2019 was a big year for ride-hailing startups in Lagos. The city’s 21 million inhabitants were an attractive market for startups like Gokada, Max NG and ORide from Opera.
In May 2019, Gokada raised $5.3 million in Series A funding to increase its fleet and ride volume. It also had plans to introduce Gokada clubs and shops where drivers could relax or buy items. Again in June, Max NG attracted a $7 million investment to expand to 10 cities in West Africa, scale its technology infrastructure and introduce an electric fleet. ORide also benefited from the $50 million and $120 million its parent company Opera raised for its digital service verticals in July and November 2019, respectively. Branded helmets of the different ride-hailing players were common on the streets of Lagos.
Key takeaways:
- Ride-hailing startups in Lagos turned to on-demand delivery after they were banned from major commercial highways. Their
But all of this came to a screeching halt when Governor Babajide Sanwo-Olu’s government enforced its 2018 Transit Sector Reform Law which banned motorcycles (okada) from major highways in Lagos, citing safety and security concerns.
Faced with the prospect of winding down operations, ride-hailing startups laid-off workers and began selling off motorcycle fleets. But some (in particular Gokada) pivoted to on-demand food (GFood), groceries and other essential deliveries. They also introduced GSend, where individuals could send items to other people.
You might say this was a good call, given that Gokada has grown tremendously. The startup has one of Lagos' largest delivery fleets, helping over 30,000 Nigerian businesses make deliveries. It crossed 1.5 million deliveries in 2021 and onboarded more than 100 restaurants, as reported by Disrupt Africa. It also launched a super app, expanded to Ibadan in 2021 and claimed to have surpassed $100 million in transaction volumes in 2021.
However, it’s still too early to conclude that on-demand delivery services are smooth sailing. One key consideration in assessing the viability of any startup is its ability to scale. Today we will unpack how Nigeria’s on-demand delivery startups can scale their operations.
The current bear market makes this question particularly relevant. Scaling has always been important to tech companies, mainly because of the emphasis on growing quickly to serve as large a market as possible. To survive the global venture funding slowdown as the threat of a recession increases, these tech-enabled companies will need to find better ways to deliver value to their markets.
So what is scaling?
Scalable growth is the kind of growth venture capitalists (typical startup investors) care about. Scalable startups take innovative models that that lead to high-growth—think 100x returns on capital. This typically happens by entering a large market and seizing market share from incumbents or creating a new market and growing it rapidly. The second option looks more like what is typically referred to as non-consumption.
To fully qualify as scalable, startups must deliver this growth by ensuring the marginal cost of adding each new user is very close to zero—exploiting economies of scale. This is also why Marc Andreessen, venture capitalist and co-founder of a16z, famously declared that software is eating the world.
Take Airbnb, for example. Airbnb, just like Marriot and Hilton Hotels, provides accommodation-as-a-service. However, it doesn't own a single building. Airbnb built an app and convinced people who already own homes to provide accommodation to its 150 million users worldwide. Again, we see the near-zero marginal cost in action. For example, if Airbnb wants to open up operations in a new country, it will just sign up new users and homeowners to list on its existing app. In comparison, hotel chains like Marriot and Hilton Hotels have to build expensive hotels to operate in a new country. Essentially, zero marginal cost businesses, mostly software businesses, are highly scalable.
But while Airbnb gives some useful insight into how to design a scalable model, our focus today is on scalability for on-demand delivery startups. Let’s start by unpacking what an on-demand delivery service looks like.
What is on-demand delivery?
The idea behind on-demand delivery is simple—it gives customers more options for when and where they want their products delivered. Any economist will tell you that one way to improve customer value is to increase the available choices. As a result, on-demand delivery startups are betting on this service as a surefire way to deliver even more value to customers, which should be good for their business.
Arguably, the Covid-19 pandemic further accelerated demand for on-demand delivery services as lockdown measures drove e-commerce adoption but also saw more companies looking for ways to serve their customers faster. The key is to reduce the time between purchase and delivery. So, you order something and receive it at the designated time you choose.
Before we go into whether on-demand services can scale, it’s worth talking about the market. One obvious cardinal rule is that a business can’t scale without a decent-sized market.
There is no straightforward answer about the on-delivery market. On-demand delivery includes food, groceries, alcohol, and essentials, and also includes delivery of goods from social commerce merchants (social media vendors on Instagram, Whatsapp and Facebook). Even physical retail shops without in-house delivery services rely on on-demand delivery to deliver their orders to customers.
