#30 Will Super Apps take off in Africa?
Analysing the factors behind the growth of Asian super apps
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Introduction
This week, I’m taking a look at Super Apps. Everyone seems to be launching or about to launch one and most Fintechs talk about their long-term product strategy as being a super app. Of course this has piqued my interest and I figured, I’d do some digging to understand what makes a Super app fly. Most successful super-apps such as WeChat, Meituan, Grab and GoTo come from Asia. Eastern Europe and Central Asia also have successful super apps such as Kaspi in Kazakhstan and Tinkoff in Russia. Other examples could include Yandex Go in Russia although it’s still quite early to call Yandex Go a success.
In broad terms, a super-app is an app in which a user can access multiple services through one interface. These services could include, communication, travel, ticketing, health, logistics and shopping.The success of a super-app follows Bill Gates’ platform maxim in which he states “A platform is when the economic value of everybody that uses it, exceeds the value of the company that creates it. Then it’s a platform.” Often they are built on top of one daily life service and then extend thereafter. This life service could be communication, transport, food or shopping/trade.
Super-apps can be designed around “Mini-apps” such as those found on Wechat or they can be designed to be a central hub through which many services can be offered. The latter includes apps such as Tinkoff, Grab and GoTo. From a user perspective, super-apps offer convenience as they enable easier search and discovery often combined with payments. From one app, a customer can manage his/her daily life services and the data therein can be used to further customise and personalise the in-app experience.
Ron Shevlin, a contributor at Forbes and head of research at Cornerstone Advisors talks of payments being the 5th “P” of marketing with the other P’s being Product, Price, Place and Promotion. Super-apps combine all the elements of marketing and add payments.
Commercially, super-apps that gain traction have very useful economics for the promoters. Over the long term, an app can significantly improve its LTV/CAC ratio by adding more services. Meituan for instance benefits from an average of 26 transactions per user per year whereas AirBnB only has 0.5 transactions per user per year on average. This ability to cross-sell and up-sell by Meituan enables it to be more aggressive on customer acquisition. The data and insights generated from the platform then power personalisation and discovery that leads to stickiness. These same dynamics are present with Tinkoff as a finance super app and Kaspi in Kazakhstan which has an average of 39.3 transactions per customer.
Source: Kaspi Investor Presentation
Source: Kaspi Investor Presentation
The screen above shows an example of the user journey when booking train tickets on Kaspi. At the end of the process, the two payment options are both provided by Kaspi including a BNPL later. This shows that Kaspi earns revenues potentially on the ticket commission as well as the payments either as an issuer, through a payment commission or through interest or fees on BNPL.
My approach to this article was to dig into the histories of Meituan, Wechat and Grab and then tease out any central themes from their origin stories that can be extrapolated to other markets. Of course, through the process, learning what works and what doesn’t work.
Meituan Dianping
Meituan is China’s third largest tech company behind Alibaba and Wechat and it’s the 8th largest company in China by overall market capitalisation. Meituan Dianping is the largest marketplace for lifestyle services particularly offline to online services in China. These include movie tickets, meals at restaurants, flights, home delivery services, pharmaceuticals amongst others. It was formed by the merger of two companies Dazhong Dianping and Meituan and was backed uniquely by both Tencent and Alibaba. After the merger though, Tencent became the main backer of Meituan Dianping with Alibaba focusing on Ele.Me, Meituan’s main rival in the O2O space.
To understand it’s origins one has to go back to the history of both Meituan and Dazhong Dianping. Meituan was founded by Wang Xing who is the quintessential entrepreneur. After graduating from Tsinghua University, he travelled to the USA to pursue a PHd in computer engineering from the University of Delaware. An entrepreneurial itch bothered him and he later dropped out to move back to China. He had been inspired by the revolution in consumer software companies in the USA such as Friendster and later Facebook and he saw the massive opportunity back home.
At this time i.e. early 2000s, China was exploding with entrepreneurial energy. Many modern tech giants in China trace their history to this period and were led by Gen X tech founders. Once back in China he built three knock-offs of American tech companies. His first was called “Duoduoyou” which literally meant “many friends” which was modelled on Friendster. He later built a like for like replica of Facebook called “Xiaonei” which also failed. This was followed up by a Twitter replica called “Fanfou” which fell foul of the Chinese government due to politically sensitive content that appeared on the microblogging site.
In 2010, he started Meituan which was modelled on Groupon and was based on the idea of collective bargaining power for group discounts. At the time, there were over 2,000 similar companies in China offering such services including Dazhong Dianping. Meituan piloted its services in Beijing and Shanghai prior to launching in tier 2 and 3 cities across the country. In 2011, Meituan received US$ 100m led by Sequoia and Lightspeed ventures. The company was still burning through cash to achieve scale.
