Alibaba’s entry into Southeast Asia served as social proof for many entrepreneurs and businesses that they were onto something big, which led to a year of exuberance for ecommerce in the region.
“We’re just at the beginning, [the Alibaba-Lazada deal] will kickstart the whole cycle. It will attract more global investments into the region, and attract more entrepreneurs who now see this region as a great place to start a business.” — Stefan Jung, founding partner at Indonesia-based Venturra Capital in an interview with Tech in Asia
Even as we get closer to 2018, there are already numerous casualties in one of the most promising ecommerce growth markets in the world.
Alibaba doubled down on its Lazada investment by upping its share from 51 percent to 83 percent and in a push to monopolize the market, put grips on Tokopedia, arguably one of Lazada’s biggest competitors in Indonesia.
Tencent, through JD or directly, also began executing its China playbook by investing in companies like Sea, Go-Jek, Traveloka, Pomelo Fashion and Tiki.vn.
Global attention from the US came from KKR, who through Emerald Media, put $65M into ecommerce ‘arms dealer’ aCommerce in a bid to replicate Baozun’s dominance in the Chinese “TP” (Tmall Partner) landscape.
And the plays won’t stop here.
Leveraging newly consolidated positions of strength, marketplaces will cross traditional boundaries and move into areas like private label brands and offline distribution. Brands will also feel increasingly cornered, facing a “damned if you do, damned if you don’t” situation.
Those that survive 2018 will have to find a niche for themselves, such as in fashion or home, because there isn’t much room left for another horizontal ecommerce player. Others will be tempted to take risky shortcuts like say, raising money through ICOs.
2018 will also see Tencent, not Alibaba or a local company, emerge as the winner in mobile payments in Southeast Asia.
It might be a good time to start learning Chinese.
1. Plata o Plomo: Southeast Asia ecommerce will be increasingly factionalized into Alibaba and Tencent camps, and locals will pick sides
Given its similarities to China roughly 10 years ago, Southeast Asia has become a gold rush for Chinese Internet giants looking to expand beyond the mainland. It was Alibaba’s acquisition of Lazada last year that triggered an arms race between China’s #1 and #2 in Southeast Asia, and in turn, will cause local companies to choose sides.
Alibaba also led a $1.1B investment in Tokopedia in 2017, continuing to place its biggest bets on ecommerce. Moving forward, the company is expected to position Lazada and Tokopedia as the Tmall and Taobao of Southeast Asia, respectively.
Meanwhile, Tencent has aggressively tried to replicate a three-prong formula that was successful in its fight against Alibaba in China: gaming, mobile and payments.
The first step was becoming the largest shareholder of Sea (previously Garena), predominantly a gaming powerhouse that runs Shopee, a mobile-first ecommerce marketplace and the second was placing bets on Go-Jek to become a “super app” like WeChat and WeChat Pay.
Understandable as WeChat Pay now commands an impressive 40% market share in China vs. AliPay’s 54%, up from 11% in 2015.
“Is there a land grab right now for these kind of assets? I think in the land grab they [Tencent] are following us. They are seeing that we have positioned ourselves very well, and they’re sort of playing a catch up game. So what we want to do is, since we already have our positions, is to work with local entrepreneurs.” — Joe Tsai, Alibaba Vice Chairman, in speaking with Bloomberg.
With both Tencent and Alibaba market caps at all-time highs, we expect this trend to continue throughout 2018 with both sides gobbling up more local companies across the ecommerce ecosystem and upping shares in existing ones.
2. Facing slow organic growth, Amazon will acquire a company to fast-track its ecommerce expansion in the emerging region
Amazon’s entry into “Southeast Asia” was the biggest surprise and non-surprise at the same time.
A non-surprise because Amazon’s long-awaited and rumored soft-launch into Singapore was widely covered by the media even before the company’s Prime Now services officially became available on July 26, 2017.
A surprise because Amazon’s expected tour-de-force across the region ended before it even started.
“I was expecting more things that I can’t get in Singapore, for example Sriracha or something small that’s not available in Singapore but most stuff on Prime Now are basic things you can get from Fairprice…” — Reddit User Ticklishcat
But there’s good reason for it.
It doesn’t make sense for Amazon to set up a full-blown local presence in the country-state. Singaporeans, under the Free AmazonGlobal Saver Shipping option, were already enjoying free international shipping from Amazon en masse for orders over US$125.
