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One hundred two billion dollars. That’s how much the value of ecommerce in Southeast Asia is estimated to exceed by 2025.

The latest e-Conomy of Southeast Asia report by Google and Singapore-based Temasek confirmed the growing confidence among investors in the region. Startups raised $9.1 billion in the first half of last year, almost as much as throughout the whole of 2017.

2018 was dubbed as the year of ecommerce for the region, so what can we expect in 2019? We speak to industry leaders to discover the anticipated trends for online retailers and brands in Southeast Asia.

1. Brands Shift Their Focus from Data Gathering to Data Utilization

The biggest differentiator between online and offline retail is the ability to track, collect, monitor, and manage information, all in real time.

Through online channels, brands are able to access customer data through chats, social media, and their own websites. This information can be used to devise online strategies. Globally, 73% of brands plan to allocate their ecommerce budget on data & analytics services in 2019.

However, despite the general agreement of its importance, many brands still have no concept of how to utilize data to their advantage.

“Even today, not all retailers have embraced data fully to the point where they think of themselves as data companies, and this might be why many companies are suffering.” Harvard Business School Professor Srikant M. Datar.

Data collection is easy but having and optimizing the analytics capability to use it is a completely different ball game.

A survey by ecommerceIQ identified data analysis as one of the most difficult skills to find among the digital talents in Southeast Asia. Brands are constantly searching for data aggregators to consolidate information into one place for convenient retrieval and use to target, retarget, and personalize products and services.

Reagan Chai, Head of Regional Business Intelligence and Business Development at Shopee told ecommerceIQ that data acquisition enables the company to map out and optimize buyer and seller user experience while pre-empting customer demand and anticipating future potential. The company has seen an increase in website traffic in the past year that even surpasses the other regional players.

In China, Alibaba and JD.com have taken this a step further by utilizes the data gathered online to improve inventories and experiences at their physical stores. Alibaba Chief Marketing Officer, Chris Tung said the company wants to help brands find the right consumers by tracking them throughout Alibaba’s system.

“We’re finding all data that has to do with people, their behavior, what they like, what they buy and binding this online data to real people,” concluded Chris.

Seeing the need, regional brand ecommerce enabler aCommerce launched a data analytics platform BrandIQ last year to enhance their capabilities as a data partner to help brands centralize their customer data and offer customized products or services to each target group.

The capabilities of BrandIQ that aim to enhance brands’ performance on online marketplace; BrandIQ

This leaves brands with two options: find an economical way to utilize the data or continue looking for a needle in a haystack.

2. Social Commerce Channels are Brands’ New Sales Outlets

Social commerce in this region boomed before the rise of ecommerce as we know now.

Facebook groups have long established as an online space where people connect to buy and sell goods, even before the launched of Marketplace feature. The social media’s rapid growth in Southeast Asia is propelled by mobile adoption and smartphone, where 90% of the online population access the internet via smartphones. For some, Facebook even defines the internet itself.

With multitudes of potential customers gathered in social media platforms, brands naturally espied alternative sales channels. Following Facebook’s footsteps, social platforms like Instagram and Pinterest have also developed their own shoppable features.

“Brands will miss out if they don’t have a social media presence. The best way to get feedback from consumers is by having a direct conversation,” Deb Liu, Vice President, Facebook Marketplace told Forbes.

LINE recently acquired a social commerce management startup Sellsuki in Thailand, where it has the second biggest user base, to build a strong foundation for its ecommerce business. The company has also formed a joint venture with three local banks to offer personalized loans to SMEs.

A few big brands like L’Oreal have already equipped their social media page with ‘Shop’ feature that allows consumers to purchase the order directly on the page and it’s only a matter of time before more brands activate the platforms as one their sales channels and remove another layer between them and the consumers.

Consumers can purchase L’Oreal products on their Facebook page assisted through the Messenger app until the checking out process; L’Oreal Thailand.

3. E-Marketplaces Launch New Services to Differentiate

Looking at the successful existing ecommerce players in more developed markets, one key success factor they share is the various services rolled out on their fully-controlled supply chain.