Dianping on the other hand was formed in 2003 by Tao Zhang and was also focused on group buying in the Food and Beverage industry. Whereas Meituan was focused on delivery, Dianping was focused on restaurant reviews. For western readers, think Yelp. However, Dianping went deeper than just restaurant reviews. It enabled users to know the exact prices, what other people said about exact dishes and which combinations worked best. For restaurant owners it built out cloud based ERPs, accounting systems and even built out training capabilities. In addition to this, it enabled restaurant owners to be matched to customers based on their preferences.
The merger then brought about Meituan with its significant logistics capabilities and Dianping with its rich data. By 2015 when the merger was happening, Tencent invested over US$ 1 billion in the new Series A which raised over US$ 3.3 billion. In 2017, Meituan Dianping raised an additional US$ 4 billion led by Sequoia, Coatue and Tencent. The key insight for Meituan Dianping was that despite Chinese e-commerce being only 20% saturated, real world services were only 5% built out. It’s a really useful model for African super-app builders, the focus on real world services as opposed to digital services.
Meituan dominates both the local food delivery market as well as the hotel booking vertical.
Meituan rode on a number of macro-trends;
Growing mobile usage in China;
A growing middle class on top of the worlds largest population;
The growth of tier 3 and 4 cities;
Cultural trends around food and language that required local customisations;
A venture capital scene that was benefiting from international VCs as well as growing local Corporate VCs such as Tencent, Alibaba and Ping An. Moreover, Wang Xing had failed countless of times but still managed to raise funding for new ventures;
WeChat
One has to go back over 20 years to trace the history of WeChat. Currently, WeChat or Weixin in China is the largest super app in the world with over 1 billion users. In 1997, a then 28 year old Allan Zhang created Foxmail which was one of the first Chinese internet companies. It had an over 33% market share in the Chinese email market. In 2001, Boda, another early internet company acquired Foxmail for around US$ 1.5 million. Allan fell out or rather didn’t fully agree with Boda’s vision for Foxmail and this was eventually resolved through the sale of Foxmail to Tencent. Allan then found his way to Tencent.
Allan was made head of R&D at Tencent’s research division in Guangzhou at a time when Tencent was competing fiercely with MSN and Hotmai for email dominance in China through its QQ product.
At a similar time, instant messaging was emerging as a new trend in communications away from email. The leadership at Tencent was wary of this led by Allan Zhang and Pony Ma himself. The main players at the time were Kik Messenger and Talkbox. Allan shot off an email to Pony Ma detailing the new trend in instant messaging and how it would be a mortal threat to QQ. Pony Ma allegedly responded “马上就做” (Do it now)”.
By 2010 Allan Zhang led a small internal team to develop the first version of WeChat (v1.0). One of the early insights at the time was that other messenger apps such as Kik were struggling in China due to the fact that users were struggling to communicate using the Roman alphabet given that they weren’t customised for the Chinese alphabet. Talkbox and WeChat fixed this issue and saw initial growth in China.
Many iterations over the coming years involved innovations such as hold to talk, shake (enabling you to connect with someone who was also shaking their phone at the same time), moments (think instagram and twitter reels), QR codes that enabled you to connect to other users and later became a pillar of their payments system, gaming and official public accounts led Wechat to having over 600 million registered accounts by 2013.
Source: Business Insider
From an initial use case of communications, WeChat has organically gone to be a super-app which is now the official smartphone home page for over 1 billion users. Companies such as Meituan, Didi and others use WeChat for payments and are mini-apps on the Wechat page. It’s worth noting that Apple’s app policies don’t allow for mini-apps, but in China, they had to make an exception for WeChat given that China is one of Apple’s largest markets. If they deny Wechat the ability to host Mini-apps, Wechat users are likely to drop their IPhones.
Again, macro trends such as;
A large population;
Unique local features such as language;
A strong venture culture;
Deep local tech expertise - Allan Zhang and his team had significant technical expertise;
Interestingly, WeChat launched in India in 2012 to much fanfare but failed spectacularly given Indians loved Facebook and Whatsapp, the first of many failures abroad. Exporting tech can be tricky.
Grab
Grab was founded in 2012 by Anthony Tan and Tan Hooi Ling. The two were studying for their Harvard MBAs when they came up with the idea of an on demand transport service based in South East Asia. They actually won a business pitching contest and earned US$ 25,000 which was used as seed capital for building out the business case and the app.
I studied in Malaysia for six months in 2010 and witnessed first hand the opportunity that Anthony and Tan saw. Cities such as Kuala Lumpur are massive metropolises with big populations and sometimes chaotic transport services. As much as there are working metros and bus systems, the cities are so large and demand so high that additional services such as taxis and motorcycles have to augment this space. It is the Taxis and motor cycle services that are chaotic where at times the cost is too high, there is price discrimination and the services can be unreliable particularly at night. We used to either hail taxis just from outside the school or campus and in many cases we had a “taxi guy”.