The food delivery industry alone in Nigeria is valued at $848.6 million in 2022, up from $675 million in 2021. It is expected to grow at a compound annual growth rate (CAGR) of 28.64% between 2022 and 2026 to $2.3 billion. Furthermore, as social commerce in Nigeria grows, so will on-demand delivery. Social commerce is expected to grow from $791.6 million in 2022 to $4.9 billion in 2028 as smartphone and social media use rise. Overall, e-commerce in Nigeria is valued at $7 billion as of 2021, making it the world’s 33rd biggest market, and it is estimated to hit $12.6 billion by 2025.
The growth of on-demand delivery is directly dependent on the development of e-commerce. As more people buy goods online, so will the demand for providers that can deliver them on time.
These data points give us some insight into the market for on-demand delivery services, but it’s not the whole picture. For starters, estimating true market size will require considering consumer spending power—can the population to whom you wish to sell afford your product?
Luckily, Stears has previously explored disaggregated data on consumer market size for tech products.
According to the World Data Lab, the African consumer market lags behind the rest of the world. Daily per capita spending in Africa is $9.78, the lowest compared to other regions and below the $10 threshold for consumer spending that can satisfy basic needs. To avoid presenting a static view though, data also shows that daily per capita spending in Africa is expected to cross the $10 mark by 2025.
While this is welcome and indicates growing consumer spending over time, we cannot dispute the trend of double-digit inflation that has been present, particularly in the Nigerian economy. Since inflation erodes purchasing power, it is probably more prudent to be cautious about this 2025 timeline.
While the data doesn’t present the most optimistic picture, it shouldn’t stop us from looking at what a scalable business model for this kind of business should be.
How can on-demand delivery startups scale?
There are three key ingredients Nigerian on-demand delivery startups require to scale based on evidence from successful startups in the industry. The first is getting the business model right, the second is a favourable regulatory environment, and the third is focusing on customer experience. Let’s unpack these concepts.
Arguably, the most scalable businesses are those that are asset-light. The more assets a business needs to operate, the less scalable it is. Remember my Marriott and Airbnb comparison from earlier.
Uber offers further evidence for this theory. The ride-hailing app partners with car owners, and in regions like Africa, where vehicle ownership rates are low, Uber partnered with vehicle financing companies like Moove. Uber drivers can acquire vehicles to use and remit part of their income to the financing company monthly until they fully own the vehicle. There is no Uber without cars, so this has enabled their scale worldwide.
Similarly, startups shouldn’t have to go through the financial hurdle of purchasing expensive motorbikes. For instance, these startups can partner with existing okada riders who own motorbikes. Adopting this approach will look like empowering these okada riders in different cities all over Nigeria.
Gokada has experimented with this approach. In May this year, Gokada launched its GPartner program for people with motorbikes to register and use their platform. It is still unclear just how beneficial this approach has been for scalability. Regardless, one key consideration we cannot ignore is the potential risk. Even the likes of Uber have had to deal with multiple reports of harassment from drivers on their platform going rogue. But this can be solved by doing thorough background checks on the drivers and maintaining updated data (referees and next of kin) to enable swift action should they go rogue.
Another asset-light approach could be innovative financing for the motorbikes at the heart of this business model. Motorbikes are essential for making timely deliveries because they can crisscross through traffic. Recall that the key to success for on-demand services is getting customers’ purchases delivered when they need them—literally on demand. So rather than spend millions of dollars to acquire motorbikes to expand across Nigeria, these startups might consider partnering with motorbike financing companies to provide the two-wheelers for prospective drivers who don’t own one.
That might be one fix, but it’s not a silver bullet.
Aside from these considerations, we would be remiss to discuss the scalability of operations without looking at some of the infrastructure challenges that on-demand delivery startups face. Most Nigerians do not have addresses, making locating them for delivery difficult, especially in rural areas. Google Maps is also not sufficiently accurate in most parts of Nigeria. So, delivery drivers have to rely on the customer’s landmark descriptions which bogs down the efficiency of the delivery process.
If possible, the startups can partner with drivers that understand an area to make the deliveries, especially when the person making the order is around the location of the shop or restaurant. For non-perishable goods, they can partner with local shops as pickup points, and this can work if they are scaling from urban to rural areas. This model has been executed by the e-commerce startup Copia Global in Uganda and Kenya. Per Forbes, the startup has served 1.6 million customers from its 30,000 pick-up points, mainly neighbourhood retail shops, since its founding in 2014.