JD.com’s investment to the development of their own supply chain allows them to scale their technology and offer Retail-as-a-Service proposition to help other retailers or brands sell online. Alibaba is unrivaled on its extensive ecosystem beyond commerce, including a logistics network Cainiao, a payment firm Ant Financial, not to mention its recent foray into the entertainment industry.

The same practice has infiltrated down to Southeast Asia. Lazada has strengthened its logistics arm FBL (Fulfilled by Lazada) post the acquisition, and although no concrete plans have been disclosed, Shopee has expressed the intention to build its own logistics network.

Singapore’s Qoo10 is set to launch its blockchain-based ecommerce site QuuBee this year, leveraging the blockchain technology to eliminate the transaction and listing fee which in turn increase the retailers’ profit margin and make a more sustainable commerce approach.

In Indonesia, Tokopedia is set to offer “Infrastructure-As-a-Service” with the fresh $1.1 billion funding. They also plan to use AI for customer care services and to run credit checks on merchants seeking loans to expand their businesses.

The practice is not exclusively done by the general e-marketplaces. Fashion e-marketplace Zilingo scored $226 million in funding due to their new focus to build a network of fashion supply chain that anyone, small merchants or big retailers, can tap into.

“It’s imperative for us to build products that introduce machine learning and data science effectively to SMEs while also being easy to use, get adopted and scale quickly. We’re re-wiring the entire supply chain with that lens so that we can add the most value,” revealed Zilingo CTO Dhruv Kapoor to TechCrunch.

Facebook is also showing more intention to jump into the bandwagon that is the region’s ecommerce. The social network has launched Marketplace feature in Thailand and Singapore without much fanfare, but the recent partnership with Kasikorn Bank in Thailand to allow in-app payment feature might be the start of the company’s effort to bulk up its commerce capabilities and cater to those that utilized the platform for their business.

Facebook partners with Thailand’s Kasikorn Bank to enable transfers and card payments on chats from Facebook Messenger; Facebook

 

In a bid to recruit more brands to sell on their platforms, we anticipate that e-marketplaces will continue to go head-to-head with each other through new services, acquisitions, and partnerships. Ready to burn more cash to win in this battle, e-marketplaces?

4. Brands to Reinforce Reviews and Fund User-Generated Content to Win Ecommerce Consumers

E-marketplaces in Southeast Asia has been upscaling and building add-ons which provide consumers with the utmost convenience. The search for better technology and assistance for the consumers is constant and never-ending.

Lazada introduces AI-powered image search feature onto its platform which allows shoppers to take a picture of an item and the platform will suggest similar items available; LiveatPC

Online consumers begin their online purchasing journeys by searching for product information or reading reviews, usually on the e-marketplace platforms, before making their purchase decision. They are looking for real opinions and user-generated reviews to validate the products.

The habit of leaving product reviews on ecommerce platform is not as common in Southeast Asia as it is in the US — Amazon even have dedicated page for top reviewers — and when they do, the reviews usually left little information about the product and more about the other aspect of the purchase (i.e. delivery time, packaging, etc).

Platforms like ReviewIQ are used by brands to increase their ratings and reviews engagement on their e-marketplace listings to help boost consumers make their decision. While the use of chatbots is an increasingly popular solution to help smooth the online customer experience, it’s more suitable for generic questions such as “where is my order?” or “is this product available?” instead of personalised questions such as “will this lipstick look good on a yellow-undertone skin?”.

Community-crowd model like one that’s popular with travel platforms such as Airbnb might also be suitable for ecommerce in the region to help consumers get passed their apprehension with online shopping — something that Edouard Steinert, aCommerce Thailand’s Director of Channel Management, is investigating to help the company’s clients as this model has shown to save time, increase results, and keep costs low.

“Consumers today want to hear genuine feedback and reviews about a product and become more averse to hard-sell methods. [User-generated] Reviews, especially from people who share the same passion with them, proved to drive better conversion for the brand,” added Edouard Steinert.

5. Brands Employ Direct-to-Consumer strategies to Acquire Direct Consumer Data

89% of companies are now competing mostly on a customer experience playing field and the Direct-to-Consumer (DTC) approach is becoming more important for brands as it allows them to gain insights into their end users and anticipate their needs.