Grab launched Grab Taxi in 2012 and has over the last 9 years launched its hailing services to over eight countries across the SEA region. In March 2018, Grab merged with Uber and took over Uber’s South East Asian operations. It is now a super-app offering taxi hailing, shuttle services, food delivery, car pooling, bicycle services, hotel booking, on-demand videos, grocery shopping and financial services.
Unlike the Wechat model, Grab offers all its services within the Grab app and not through mini-programs. This is powered by a partnership strategy where it partners with other service providers such as Accor for hotels, Hyundai and Microsoft. Tinkoff has a similar model where offerings such as hotel bookings are offered through partnerships with Expedia or Bookings.com. Where such services are not offered, the company builds out the proposition itself.
The diagram below shows the history of Grab;
Source: Grab investor presentation
These are some metrics that show Grab’s reach in the region;
Source: Grab investor presentation
Overall, the South East Asian market offers the following opportunities;
Source: Grab investor presentation
It’s simply an incredible business that has benefited from the below mega trends;
Strong demand for mobility and food services - As a side note, South East Asia has a very strong food culture where in many instances, eating out at restaurants is the daily norm. Whilst studying there, we never cooked at home. Thus food delivery and mobility are natural companions in this region;
Young and growing population;
Big economy when measured from overall GDP;
Strong computer science expertise;
The Super-App Matrix
Tying this all together, I came up with 6 measures that seem to be necessary ingredients for the success of a super-app. They are;
Overall population size;
GDP per capita;
Median age;
The presence of a local alphabet - proxy for customisation or culture;
VC investments per capita - proxy for the depth of VC investments and entrepreneurial culture;
Citable computer science documents per 1 million people - proxy for depth of scientific expertise;
The idea behind this is simple. A large population combined with high GDP per capita is a necessary condition to evaluate the addressable market. In addition, GDP per capita can act as a proxy for other factors such as smartphone penetration, the quality of smartphones, internet usage and consumption. The median age is a good proxy for the size and growth of the digital population. This is of course non-linear given that there’s a sweet spot, not too young and not too old. VC investments per capita reflects the depth and strength of the entrepreneurial environment. A super-app needs significant funding to achieve scale.
The idea of language is based on the experience of WeChat where Kik messenger failed in China due to local characters. It is a proxy of culturally unique factors such as tastes, communication patterns etc. The idea is somewhat explained in this article by Ben Thompson on how Facebook had initially failed in Mobile, with a comparison to Line in Japan. Lastly, citable computer science documents per capita represent the depth and scale of the local tech community. You need strong engineers to build these products and expertise in data science, machine learning, Devops and other areas that are key to building super-apps.
If you can contort your brain to think of a 6 dimensional space, the thinking is that there’s a sweet spot at which all these factors converge to create the fertile grounds needed for a super-app to succeed. Of course, this is a random claim and there is no scientific evidence to back these claims.
I standardised these figures by giving each element a ranking out of 10. For instance China has the largest population and thus it gets 10. India, with a similarly large population gets 9.7 given that its population is 97% the size of China’s. This approach isn’t meant to be statistically perfect but it’s just a back of the envelope approach that gives a rough guide.
Out of a total score of 60 i.e. 10 for each of the 6 factors, I charted the outcomes on the graph below;
China is the most super-app friendly country scoring well on all metrics and no wonder the largest super-apps all come from China. Russia and India do well on this as well. India particularly benefits from having a large and relatively young population. Russia has a very strong scientific community and of course the language is a major issue. Yandex did well by adapting to the morphology of the Russian language in its search function. Brazil does ok, but the lack of local language means that apps such as Whatsapp do well. In fact, Brazil is one of Whatsapp’s largest markets.
In Africa, countries such as Nigeria, South Africa and Kenya fare poorly and it could be a sign that we’re still not at the level where a super-app can succeed. One area where all Africans fare poorly is the language element. This is a proxy for technology import as well. Given that all the languages or at least the main languages are expressed in the Roman alphabet, it’s easy for apps such as Facebook and Whatsapp to thrive in these markets. Contrast this to Line and Wechat in China. Additionally, relatively low GDP per capita and scientific expertise work against such super apps.
Naturally, what has then happened in both Kenya and South Africa is the launch of corporate super-apps such as M-Pesa in Kenya and Vodapay in South Africa. A student of Africa’s economic history will soon note that super-apps in Africa may work out like all other technologies used in Africa, they will be imported (built and designed abroad), but with minor customisations for the local market. Think Unilever but for Super-apps. It seems that the necessary conditions such as VC investments, scientific research and a strong consumer class are not yet present. Asian super-apps are built around “daily life services” either communication, movement and food. Given low GDP per capita, the question is what are the “daily life services” in many African countries. Whatsapp and Facebook are the communication and e-commerce platforms used most in many parts of Africa. Probably, Whatsapp could embed payments and discovery to be the Super-App of Africa.
As always thanks for reading and drop the comments below and let’s drive this conversation.
If you want a more detailed conversation on the above, kindly get in touch on samora.kariuki@frontierfintech.io