🎰 What R60bn Marketing Buys You…

Plus: Cape Town E-buses, more techpreneur funding & how to get growing in Africa EdTech.

Newsletter

April 12, 2024

Sneaky AIs? If you ever felt like ChatGPT or Gemini are sometimes just acting dumb, you’re not crazy — a ground-breaking new study just found that AIs are 100% capable of acting less intelligent than they are, on purpose and of their own volition.

In this Open Letter:

Made in China: A masterclass in retail gamification.
Cape Town E-buses, SA’s latest FSP & more techpreneur funding.
The scope: How to get growing in EdTech in Africa.
Poll results: This is how you’d save SA education.
Free stuff: Share The Open Letter and get you some.

Inside The Retail Game

If you spent any time on the net recently, chances are you’ve seen a Temu ad (ok, maybe quite a few).

Temu is a direct-from-China-to-your-door e-commerce solution similar to Shein, and it’s been aggressively marketing in South Africa.

(It’s a marketplace, if you must know, launched in September 2022 by a Chinese group called PDD Holdings, which’s mainly an agriculture player in China…? – yeh, and they’ve been in and out of court with Shein over mutual lawsuits for most of 2023.)

Either way, Temu’s app is now #1 on both the Google Play Store and Apple App Store in SA – so, needless to say, South Africans have been checking it out.

Not to mention considering the potential impact of these Chinese players on various local industries – including SA’s R1.6 trillion retail sector.

Literally offered me an item for R0 and free delivery 🫤

Cut out the middleman and shorten the supply chain. These are stock-standard business tactics to cut costs and increase margins. And, in Temu’s case, they’re cutting out everyone from local fashion retailers to the “China Town” malls by selling directly to consumers.

The upside for them? Well, clothing markups are anything from 80% (in stores like PEP) to as high as 400% for higher-end fashion retail. Obviously, in brick-and-mortar, a lot of this gross profit goes towards rent, staff and logistics, so net profit margins wind up being small (up to 5%).

But avoid most of those costs with an e-commerce solution, and there’s a margin to be made. That is if you can lower the cost of repeat business and keep them buying — the ultimate challenge in e-commerce.

See without a physical retail presence, e-commerce doesn’t have the luxury of passing foot traffic to stay top of mind — you need expensive online marketing to re-engage that customer. Probably one of the reasons why Amazon invested in a Netflix-like TV service called Amazon Prime — watch your fave TV shows on Prime every night, chances are Amazon is top of mind when you buy.

But Temu is taking a different approach to solve this issue.

There’s more to this than e-commerce

To see what the hype is about and why their ads are everywhere, we gave Temu a spin and got a feel for how they operate…

Step 1 is to get you in, and they do so by spending a ridiculous amount on marketing. In the US, they spent $3 billion on digital marketing last year, which is equivalent to the market cap of South African retailer Woolworths. What’s more, Goldman Sachs estimates that they are losing $7 per order due to marketing costs and markdowns.

Step 2: Once you’re in, the whole thing turns into a game. Countdown timers (“check out in 10 minutes to receive a box with gifts”), special timed discounts on certain items, basically non-stop promotions and prompts. Essentially, Temu is designed to give you a dopamine hit from acting on the casino-like prompts and interactions. It’s designed to make you feel like you won when you find something cheap or unlock a new voucher, which then, in turn, makes the arrival time and quality of the product secondary.

They even “short” their delivery date, promising you a voucher if it takes longer than 2 weeks to arrive. Which almost makes you want it to be late, you know, so you can get that sweet-sweet voucher.

The whole experience is a masterclass in behavioural design and game theory.

In fact, once you’ve used Temu, it's hard to pin it against a traditional e-commerce player like Takealot. It feels more like you’re playing Candy Crush or something similar.

Will this kill the local market?

Temu is backing its gamification strategy to keep you locked in and buying – betting on that $7 loss on your first order turning green once they successfully suck you in and get you playing regularly. And that obviously appeals to a specific type of buyer.