One trend observed among brands to promote DTC is ecommerce subscription. From a consumer perspective, subscription offers a convenient, personalized, and often cheaper way to buy what they need. For brands, it’s a subtle method to create customer loyalty in the digital landscape.

One brand adopting subscription ecommerce in the region is Nescafe Dolce Gusto, offering free coffee machines in exchange for a minimum 12-month subscription. Besides witnessing sales growth, Nescafe Dolce Gusto also noticed that consumers continued to purchase goods from its brand despite dropping out of the subscription plan.

“They may have dropped out of the subscription but not the brand. They still buy capsules from different channels; ecommerce website, online marketplaces, and supermarkets. A subscription strategy is not just a long-term consumption enabler but also a consumer acquisition channel for the whole brand,” Bhuree Ackarapolpanich, Brand Director & Digital Expert at Nescafé Dolce Gusto.

aCommerce’s Regional Director of Project Management, Mandy Arbilo said that e-sampling is a popular strategy employed by brands to evaluate the demand, especially ecommerce.

While normal sampling techniques used by offline retailers are expensive, e-sampling saves brands up to 40% as well as providing essentials customer data.

Mars Petcare is one of the e-sampling pioneers for aCommerce. The campaign prompted up to 25% of pet owners to try Pedigree as the main meal; aCommerce

As DTC becomes widely adopted, consumers will see brands coming up with attractive gimmicks using digital tools to gain insights and entice consumers to spend more on their brands.

6. 2019 Will Finally see Regulation of Ecommerce across the Region

Ecommerce practice in the region has remained largely unregulated as a nascent occurrence. As the industry grows, it is only a matter of time until governments step in to tax this fast-growing segment and level the playing field for foreign companies to offer digital services and goods locally.

News of the implementation of ecommerce tax regulations in Southeast Asian countries has been floating around since the beginning of last year but nothing concrete has as yet materialized.

A couple of months ago, Economic Ministers from the Association of Southeast Asian Nations (ASEAN) signed an agreement to facilitate cross-border ecommerce transactions within the region.

However, while nothing has written in stone, predictions abound concerning the impacts of ecommerce tax on imported goods into the region. In Indonesia and Thailand, ecommerce tax is predicted to bolster the growth of social commerce because, unlike marketplaces, they are uncontrolled.

“If tax regulations restrict ecommerce platforms, making selling in Bukalapak complicated, there will be an exodus of people who prefer selling on Instagram and Facebook. These platforms are uncontrolled and not chased for tax because they sell through the back door,” Bukalapak co-founder and Chief Financial Officer Muhamad Fajrin Rasyid.

Singapore might also see a decrease in cross-border shopping as prices increase with the introduction of Goods and Service Tax (GST) on ecommerce goods and services from overseas. Currently, 89% of all cross-border transactions in the Asia Pacific region are conducted by Singaporeans.

A snapshot of the state of ecommerce tax regulations across six major Southeast Asian markets; ecommerceIQ

Looking at another high-potential ecommerce market, India introduces the new e-marketplace laws that indicate the prohibition of marketplace “owners” to sell products on their own marketplace through vendor entities in which they have an equity interest. It also prevents marketplaces to make deals with sellers that grants the marketplace exclusivity rights on the product. Could we see such laws be applied in Southeast Asia?

Regardless, brands will have very little influence on how the new tax policies take root but they will be behooved to anticipate the ruling and adjust online strategy accordingly to mitigate the impact of a shift in customer behavior. This ASEAN agreement will encourage more local entrepreneurs to create new products and venture online to access a larger and more diverse market. Brands will now need to be nimble and innovative to adapt to local nuances and preferences.

7. Grab and Go-Jek Challenge Logistics Providers to Capture Ecommerce and Online Food Delivery

Since Uber’s exit last March, Grab monopoly in countries like Thailand, the Philippines, and Malaysia has led to complaints about services and prices increased which resulted in protests from consumers and fines from governments which hit the headlines of the Filipino newspapers and Singaporean watchdogs.