The country ranks #29 in terms of session/year to Amazon.com on a global scale but #4 when normalized for population size. With an average of 14.04 sessions per person per year visiting Amazon.com, Singapore takes the top spot among all the countries in Asia.
Singaporeans already buying from Amazon, without the latter’s full-fledged local presence: Singapore ranking only #29 in traffic to Amazon.com but #4 when normalized for population size (#1 in Asia)
The launch of Amazon Prime in Singapore earlier this month makes it even less likely for the firm to set up local operations beyond Amazon Prime Now. Amazon is no longer subsidizing the original free shipping for orders above US$125 to Singapore and Singaporean Prime members have free international delivery only on orders above S$60 on Amazon’s US website for S$8.99 per month in addition to other benefits.
Not much else has been heard about the company’s further expansion into the region, particularly Indonesia and Thailand, where markets are being rapidly carved up by Alibaba and Tencent.
With time running out for a full-fledged, organic entry into the high-growth markets of Southeast Asia, its stock trading at all-time highs, and not too distant memories of failure in China, we expect Amazon to attempt at least one major acquisition in 2018 to accelerate regional expansion.
3. Offline is the new online: pure-play ecommerce to launch physical stores to offset rising online customer acquisition costs and improve last-mile fulfillment
While traditional offline retailers like Central in Thailand and Matahari in Indonesia scrambled to move business online, online pure-play ecommerce is expected to make moves offline.
With online customer acquisition channels like Google and Facebook rapidly reaching saturation and diminishing returns, ecommerce players like Pomelo and Lazada will look to offline channels to reach new customers.
Pomelo dabbled in offline over the last few years but, fresh off a $19M Series B, recently launched its biggest pop-up to date in Siam Square, the fashion center of Bangkok. The store applies “click-and-collect”, enabling customers to order online and try items in store before deciding which ones to keep or return.
“In fashion, the number one barrier to purchase is still the need to try product on for fit coupled with the hassle of returns. An offline footprint addresses this barrier head on. Additionally customers can be acquired offline and data from online can be used to drive higher sales and greater operational efficiencies offline. In short, a mix of offline and online is the optimal strategy for fashion retail going forward.” — David Jou, Co-Founder and CEO, Pomelo Fashion
Love Bonito, another online-first fashion brand from Singapore, officially launched its permanent flagship store at Orchard Road after seven years of being an ecommerce pure-play.
Lazada, on the other hand, may follow Alibaba’s moves in China where the ecommerce juggernaut launched Hema supermarkets in Beijing and Shanghai. In addition to reinforcing a positive brand experience and customer acquisition, these new offline stores serve as fulfillment centers, effectively making up for Southeast Asia’s lack of logistics infrastructure.
Lazada Group CEO Max Bittner already hinted at the possibility physical stores in Indonesia at a conference earlier this year.
Over the last decade in China, Alibaba rode 50%+ year-on-year ecommerce growth to become what it is today, however, as maturation slows, Alibaba has doubled-down on initiatives like Single’s Day (11.11), “New Retail” (smart pop-up stores around China), and market expansion to accelerate sales (Southeast Asia).
Despite the region being projected as the next big ecommerce growth story, online accounts for only 1-2% of total retail today. If companies like Lazada and Shopee want to grow faster than the market allows, going offline will be the obvious choice.
4. New ecommerce startups will use ICOs to raise funding to battle giants
With Southeast Asia increasingly being carved up by giants such as Alibaba and Tencent in a presumed winner-takes-all-market, smaller ecommerce startups will look at alternative ways to finance themselves.
Enter newly hyped Initial Coin Offerings (ICOs).
Raising funds through these means in Southeast Asia was pioneered by Omise, a fintech startup based in Thailand, that successfully raised $25M in a few hours to develop a decentralized payment system.
Given early speculation of Amazon moving into the cryptocurrency space, we’ll have fertile ground for our first Southeast Asian ecommerce ICO. Already a start up called HAMSTER is selling HMT tokens to develop a decentralized marketplace that promises “no fees, no brokers”.