So far, we’ve considered how on-demand delivery startups can implement asset-light business models while allowing for innovation around infrastructure challenges like poor address systems in Nigeria.
However, the right regulatory environment is vital for every business, especially startups that want to scale fast. Regulations are rules set by the authorities (most times the government) that all startups doing business in a country should follow. Regulations can determine how a startup operates, where it operates and for how long. Remember, Gokada and Max NG were ride-hailing startups until Sanwo-Olu’s okada ban in major commercial areas in Lagos almost made their operations obsolete.
An example of a regulation affecting on-demand delivery riders happened early this year in Rivers State. The infamous governor Wike directed that Logistics companies using motorbikes have to register with the state government for proper documentation for “security reasons”. A slew of arrests and harassment of delivery riders by state task force officials followed immediately after the governor’s ban. So, if any government or regulator gets hit with another whim to tackle delivery companies again, it could spell disaster for on-demand delivery.
Essentially, on-demand delivery startups will have to lobby for favourable regulations. For now, their ability to scale is determined by what licence they can afford from their regulator, Nigeria Postal Services (NIPOST). Under the NIPOST Act, on-demand delivery startups must pay ₦10 million for a license to operate across Nigeria and ₦4 million annually for its renewal. If a startup can not afford to pay this, it will have to settle for a regional license of ₦5 million or a state license of ₦2 million.
When NIPOST announced these new fees in July 2020, there was outrage across the Nigerian public because many small operators could not afford to pay them. NIPOST is also an operator, besides being a regulator, and the license fee increase could probably be interpreted as a move to price out competitors. The startups were also supposed to remit 2% of their annual revenue to NIPOST. If these exorbitant fees were reasonable, these startups would be able to bring their services to users in multiple cities across Nigeria without poking holes in their coffers. The business environment could get better for the on-demand delivery startups as plans to repeal the NIPOST Act in the National Assembly (NASS) were confirmed in May 2021.
We’ve defined how the right regulatory environment can make or break startups. But the last thing on-delivery demand startups need to scale is a laser focus on the customer experience.
The Harvard Business Review defines customer experience as customers' internal and subjective response to any direct or indirect contact with a company. Direct contact is when a customer purchases or uses a company's service, and for the on-demand delivery startups, this involves ordering food or sending packages.
Indirect contact refers to encounters with representatives of a company (for example, the delivery drivers) or criticism of the company through word of mouth or reviews. According to this 2018 PWC report, 73% of people point to customer experience as essential when parting with their money, and 65% cited a positive customer experience as more influential than great advertising.
The customer experience for on-demand delivery startups should leverage technology to improve efficiency and user convenience. According to a PWC survey, 43% of users are willing to pay more for greater comfort.
For instance, most young people prefer apps over websites because they find them more convenient. An IBM study on Generation Z (Gen Z) revealed that 74% of Gen Zs see mobile phones as the device of choice, while 62% said they would not use an app or website that was difficult to navigate.
Hence, a startup that wants to scale must prioritise a good user app experience with algorithms that make the customer’s life easier. A good example is an algorithm that recommends foods and products from restaurants and shops to users according to their previous orders. E-commerce giant, Amazon, is well known for its accurate recommendations. Per this Accenture survey, 91% of online store customers admitted they are likelier to use a brand when suggestions are valid.
However, perhaps more important than a good app experience is professional human interaction from riders. Startups must prioritise the training of riders to be professional and make deliveries on time. This is crucial, especially if the startups partner with the third parties that provide the motorcycles. The divers will be the human element of the startup. Strict training and vetting must be done to ensure that the drivers carry the culture of good customer experience from the app to the physical interactions with the customers.
The goal of a good customer experience is word of mouth associated with it. Word of mouth is the most effective form of marketing. Per this Nielsen study, 92% of consumers believe suggestions from friends and family are more than marketing. And for the most part, it is mainly free, reducing the customer acquisition cost of the startup. Companies like Tesla and DropBox have scaled to billion-dollar companies based on a good customer experience and word-of-mouth advertising.
Nigerian on-demand startups may be able to scale, but they must tweak the leasing model in which Gokada and Max NG mainly operate. Gokada has made progress with its GPartner program and should be the logical way forward to bring their services to people outside their Lagos strongholds. It is crucial now, more than ever, that startups find a way to take their services to new users, even without venture capital. Scaling is one of the ways to do so.
