Jumia once hailed as the “Amazon of Africa,” has recently released its financial results for Q2, and the numbers are raising concerns throughout the business world. The company that was once a unicorn startup is now grappling with a slew of challenges that could potentially undermine its position as one of Africa’s most hyped tech ventures. Let’s delve into the analysis and explore the key factors that have contributed to Jumia’s current predicament.
Dwindling Revenue and Operating Loss: A Double Whammy
One of the most pressing issues that Jumia faces is a significant decrease in revenue, which stands at -15.4% for the quarter. What’s even more alarming is the operating loss of $23 million. Typically, businesses encounter either a revenue problem or a profit problem; however, Jumia is facing the daunting task of addressing both simultaneously. This financial conundrum is akin to a football team struggling to score goals while also struggling to defend its net.
Growth Stagnation: A Major Shift in Dynamics
Jumia’s previous allure was grounded in its growth narrative, which played a pivotal role in attracting investors and stakeholders. Notably, “growth” appeared over 100 times in the company’s 2019 IPO prospectus. Yet, the tides have turned, and Jumia finds itself in an alarming situation where growth has come to a grinding halt. While some solace can be found in the fact that losses have decreased compared to previous periods, this improvement stems primarily from drastic cost-cutting measures that have seen expenses plummet by a staggering 47%.
Cash Crunch: A Looming Crisis
Perhaps the most critical challenge for Jumia is its precarious cash position. With $166 million in cash reserves and a Q2 cash utilization rate of $38 million, the company’s cash runway is estimated to last approximately 13 months. While such a scenario doesn’t invariably spell disaster, a critical shift in circumstances sets this situation apart—the plummeting stock price.
In 2020 and 2021, Jumia managed to shore up its cash reserves by issuing shares when its stock was thriving. However, a drastic nosedive in stock price, plummeting by a staggering 90%, has significantly diminished the amount the company would raise through stock issuance. This stock price decline makes it challenging for Jumia to secure funds from stock issuance and debt financing.
Navigating the Path Forward: A Strategy of Survival
Jumia’s immediate strategy centers on stringent cost-cutting measures to extend its lifeline as much as possible. The company has been aggressively slashing costs, with remarkable reductions in Sales & Advertising expenses, which are down by a staggering 74% compared to the previous year. In a bid to showcase some semblance of progress, Jumia has adjusted its EBITDA guidance to reflect an anticipated additional saving of around $10 million.
However, the question remains whether these measures will be enough to steer the company back on course. It’s worth noting that while cost-cutting can be effective in inefficient businesses, it can backfire if there are underlying issues beyond cost inefficiencies. The current management is taking proactive steps, but it’s plausible that they may have inherited a business with more fundamental flaws.
Structural Profitability Challenge: An Uncertain Future
Analyzing Jumia’s financial trajectory, Finance Professor Aswath Damodaran points out that while cost-cutting can work in businesses characterized by inefficiencies, it can be perilous if deeper underlying issues are at play. A telling sign of Jumia’s predicament is a reconstructed Quarterly P&L using historical best performance metrics. Even in this optimistic scenario, Jumia remains in the red.
This prompts the consideration that Jumia might face structural profitability challenges, much like a business selling $100 bills for $50. While growth and demand might persist, the ability to achieve profitability remains elusive. At best, the company might succeed in curbing losses, which seems to be the current strategy.
Growth vs. Profitability: A Delicate Balance
The tale of Jumia offers a valuable lesson for startups and businesses alike. While growth is unquestionably a critical factor, especially for startups, it should not be taken for granted that achieving scale will automatically translate into profitability. The need to strike a balance between growth and financial sustainability is paramount. Ultimately, failing to deliver on the promise of profitability may eventually lead to steep consequences.