But with the recent regional expansion from Indonesia’s Go-Jek, the competition between the two will only get fiercer. Go-Jek has successfully carved its existence in Vietnam, Singapore, and Thailand last year alone. In addition, Grab’s competitor in Malaysia, Dacsee, has also expressed the plan of expanding to Thailand.

Both companies are not racing to be the best ride-hailing providers, they’re aiming for something much bigger; super apps. Go-Jek has secured $1 billion funds from Google, Tencent, and JD.com in part of their plan to raise $2 billion for this venture. Meanwhile, Grab recently nabbed $200 million investment from Thailand’s Central Group, boosting their valuation to 11 billion to date.

2019 will see these two competitors steer toward the same goal of food and ecommerce delivery. Google and Temasek reported that the online food delivery business grew 73% CAGR in 2019. By 2025, they predict online food delivery growth at 36% CAGR with online transport only 23%.

Market size of the ride-hailing industry in Southeast Asia; e-Conomy SEA 2018 Report by Google and Temasek

“We will be expanding our GrabFood and delivery business and deepening our relationships with restaurant merchants and key partners in some markets,” said Grab’s head of regional operations Russell Cohen.

Same-day delivery providers are going to feel more competition next year. The impact of Grab and Go-Jek on market vibes will definitely raise the bar for the logistics and delivery sector.

8. Brands and Retailers will Double Down on Omnichannel is Southeast Asia’s Preference over Pure-Play Ecommerce

The omnichannel shopping experience is not a new concept, but companies do have diverse interpretations of the concept. Headlines revealed that online retail behemoths, such as Amazon and Alibaba, are moving into physical retail.

The main reason why Alibaba ventured out of online space reflects its determination to solve core problems of the shopping experience, such as scattered operations and lack of payment transparency.

JD.com pipped Alibaba for once by opening the first unmanned convenience store in the region in Jakarta to leverage the enormous database by offering beneficial insights to brands such as the best products to stock and advertise. Through their JV with Central Group in Thailand, JD Central also planning a similar launch in the country by 2020.

Inside JD.ID X Mart in Indonesia. It is JD.com’s first unmanned store outside of China and it is a demonstration of JD.com’s mission to implement RaaS; Food Navigator Asia

Pure-play ecommerce retailers and brands recognized drawbacks in online marketing channels with fragmented infrastructure and a limited pool of shoppers. They promoted offline as an attractive option to push sales growth.

Elsewhere in Southeast Asia, companies are slowly but surely adopting this strategy across all categories. Ecommerce fashion players like Thailand’s Pomelo and Singapore’s Love, Bonito have opened physical stores in their respective countries.

In 2018, Pomelo opened 5 new outlets, embarking away from Bangkok’s prime shopping areas to central business districts (CBDs) like Asoke and residential areas of Bangna. Meanwhile, Love, Bonito has 17 retail outlets spread across Singapore, Malaysia, Indonesia, and Cambodia.

Rachel Lim, Co-Founder of Love, Bonito told Peak Magazine, “Data can tell you what’s selling but being on the ground tells you why something is not selling and what the customer is looking for.”

Visiting shopping malls is a popular social activity in Southeast Asia and this trend is not set to disappear anytime soon. Brands should take advantage of dual physical and online presence.

Updated (28 Feb 2019): Shopee Thailand does not have a solid plan to build its own logistics network yet. The comment was mentioned briefly in the interview with Bangkok Post which was made a focal point by the media.

What does the FMCG giant Unilever have in common with grocery retailer The Kroger and a luxury watch brand Audemars Piguet?

The answer is Retail-as-a-Service (RaaS).

Unilever worked with JD.com to distribute goods to both online and physical stores in China, while Audemars Piguet launched its pop-up store on WeChat. In the US, food store The Kroger partnered with Microsoft to increase the level of personalization and productivity in their stores.

The term ‘RaaS’ has clamoring over the headlines over the years, but what exactly is Retail-as-a-Service?

What Is Retail-as-a-Service and Why Is It Becoming a Trend?

