Reference no: EM131286069 , Length: 3

German Firms Seed Web Shopping in the Developing World

LAGOS, Nigeria-The message from his boss on the phone from Germany was straightforward, recalls Hendrik Harren, a former website manager in Africa: "I want you to build the Amazon of Nigeria for me."

The caller was Oliver Samwer, an Internet tycoon in Berlin who had already cloned American e-commerce businesses for Europe's market. By 2012, his focus was shifting to the developing world.

Mr. Harren found his new assignment daunting. "I had never founded an Amazon," he says.

Two years after the call, Nigerian men on motorbikes ply the streets of the chaotic megacity of Lagos delivering toothpaste, English soccer jerseys and women's wigs in a small and unprofitable, but growing, online shopping business.

They are the vanguard in a race to hook the developing world on American-style e-commerce. It is a contest in which the U.S. companies that largely created the business are less dominant than they are in the West. Playing a major role, instead, are businesses with roots in Germany, an economy that has excelled at refining and exporting 20th-century technologies rather than digital innovation.
The most-aggressive player is Rocket Internet GmbH, majority owned by Mr. Samwer and his two brothers. The three gained a measure of notoriety in Silicon Valley a few years ago by adapting made-in-America businesses such as eBay Inc. and Grouponin Europe, then selling them to eBay and Groupon.

Now, as U.S. e-commerce companies invest heavily in Europe, the brothers have raised about $3 billion to expand far afield-convincing investors that developing-world cities' often mind-numbing traffic jams and limited store selection offer a fertile source of future online-shoppers. They have mounted a broad effort to plant Western habits of Internet shopping from Africa to Latin America to the Middle East, Asia and Eastern Europe.

Their approach to the Internet leaves little room for Silicon Valley ideals of unstructured creativity. Instead of imagining new business models, the brothers hire young business-school graduates and consultants to focus on their English watchword, execution.

Oliver Samwer describes the business as a collection of "operational ants" focused on implementing proven ideas, as opposed to "a bird" that takes a view from high above in trying to spot new ones.

His prominence is influencing a new generation of German entrepreneurs. "America is, basically, the place where ideas are born, and Germany is the place where ideas are executed and implemented," says SayginYalcin, who built luxury-shopping and car-sale websites for the Arab world and attended the same German business school as Mr. Samwer.

To line up sellers for an eBay-type marketplace in Lagos, employees of the Samwers' firm spent months combing its huge open-air electronics market, persuading some of the vendors to list their goods online.

To lure business to a food-delivery service, they targeted the drivers for affluent Nigerians who are often sent to fetch lunch, paying the drivers about a dollar each time they order the food online. They have hired young Nigerians, mostly women, to crisscross the city with tablet computers explaining how their websites work.

OyetunjiOlabisi a 27-year-old call-center worker who earns about $5,500 a year, is already hooked on online shopping. "I shopped for, like, three months," Ms. Olabisi said in an interview in December. "And then, this month, I got a phone."Shopping in person in Lagos, she said, often means the tedium of waiting for hours in traffic and seeking out vendors at crowded outdoor markets.

The Samwer brothers stick with online business models, such as hotel booking and real-estate browsing, long perfected in the developed world. "You don't think any day, anymore, 'Does this idea work?' ". Oliver Samwer says. "You only focus on 'How can I get more and better people? How can I get more capital to spend? How can I go to more cities? How can I do a larger warehouse?'"

Their approach mirrors the process- and export-driven character of Germany's manufacturing sector, which has thrived with demand from emerging markets. "If there's one advantage Germany has...it's the export culture," Mr. Samwer said at a recent business-school conference. "We are the smaller country, so we have to get out and conquer the other countries."

With some of the most highly trafficked e-commerce sites in Africa, Latin America, India, Russia and Southeast Asia, the Samwers' Rocket Internet empire has about 27,000 employees in about 50 countries, it says.

Amazon.com Inc. by contrast, has 12 international websites, including ones targeting China, India and Brazil. EBay mounted an emerging-markets push in the past two years, initially in Russia, China and Brazil. Neither has a website aimed at Nigeria. Amazon declined to comment. EBay plans to target more countries this year, said Wendy Jones, vice president of emerging markets.

Swedish investment firm Investment AB Kinnevik and Russian billionaire Len Blavatnik poured a total of $500 million into the Samwers' Rocket Internet over 15 months through last July, and also are investing in some of its individual ventures.

Rocket Internet said it recently raised $250 million for its Southeast Asian online store, called Lazada; $112 million for a Southeast Asian online fashion shop, Zalora; and $50 million from investors including J.P. Morgan Chasefor Linio, an online store for Latin America.

South African phone company MTN Group Ltd. plans to spend $400 million for interests in the group's Africa and Middle Eastern ventures. MTN says it is seeking new income streams at a time when growth is slowing in revenue from voice calls. The Samwers' business offers one of the few vehicles for betting on e-commerce across emerging markets, says an MTN executive, Monika Steinlechner.

