Robert Clark
Jun 21, 2016

Growing pains in SEA’s ecommerce market

A fragmented market and blind investments without concrete scale-up plans leave e-tailers searching niches for growth.

In and out: Rocket Internet, the founder of Lazada, has backed up from its aggressive investments in SEA.
In and out: Rocket Internet, the founder of Lazada, has backed up from its aggressive investments in SEA.

Ecommerce in Southeast Asia is on everyone’s radar. Retailers, big tech players, ecommerce specialists and venture capital firms are tipping cash and resources into the sector. 

The low take-up suggests plenty of upside. Online retail penetration is 3 per cent, equivalent to US$6 billion in sales, compared to 14 per cent in China and the US, an analysis by Bain points out. Marketers also point to the region’s growing middle class, high mobile connectivity and the young digital natives.

Bain describes the region as “approaching a tipping point”. Some 100 million consumers in Southeast Asia have made a digital purchase. But a much bigger number — 150 million — have begun researching products or engaging with sellers.

In some categories, online is taking a major slice. According to Bain, 24 per cent of all clothing and footwear, and 18 per cent of travel is now purchased online. 

Yet while the outlook is strong, the market is fragmented and showing growing pains. This has led to some high-profile exits — most prominently Germany’s Rocket Internet. Rocket has been one of the most aggressive in the space since founding Lazada, a regional ecommerce play, four years ago. But it sold out of that in April, has put some of its loss-making Zalora fashion units on the sale block and has shuttered businesses such as Foodpanda Vietnam. Japan’s discount e-tailer Rakuten is also beating a retreat. 

But those departures are more to do with appeasing frustrated investors in those stocks, rather than a lack of confidence in the market.Many others are willing to take their place. Most prominently, Chinese heavyweight Alibaba has forked out US$1 billion to replace Rocket as Lazada’s main owner. Indonesian marketplace Tokopedia has just raised US$147 million, Chinese ecommerce firm Vipshop has a presence through discount retailer Ensogo, while A-list VC firms like Sequoia Capital are also joining the party. 

There’s no shortage of commitment from local startups and retailers. Indonesian department store Matahari is investing US$500 million to become the country’s biggest ecommerce player. SingPost — which has taken on Alibaba as 10-per cent shareholder — is spending S$182 million (US$133 million) on ecommerce logistics hubs and building kiosks in Indonesia.

Kim Douglas, MD of SapientNitro Southeast Asia, says the region is also “green pastures” for global companies, pointing to Amazon’s popularity in Malaysia and the Philippines despite its lack of investment. But he says Asian companies are behind the curve on ecommerce and have generally viewed online as an alternative to offline rather than a supplement. 

Douglas spies demand from “Eastern brands going West” too, citing the work Sapient has done with Eu Yan Sang, the Singapore-based traditional Chinese medicine supplier, and Korean luxury brand MCM.

But there is a bit of froth. Varun Mittal, group head of partnership and marketing at helloPay, Lazada’s online payment subsidiary, says: “It’s at a stage where it’s going to grow a lot. But to be frank, there are lot of companies that are just burning money like crazy. Everyone understands there needs to be investment. The question is: are you building? How long are you in for?  Are people investing for growth or are they buying customers to get scale?”

Across the region, ecommerce is heavily fragmented. Even in Singapore, the most mature market, 12 platforms account for 90 per cent of the total volume, according to Bain. Some observers make the comparison with China’s ecommerce market seven or eight years ago, which was also fragmented and Dangdang and Amazon accounted for nearly a third of all sales. Alibaba has since wiped the floor with them and, with JD.com, now owns three quarters of the sector.  

Experts believe that besides the economic factors, it will be the ecommerce experience that will drive take-up and transactions. They point to the amazing popularity of Singapore grocery retailer RedMart. The online supermarket is selling even frozen meats online, even though most people live within a few minutes’ walk from a physical supermarket, and achieving higher margins because of the ‘experience’, Douglas says. “Ecommerce is a seamless experience that people think is worth paying for.” 

Krishnan Menon, APAC chief client officer at Wunderman, believes it will be the brands, rather than platforms, that will drive the improvement in online experience. The platforms are the mall owners who will provide the environment and technical enablers, but it will be the brands that will drive customers into their stores, he says.

With its 250 million population, per capita income of US$3,647 and 52 million smartphone users, Indonesia is attracting the most attention and investment. 

Unfortunately, Indonesia has “logistics issues, trust issues, low credit card usage”, says Douglas. He is, however, excited by the entrepreneurialism of local firms, who are finding hidden niches and applying clever workarounds while taking advantage of the low-cost workforce. They have come up with ways of distributing products “in ways people don’t think about”, he says. One such example is micropayment for media products — delivering a DVD to someone’s home by motorbike and collecting a cash payment. 

Ben Glynn, MD Singapore for Emarsys, an ecommerce cloud platform provider, believes Indonesia can be lucrative for those who can seize first-mover advantage and retain their customers. “Personally I have reservations. But if some of the key bigger problems like logistics can be solved, it is very attractive.” 

One strategy that’s worked in different markets has been to seek out untapped niches. Like Singapore cosmetics startup Luxola, now owned by luxury giant Sephora, Sale Stock in Indonesia, which has a mobile-first strategy and sells lower-priced goods for low-tier consumers, and Thai startup Orami, which focuses on women. 

“I like their ideas because a niche strategy can help differentiate,” Glynn says. 

Our view: Although challenging, ecommerce in Southeast Asia is anything but a losing proposition. Have a comment?

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