Expect ecommerce startups to use ICOs to fund customer acquisition, new product development, and inventory financing. That is, until the bubble bursts…
5. A final wave of ecommerce consolidation sweeps through as local players adjust to a New World Order
We’ve shared numerous stories of casualties and consolidation during the Southeast Asian ecommerce bloodbath in our previous annual predictions.
Japan’s Rakuten sold off most of its assets in the region when it retreated in 2015/2016. Rocket Internet dumped Zalora Thailand and Vietnam in a fire sale in 2016 and sold its Phillipines entity to local conglomerate Ayala Group the year after.
In Indonesia, reports surfaced of SK Planet selling its Elevenia shares to Indonesian conglomerate Salim Group, which was quickly followed by news of its Malaysian entity up for bid between Alibaba and JD.
Earlier in the year, Indonesia’s second largest telco Indosat Ooredoo shut down its ecommerce website Cipika. Alfamart, Indonesia’s second largest convenience store chain also had to downsize operations to pivot its ecommerce initiative Alfacart away from a general marketplace play towards an online grocery channel.
Come 2018, all eyes will be on the health of remaining bastions of home-grown, horizontal ecommerce plays. As Alibaba and Tencent up the ante, there will definitely be more casualties in the new year.
6. Go-Pay will venture outside of Indonesia through Sea, Traveloka and JD to become the WeChat Pay of Southeast Asia
Indonesia’s ecommerce today is like what China was in 2008 — the pace of change is unimaginable. When I visited our office in Jakarta 12 months ago, hardly anyone was using Go-Jek’s mobile payment platform and wallet, Go-Pay.
Returning six months later, almost all of my colleagues used Go-Pay to transfer money peer-to-peer and pay for products and services.
In most of emerging Southeast Asia (excl. Singapore and Malaysia), credit card penetration rates are in low single digits and most people don’t even have a bank account.
Unfortunately, few fintech and payment startups in the region have created products to address the lack of credit cards and large unbanked population. Instead, the majority happily build payment gateways and e-wallets that rely on existing and legacy credit card infrastructure like in the US (Apple Pay anyone?).
It’s no wonder cash-on-delivery (COD) still makes up over 70% of all processed transactions according to data by ecommerceIQ.
Those that do focus on mobile wallets topped up with cash like Thailand’s True Money struggle to achieve sustainable “core product value” and reach mass.
“Community, Commerce, and Payments are inter-connected in the Digital World. Thus far, all successful mobile payment plays, globally, are centered on the commerce and community axis. PayPal started with eBay, Alipay with Alibaba/TMall/Taobao, WeChat Pay leveraged WeChat/QQ, and Amazon Pay has Amazon. Due to this very reason, standalone payments/wallet business will struggle.” — Gaurav Sharma, Founder at Atlantis Capital
Go-Pay addresses these fundamental issues by allowing users to send payments peer-to-peer (P2P) and top up by giving cash to Go-Jek drivers who act like mobile ATM machines.
More importantly, with Go-Jek being part of the Tencent faction, we expect the company to push Go-Pay into other Southeast Asian countries through its community and commerce platforms such as Sea (Garena, Shopee, etc.), Traveloka and JD.
Following rumors in November, Go-Jek finally announced its acquisition of Kartuku, Mapan and Midtrans. The latter, being one of Indonesia’s top online payment gateways, will give Go-Pay additional distribution channels and use cases such as Matahari Mall, Tokopedia and Garuda Indonesia, pushing it beyond the realm of P2P into B2C payments.
A strong contender for the “WeChat of Southeast Asia” is Grab, whose 2.5 million daily rides makes it the largest ride-hailing platform in Southeast Asia. GrabPay, launched this year, is Grab’s effort to move Singapore towards a cashless society, with plans to expand across the region in 2018.
Should Go-Jek be worried? Not really.
Singapore is not the ideal test-bed to launch a mobile wallet because the country already has an ubiquitous cashless payment platform called “credit cards”. And GrabPay’s recent partnership in Indonesia with Lippo Group’s Ovo hasn’t garnered much attention or presented wide use cases.
“While it might seem like common wisdom to first test (an idea) in Singapore, and then take it regionally and to the world, with all due respect to the government, I think it doesn’t make sense in today’s world.” — Min-Liang Tan, Co-Founder and CEO of Razer
Go-Pay, on the other hand, is adding value to users in a country where only 36% have bank accounts and 2% have credit cards. Emerging markets like Thailand, Vietnam and the Philippines have a similar (lack of) financial infrastructure as Indonesia.