But it will take away spending power, and we suspect that retailers that source from China and effectively act as distribution mechanisms for these items (be it clothing at popular retail chains or electronics at the local China mall) will have a hard time competing on price.

The best way to fight off this multinational attack is through a brand. In the last few years, we’ve seen a rise in local clothing brands that have established themselves and grown to become household names.

Bathu makes locally inspired sneakers and has already opened 31 branded stores across South Africa.
Freedom of Movement started out making leather products including the South African classic “Vellies” and has since grown to offer a range of clothing, shoes and bags through their online and 20 retail stores across SA.
Burnt Studios makes premium training clothes specifically for South African women and has become a go-to choice for fitness influencers with a bustling online store and 5 retail stores.

Whilst sourcing from overseas (likely from China) is still part of these local brands’ strategies, they can differentiate in style, distribution and what they stand for, enabling decent margins and the ability to build a thriving business.

It’s too early to tell how hyper-gamified players like Temu’s will impact the local market. But it’s good to take note and have some insights into how they operate. We’re watching this space.

A WORD FROM OUR SPONSOR

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IN SHORT

🎓 Graduate Funding. SA’s Department of Science and Innovation (DSI) in collaboration with the United Nations Development Programme (UNDP) has launched the Higher Education Innovation Fund to help newly graduated innovators and tech entrepreneurs build and launch their products.

🌝 Luno License. South Africa’s oldest crypto asset service provider, Luno, has secured a license from the FCSA to operate as a financial service provider, making it the first in SA to do so — paving the way for them to launch a whole new range of services and products into the market.

⚡️ Cape Electro. Cape Town’s MyCiTi bus service is taking a second bite at the zero-emission E-bus play with the Cape Town council giving the Urban Mobility Directorate the green light to proceed with adopting alternate energy buses as part of MyCiTi Phase 2A.

🤐 Unmuted Politicians. In a bid to prevent Netflix from making another documentary about them, Meta limited political content on its platforms. Hundreds of creators and political pundits have hit back with an open letter demanding Instagram make the political content limit an opt-in feature, rather than the default.

📈 Over Tencents. TikTok’s owner ByteDance saw its profits surge by around 60% last year, making it bigger than its online Chinese counterparts Tencent Holdings and the Alibaba Group. This is despite coming under pressure to sell off its US-held assets or face a ban in the US.

HOW WOULD YOU BUILD IT?

How to Get Growing in Africa EdTech

If you’re excited about things like ECD startup opportunities and using AI in SA schools etc., then this week’s podcast is for you. We sat down with Krista Davidson, Executive Director of Injini, Africa’s first specialised African EdTech accelerator and Think Tank. And with over 7 years of supporting thousands of African tech innovators in education, she has some remarkable insights into what it takes to succeed in this space.

Catch the highlights

1. The biggest opportunities lie in educator support

As Krista mentions here, tech is perfectly positioned to help lessen the burden on the teacher, so that they can spend more one-on-one time with learners, understand where there are gaps in a child’s understanding and have the time and ability to help them catch up.

An important point, since EdTech in South Africa is a very promising but tough space. Our ICT regulation hasn’t been properly updated since 2014, sales cycles to government (probably your biggest client) are lengthy and getting funding is competitive, so you want to be sure you’re building to solve the right problems.

2. SA startups are doing amazing things in this space

You might remember our recent podcast on AI in EdTech with Mindjoy, well Krista mentions here some exciting things are coming out of SA already. Trackosaurus, for example, uses gamification to track developmental milestones. Grow ECD and Play Sense, whom we’ve mentioned before, are working to help formalise the ECD sector by upskilling creche owners etc.

Digify Africa is another interesting one, using WhatsApp as a delivery model for skills development.

3. Evidence-based building is paramount

A key problem in Africa is our lack of openly available and transparent research. As Krista says here, when Injini started there was so little actual African information available, that they had to evolve into a think tank to generate some real data.

It’s key to build, especially something as fundamental as educational products, on actual data – i.e. knowing how people learn. So probably worthwhile connecting with people like Krista if you’re looking into this space.

You can also grab the Spotify and Apple Podcast links on our website here.