – or R22.28 billion.

Naspers does not split out the breakdown per segment within Takealot, but Takealot.com’s GMV growth was 27% in FY2022. Superbalist – which Naspers now owns 100% of following a complex transaction with subsidiary Media24, which used to own 51% – grew GMV by 42% from FY2021.

Mr D Food was the star performer in GMV growth, with an increase of 51% year on year. However, in this business Takealot will ‘only’ earn a commission or fee on each takeaway delivery.

Takealot vs Amazon: the rookie vs the veteran

While the growth of Takealot is impressive, its model may come under significant pressure when Amazon increases its footprint into South Africa.

A News24 article points out that, According to documents seen by Business Insider, Amazon plans to roll out its online marketplace in South Africa in February 2023. MyBroadband has reported that Amazon is securing warehouse space, which will presumably house products for distribution. This will make it a force to be reckoned with when it comes to future digital retailer rankings.

How it will get products to clients has not yet been confirmed, but it is also expected to sell products on behalf of third parties on its local platform.

The News24 article points out that Amazon wants to launch its full Prime service later in 2023. The Prime service involves paying a monthly fee to get all your Amazon online shopping delivered for free. In addition, Prime members also get free access to thousands of movies and TV shows through Prime Video, as well as the Kindle book library, games and music.

It also has tremendous expertise in delivery – with more than 400 warehouses across the world, 60 000 trucks, and 110 planes to get its goods to customers.

“Given that SA is dominated by a few major online retailers, the launch of Amazon in SA will provide an alternative e-commerce platform while its flexibility in pushing inventory, together with its Prime offering, will provide a competitive edge above most online retailers,” says FNB analyst Thabiso Mamathuba.

Naspers-owned Takealot may be worst affected by Amazon’s entry, argues Mamathuba.

Founder and Director of investment website JustOneLap.com, Simon Brown agrees saying the local online retailer will have to compete with Amazon’s wider product range. Access to Amazon’s Prime perks – including free delivery, video, games, books and music – will add to the American giant’s competitive edge, says Brown.

Amazon will also have a novelty factor and comes with a track record in other emerging markets like India.

Highs and lows

While Takealot is showing massive growth, and there is potential for Amazon to loook forward to a similar kind of growth in 2023, online retailers are facing massive attrition due to inflation and the high cost of living which is impacting consumers discretionary spending. Average revenue per user (ARPU) is something that has impacted DSTV and is a statistic that many retailers pay close attention to. Simply put…if your average consumer walks into a shop (or visits a platform like Takealot or Amazon) and they buy less, you might still have the same number of customers/users but what they walk out/checkout with in their basket is becoming cheaper and cheaper or they are buying less items. Digital retailers are facing their own challenges when it comes to the tough economic environment.

The Moneyweb article points out that The group is still reporting losses, with a loss of about R104 million ($7 million) equivalent to a 1% trading loss margin. This loss margin is similar to its blockbuster lockdown year in FY2021. So-called ‘adjusted’ Ebitda (earnings before interest, tax, depreciation and amortisation) has close to doubled from $8 million (R130 million) in FY2021 to $15 million (R224 million) in FY2022.

Again, it doesn’t provide specific breakdowns but it does say that Superbalist “improved its trading loss margin by almost 2 percentage points to 7% during the year”.

the Monayweb article points out that this means Superbalist is still losing R7 on every R100 in sales.

Given this information (that Superbalist is still firmly loss-making), one could construct a scenario where Mr D Food is unprofitable on an outright basis, but that Takealot.com is. Much depends on where the delivery costs are being accounted for, given the dependence Takealot.com has on the Mr D Food delivery network to handle its last mile.

The Moneyweb article points out that the group says Takealot.com’s marketplace, or third-party sales from resellers, “continued to outpace first-party sales and accounted for 52% of GMV. This means more than R500 of every R1 000 in sales on Takealot.com is for third-party products. This is likely significantly more profitable for the retailer as it carries no risk in holding stock. The life of a digital retailer can be complicated

Last year, it was estimated that 65% of Amazon’s $600 billion in worldwide GMV was from its Marketplace, or sales from third parties using its platform for fulfilment and delivery. Naspers says in the last financial year “there were 5 899 active sellers [on the Takealot platform], up from 310 sellers seven years ago”.