Go-Jek, by being part of the Tencent faction, has access to a much more diversified distribution channel and offers a variety of common day-to-day use cases such as gaming (Garena), shopping (Sea, JD), travel (Traveloka) and pretty much everything else (Go-Jek itself).
7. New mobile-first fashion and beauty marketplaces will fill void left by Zalora
Zalora, Rocket Internet’s once star fashion ecommerce venture, has struggled in Southeast Asia since launching in 2012. Zalora Thailand and Vietnam were picked up by Thai retail conglomerate Central Group for pennies on the dollar while the Philippines entity was partially sold off to the Ayala real estate group.
A few factors contributed to the company’s difficulties: 1. Price and product variety competition with merchants selling on Facebook, Instagram and LINE, 2. Control of brands by one or two retail conglomerates like Central in Thailand, MAP in Indonesia, and SSI Group in the Philippines.
These two factors made it difficult for Zalora to pivot to an ASOS-style premium brand marketplace.
A shell of its former self, Zalora’s challenges left a void that is increasingly being filled by more nimble, mobile-first fashion marketplaces that see an opportunity in a space dominated by mass-market, general ecommerce platforms like Lazada and Shopee.
As evident from Amazon’s struggle to court premium fashion brands in the US, luxury brands don’t like to sell on mass platforms, where merchandise shows up beside detergent and washing machines.
“After purchasing Whole Foods, Amazon now has access to the wealthiest refrigerators in the country but they still can’t get into our closets because the aspirational beauty and fashion brands don’t want to distribute on their platform. Why? Because they don’t have their heads up their ass and realize that Amazon partners with brands the way a virus partners with its host.” — Scott Galloway, L2 Founder and NYU Stern Professor
Over in China, both Tmall and JD had to exert a Herculean effort to attract fashion brands. In October, JD launched TopLife, a standalone online luxury platform to provide a high-end experience that high-end brands promise. Alibaba also launched Luxury Pavilion, a section within Tmall tailored to luxury brands like Burberry and Hugo Boss.
Spearheading a new wave of mobile-centric Southeast Asian fashion marketplaces are Zilingo, fresh off an $18M Series B, and Goxip, a Hong Kong based startup that recently completed a $5M Series A with plans to enter Thailand. In Indonesia, there’s LYKE, ironically founded by the ex-Zalora CMO.
With the benefits of hindsight and understanding of the importance of social commerce on driving fashion, these emerging players will offer elements like chat, content and an influencer network to offset some of the customer acquisition cost challenges inherent in scaling ecommerce.
8. Marketplaces will grow up and clean up ‘grey market’ for blue-chip and luxury brands
Over the last six years, most of the region’s initial ecommerce growth was focused on driving GMV by tapping into any merchant and brand willing to sell online.
In 2018, marketplaces like Lazada and Shopee will continue to attempt to onboard bigger global brands but their success will require them to control grey market sellers and counterfeit goods in order to cultivate an environment in which blue-chip brands will feel comfortable selling.
Alibaba went through the same process in China when discussions surrounding counterfeits and grey market goods on Tmall and Taobao peaked around the company’s IPO in 2014.
Based on data provided by marketplace analytics platform BrandIQ, 80% of SKUs from consumer product giants like Unilever, Samsung, and L’Oreal on average are sold by unauthorized, grey market resellers. These grey market SKUs are sold at a price 30% lower than official flagship stores and authorized resellers.
Why all the fuss? Because grey market sales impact the image of brands selling in official stores.
“Lately, the explosion of third-party sellers on the site has led to authentic goods from companies such as Nike, Chanel, The North Face, Patagonia and Urban Decay being sold on Amazon even though they don’t authorize the sales, undercutting their grip on pricing and distribution,” said the Wall Street Journal.
Nike, for example, refused to sell directly to Amazon for a long time, fearing it would undermine its brand. But by not selling on marketplace creates space that will be quickly filled by grey market, unauthorized third-party resellers looking for arbitrage opportunities as seen from the previous BrandIQ data.
Customers buying from these grey market resellers perceive this as buying from the brand itself and, when having a poor customer experience, end up blaming the brand rather than the unauthorized reseller.
