By Tinashe M Tmukogo:
1. Jumia once called the “Amazon of Africa” just released their financial results for Q2 & they are not looking good. The former unicorn, has stopped growing & is facing challenges that could bring down one of the most hyped start-ups from Africa.
Analysis + V11s below #Jumia
2. The first concern is the -15.4% decrease in revenue combined with a operating loss of $23m. Usually a company has a revenue or profit problem, Jumia has both. That’s like a football team that can’t score goals and also can’t defend.
3. Jumia has always made huge losses. What saved it in the past was the African growth story. Even in their 2019 IPO prospectus the word “growth” appeared over 100 times e.g. in one section alone Jumia mentions growth 10 times (yellow highlights).
4. But now Jumia is not growing and the only “good news” is that it is losing less money than before. However, this improvement is driven only by brutal cost cutting measures with expenses down -47% .
Jumia’s most tricky problem however is going to be cash…
5. Jumia has $166m in cash, which, if the Q2 cash utilization of $38m continues, will last ~13 months. While this doesn’t always mean disaster (Jumia has been there before), there is a significant difference this time that changes everything – the stock price…
6. In 2020, Jumia was low on cash. Fortunately its stock was flying so they issued shares & raised $231m at $30.51 per share. They did this again a few months later in 2021, and raised $341m at $38.90 per share. Their stock had helped them raise $571m in cash in a few months.
7. Now however, Jumia’s stock price has crashed from $38.90 to $3.05 (+90% drop). The shares issued in 2020-21 that raised $571m, would today raise less than $57m which wouldn’t last 6 months. Also investors who had bought shares made big losses & so less likely to be interested.
8. Jumia could theoretically try raise cash from debt financing e.g. from banks. However even they mention that this is unlikely due to history of losses, negative cashflows etc.
So with both issuing new shares and debt financing being challenging what options does Jumia have?
9. Cut costs and try stay alive for as long as possible. This is exactly what Jumia is trying to do. Jumia has been incredibly aggressive on cost reductions e.g Sales & Advertising expenses down 74% compared to last year.
10. Jumia is so focused on cost reduction they have even adjusted their EBITDA guidance to indicate they will save ~$10m more than planned.
I also think was done to show some element of progress to investors amidst all the bad news.
But will all these measures work?
11. Ironically I wrote about cost cutting this week in another thread and the principle still applies. Cost cutting cash only take you so far. Ultimatelty you need to deal with the underlying business issues.
This is where my concern is…
12. Management is taking the right steps but may have inherited a fundamentally flawed business. I reconstructed a Quarterly P&L using historic best performance for each line. This is represents the perfect case scenario but even with that Jumia is still loss making.
13. This leads me to thinking that Jumia might be structurally unprofitable, like a business selling $100 bills for $50. It will grow and have lots of demand, but you can never make it profitable. At best, you can decrease the losses – which seems to be what Jumia is doing now.
14. The key lesson here is that, although growth is crucial, especially for startups, it should not be assumed that growth and scale will automatically lead to profitability.
If you can’t deliver on profit you will eventually have to pay for it.
15. Thanks for reading. If you found this insightful, please Like/Retweet the first tweet below and follow me
I write on the finance & strategy behind the most important companies in Africa and the rest of the World.
PS: Not Financial Advice
Investors react negatively after Jumia’s tepid Q2 results
Jumia, the “Amazon of Africa”, is facing a reclining liquidity position amid losses and unprofitability Image source: Textmaster
Investors baulked after Jumia’s Q2 results showed the company lost 1 million active customers despite reporting its lowest loss in four years.
After Jumia shared its financial results for the second quarter of 2023, investors reacted negatively, causing its shares to close at a 17% low on Tuesday. Jumia reported a 15% decline in revenue, with other metrics also declining. Gross Merchandise Value (GMV), number of orders and active customers declined compared to Q2 2022. Jumia also lost 1 million active customers between Q2 2022 and Q2 2023.
One big positive in Jumia’s report was that it reduced its losses to the lowest in four years. Reducing its losses is significant if the company becomes profitable. Yet there are many other worries. Its lower operational losses came from a massive reduction in sales and advertising spend. A significant reduction in its workforce also reduced its General and administrative expenses. While lowering costs is one part of the lever, increasing revenue is the second, and this is where Jumia fell short in Q2.
Macroeconomic headwinds across many of its African markets have made business difficult. Inflation in key markets like Nigeria, Ghana and Egypt and currency devaluation continues to hinder growth; it contributed 14 basis points to the reduction in the company’s GMV. The biggest challenge remains the slow growth of these economies and the decline of the purchasing power of citizens. It remains to be seen if Jumia can be profitable despite the economic terrain.
One thing is clear: Jumia is throwing the kitchen sink at it in search of revenue growth. It has done an about-face on its strategy of focusing on groceries and everyday items. Jumia also insinuated that the theory that selling groceries and everyday items would improve stickiness may not be accurate. “We continue to recalibrate our product and service portfolio, moving away from the most profitable categories with limited consumer lifetime value,” said the company’s CEO, Francis Dufay.
Critically, one effect of reduced consumer purchasing power is that people cut down on non-essentials or switch to cheaper alternatives. Even if Jumia offers groceries, it may not have the more affordable alternatives many customers can find offline.
Jumia is betting on JumiaPay, citing “strong development potential to process payments on behalf of third-party merchants.” Dufay added, “In line with our objective of making JumiaPay an even more effective e-commerce enabler, we are significantly increasing the penetration of JumiaPay in both our physical goods and food delivery platforms.”