Whether or when this pays off for investors is unclear. Rocket Internet's ventures world-wide generated about $3 billion in revenue in 2013, it says. So far, many are unprofitable, among them its Nigerian e-commerce business, called Jumia.

In some places, the Samwers have fallen short and cut their losses. In China, they ceded the market to dominant local players. They pulled the plug in Turkey after failing to gain traction."You can't get stuck in one country if you don't see the business growing as fast and as nicely as you want it to be," Marc Samwer said at a recent conference in Berlin.

In Nigeria, they have plunged in with at least seven online business models, from shopping to taxi booking, with about 800 employees.
That marks a fast ramp-up since Oliver Samwer's 2012 phone call drafting Mr. Harren to help start an e-commerce business in Lagos, which Mr. Harren says promised $2.5 million in initial funding. A Rocket Internet spokesman says Mr. Samwer doesn't recall the specifics of the episode and notes that Mr. Harren was part of a larger team.

In Lagos, the team had to create both demand and infrastructure.

A living room was its first warehouse. Rented houses doubled as offices and living quarters. Team members had to traipse after a shower through a room where local hires worked, recalls an ex-employee, Leo Stiegeler.

They bought a fleet of motorbikes, and a firm owned by the father of Mr. Harren's driver hired delivery people to ride them. To ensure against theft, they required each driver to come up with a guarantor, met with their spouses and fanned out around Nigeria getting to know drivers' other relatives, says Mr. Harren's driver, Benjamin Monday. Within a few months, Mr. Harren left for Kenya to help start a Rocket Internet food-delivery website there.

Television commercials stressed that buyers from Jumia could pay in cash on delivery. That has drivers fearing robbers as well as scam artists, who have at times managed to collect delivered items without paying, drivers say.

Rocket hired two Harvard Business School graduates, Nigerian TundeKehinde and Ghanaian Raphael Afaedor, to oversee Jumia, with "co-founder" titles. Both men are now moving on to work on ventures of their own.

While many locals are skeptical, some are getting aboard.

Surrounded by a concrete wall and barbed wire in his compound's courtyard, retired customs officer Falore Johnson recently peeled off 58 thousand-naira bills, each worth about $6, and handed them to Jacob Yahaya, a delivery driver for the Jumia online store. Mr. Yahaya unloaded four standing fans.

"I'm not so comfortable ordering on the Internet," Mr. Johnson said, noting that it was his wife who placed the order. "I'm surprised that we bought it."

The Samwers have faced competition from SimShagaya, another Nigerian Harvard Business School graduate, who two years ago was laying the foundation for his own online store. He brushed aside Rocket Internet's attempts in 2012 to hire him or buy his business, people involved say, and went ahead on his own, partly with indirect backing from Kinnevik, the Swedish firm that holds a stake in the Samwers' business.

Internet data provider Alexa now ranks the Samwers' Jumia neck-and-neck with Mr. Shagaya's business, Konga, as Nigeria's most popular online store.

The Samwers acknowledge their ventures are heavily influenced by existing businesses but avoid the tech industry's term of art for such imitation, "cloning," saying that making such models work in other countries requires their specialized execution skills.

They recruit at business schools and seek out young bankers and consultants. MatoPeric, formerly their global e-commerce chief, says he hired more than 50 former management consultants. Some now shuttle among developing countries rolling out what they call "Amazon businesses" and "eBay models," speedily setting up warehouses and hiring locals, while often paying suppliers in cash.

Others from Germany have followed in the Samwers' footsteps. Mr. Peric now runs a "company builder" funded by a German TV network. Oskar Hartmann started a Russian online fashion retailer called KupiVIP. Mr. Yalcin moved on to his car-sales website after selling the luxury retailer he built for the Arab world.

E-commerce can be a tough business. Amazon ran losses in the second and third quarters of 2013. So the risks for the Samwers and their investors are ample.SucharitaMulpuru, a Forrester Research analyst, suggests it is wise of the big U.S. pioneers of the business to be cautious in the developing world for now. The Samwers, in her view, "are taking models that are fundamentally unprofitable and replicating them.

Jumia orders averaged about $100 and reached 4,000 a day in December, according to the company. It is a tiny fraction of the more than 50 million Nigerians with Internet access but still an indication online shopping is creeping beyond the elite into the middle class.

Stefan Lenhof, a German who has run an online sunglasses shop in Nigeria, recalls that when his website listed his residential compound as its address as recently as early last year, several people arrived looking for a physical store. Still, he believes, Nigeria is simply a few years behind Europe and the U.S., with the gap destined to close.

"This place here is a time machine," Mr. Lenhof said over coffee at an Italian restaurant in Lagos, dragging on a cigarette he had a waitress bring to him. "Globally, people are similar enough."

QUESTIONS:

1. (Introductory) What reasons do you think are responsible for growth of e-commerce in the developing world?

2. (Advanced) What are the challenges that e-commerce firms are facing in Nigeria?

3. (Advanced) Discuss the strategies being followed by Samwers to increase their business in Nigeria?