BrandIQ data shows that the average rating for grey market SKUs are 24% lower than reviews for similar products sold through the official shop-in-shop or flagship store.
We’ll see a push from the marketplace and brands to address grey market sales in Southeast Asia in 2018. Marketplaces will employ a tighter grip on third-party resellers in order to attract better brands, while brands will set up an official presence on marketplaces as a way to pro-actively manage the customer experience and brand image.
9. Marketplaces and e-tailers will introduce its own private label products and alienate brands
As the ecommerce market in Southeast Asia matures and consolidates, marketplaces, e-tailers and ecommerce startups will be increasingly scrutinized for margin growth. Gone are the days of aggressive top line growth and market share grabs at all cost.
With Lazada post-Alibaba acquisition and Shopee post-IPO (as part of Sea), what other value-added services will these companies tap into for sustainable revenue growth?
In this instance, companies in Southeast Asia have taken a cue from the China playbook. Lazada launched a Lazada Marketing Solutions unit to monetize its 23M active annual customers through advertising similar to how Tmall and Taobao charge for ads in China.
Today, Lazada offers display ads and programmatic promoted product ads to its customers but is expected to launch pay-per-click search ads in 2018 competing with Google, Facebook and similar networks out there. Across the region, Shopee has already launched pay-per-click search ads.
Beyond advertising, we can expect more marketplaces and e-tailers to follow Amazon’s foray into private label brands to boost margins. With the data collected from selling third-party brands, these ecommerce platforms know exactly what kind of products sell best, to whom, at what time and where.
Flipkart, one of India’s top marketplaces competing with Amazon, recently announced its aim for 20-22% sales contribution from private labels in the next five years.
“When we first decided to foray into private labels in mid-2016, a ‘Tiger Team,’ for private labels was created internally to research 50-odd retailers around the world, including Europe, the US, China and India, to envisage what the private label landscape would look like for Flipkart over the next few years. Research revealed that private labels can contribute 10-20 percent of the company’s business. For instance, US-based Costco Wholesale’s private label brand Kirkland contributes 20-25 percent of its business,” said Adarsh Menon, Flipkart’s Head of Private Labels in an interview with The Hindu.
Launching private label brands in Southeast Asia isn’t something new. Zalora launched its own fashion label called EZRA as early as 2013 followed by Lazada’s LZD Premium Collection in 2014. With the focus on top line growth in the period of 2013-2016, private label brands have taken a backseat as seen from the limited number of them listed today on Zalora and Lazada.
Althea, a Korean beauty e-retailer that recently raised a $7M Series B, specifically said to be using the new funds to launch more private label products.
“Based on the vast amount of user data that we have gathered… we are now able to understand the specific needs of our customers in each market, garner feedback almost instantly through our online platforms, and quickly turn that into a product within a month or two,” said Althea Co-Founder and CEO Frank Kang. “We have deep insights into our customer base that traditional brands simply cannot match.”
In light of all this, it’s not surprising Zalora has expressed renewed interest in pushing its own private labels, “Something Borrowed” and “Zalora”, for the new year.
10. B2B ecommerce to disrupt offline distributors, blurring lines between online and offline distribution
Despite the rosy outlook for ecommerce in Southeast Asia, the reality is that B2C ecommerce today is still in the low single digit percentages. Given aggressive growth targets, brands, marketplaces and e-tailers will increasingly look toward non-B2C channels such as B2B and B2E (Business-to-Employee) channels for revenue.
Zilingo, the Sequoia-backed fashion marketplace, launched its Zilingo Asia Mall B2B marketplace to allow fashion buyers in the US and Europe buy Zilingo merchandise at wholesale prices, effectively creating an “Alibaba” for fashion.
Shopee launched a wholesale feature earlier this year, allowing merchants to set lower unit prices for larger order quantities.
aCommerce, Southeast Asia’s ecommerce enabler and e-distributor, fresh off a $65M Series B from KKR-backed Emerald Media, coined a new term for all this — “B2A” or Business-to-All.
The company is behind the B2B and B2E initiatives for brands like Samsung and L’Oreal. According to the company, B2B ecommerce now contributes to 30% of total revenues at aCommerce, up from 10% a year earlier (disclaimer, I work here).
Opinions expressed are solely my own and do not express the views or opinions of my employer.