Kinnevik’s investment in Konga further deteriorated in nine months

Swedish top tech investor, Kinnevik AB disclosed in its latest trading update for the first nine months of the year that its investment in Konga further deteriorated.

Kinnevik’s 34% in Konga was further impaired down to SEK128 compared to SEK133 disclosed last year. On a USD basis, the company did a further write down to USD15.3 million from USD15.9 million in the previous year.

On a local currency basis, total impairment on its investment for the period was NGN216 million on a year on year basis.

The company co-owns Konga alongside South Africa’s most valuable company, Naspers with about 41% of the eCommerce company on a fully diluted basis. Kinnevik disclosed that its total investment in Konga till date was SEK292 million. This is NGN12.5 billion in local currency.

Within the first nine months of the company said the fair value of this investment fell by about 40% on a year on year basis. However, impairments on Kinnevik’s investments seem to be slowing down as its net impairments for the third quarter of the year only increased by 10%. It is logical to deduce that the first and second quarter had the highest impairments.

As an understanding of how Kinnevik values its investment in the eCommerce company, the group said “The valuation is based on the average sales multiple of a group of comparable companies. Konga generates revenue from two business models, inventory and marketplace”.

The company did not, however, disclose the weight of the two business models to Konga’s revenue profile.

Konga competes with Rocket Internet’s Jumia Nigeria. In its latest trading update for the first six months of the year said its businesses across six countries in Africa suffered a total loss of USD61 million on a year on year basis. In local currency, Jumia has to its negative credit NGN21 billion in losses.

In fairness to two of Nigeria’s largest eCommerce companies, the business of eCommerce has been one of the worst hit after Nigeria’s economy relapsed into its worst recession in over 20 years. An unprecedented depreciation in the Naira against the USD, increase in basic commodity prices, and a subsequent drought in hard currency led to a spike in inflation on mostly imported goods sold by both Jumia and Konga.

Towards the end of last year’s third quarter, both companies changed their business models to majorly merchant system where they practically do not own most of the goods they display on their website. However, from the look of things, it is clear Konga has not done away with the inventory model. It is not known how this approach seems to be working for the company or otherwise.

In the last twelve months, the disposable income of the lower-middle-class population, the core target market of eCommerce companies have further deteriorated beyond precedence. Customers now seek cheaper alternative on essential items or totally cut-down on certain goods. This is a major problem for eCommerce companies as their lifestyle, gadget and electronic side of their business a heretofore market mover has seen the worst performance in the last two years.

The need to adapt to the changes has seen both Jumia and Konga delving into grocery and essential commodities business. While this brings them, new customers, it further exposes them to competitive risks as there are bigger players in the offline side of things such as Shoprite who can offer cheaper prices albeit lower margins, but a higher volume is an upside for the company.

In the last nine months of the year, Shoprite underwayred some of its highest revenue from Nigeria with further expansions under way across key cities of Nigeria.

The need to have a sustainable business model for both Jumia and Konga is therefore crucial as Nigeria transits out of recession. The two companies have been on their way to search for the ‘Holy Grail’ of business- profit. The need to reach this milestone quickly is more pressing than ever given the massive investment that has been staked into these companies.