An analyst from Kantar Retail, Stephen Mader, defines the Retail-as-a-Service model as when “retailers build open platforms and toolkits that enable brands and third-party sellers to connect with shoppers directly through a physical store”.

Having an abundance of data in hands, these retailers bundle up services, customer data, technology, and its expertise to offer brands a service.

The emergence of ecommerce has reduced the in-store retail visits by billions in the US and part of the reason is because the experience offered by a traditional physical store is no longer enough for the savvy consumers. Besides shopping for products, consumers are slowly and surely seeking an experience when they’re out visiting the store.

“Nearly 3,800 stores are expected to close their doors by year’s end, and the brands that do survive will have done so by creating engrossing experiences.”

In order for the brands to maximize the potential of offline stores effectively, they need to provide engaging experiences to keep the consumers hooked. For example, Sephora combined activities that are completely unrelated to making a purchase into its app, while Samsung’s pop-up store was set up to allows consumers test its technology and experience rather than to focus on sale.

The trend also drives the growth of RaaS platform startups that provide an easy, cost-effective solution to brands wanting to launch physical stores.

In the US, a “Retail as-a-Service” startup b8ta has helped retailers such as Macy’s, Lowe’s, and 15 other consumer brands to set up pop-up stores and physical shops, incorporating technologies and cutting-edge gimmicks to traditional physical retailers.

Chicago-based Leap recently secured $3 million in funding to offer an end-to-end service — that ranges from staffing, experiential design, tech integration, and day-to-day operations — to help digital brands to launch a brick-and-mortar store.

Meanwhile, Fourpost is focusing on providing a ready-to-use retail space for digital native brands looking to open a physical store in the US, lowering the barrier of entry in terms of both capital and time. Each of these companies is tackling the problems that usually came with setting up an offline store and elevate the consumer experience.

“If you shop in one of our stores, you will feel different because we have gone to such a great length to remove the idea of your visit being about buying a product.” – Vibhu Norby, the co-founder and CEO of b8ta.

With over 70 locations, B8ta’s store allows brands to place their merchants and train shop assistants while gaining revenue from space rental and subscription fees from brands; Retail Dive

JD.com spurns the growth of RaaS in Asia

Chinese ecommerce giant JD.com is a big advocate of the strategy.

One of JD.com’s latest initiative to establish RaaS is the partnership with Chinese retailer Better Life. JD.com was also one of the first retailers to develop a mini ecommerce program on WeChat. To date, JD.com has developed and bundled up its marketing, logistics, financial services, and big data as a service and leverage these capabilities to help over 2,000 brands and its merchants.

JD.com also partnered with Google to develop next-generation retail infrastructure solutions by combining JD.com’s supply chain and logistics expertise and Google’s technology strengths.

All of these were the result of JD.com’s mission to go forward by scaling its technology in order to outsource its developments to third-party retailers around the world. Chen Zhang, Chief Technology Officer at JD.com says that making money is not their priority at this stage as he believes that:

“With Scalability, comes profit”

Taking the burgeoning amount of investment coming from China to the region into consideration, it’s only a matter of time for RaaS to kick off in Southeast Asia.

In Indonesia, JD.com has already started the concept on its unmanned store JD.ID X Mart. The store collected data that can be used to understand shopping behavior and optimize inventory, product displays, and other aspects of store management and marketing.

With JD.com’s joint-venture in Thailand, it’s fair to assume that the market will be the next destination for the innovation. And although Alibaba’s Lazada has been quiet on the front, looking at the fierce competition between the companies in the mainland, it seems like a matter of time until Alibaba does so.

Inside JD.ID X Mart in Indonesia. It is JD.com’s first unmanned store outside of China and it is a demonstration of JD.com’s mission to implement RaaS; Pandaily

With the ‘offline is the new online’ trend carried over to 2019, we can expect to see more traditional retailers offering their service and retail space to help online brands expanding their reach and getting more foot traffic in return.

A win-win strategy for the ever-changing landscape of retail.

Chinese ecommerce platform JD is lesser known amongst international audiences, but its mid-annual 618 shopping festival generated almost $25 billion in gross merchandise value this past June. The company has a 33% share of China’s B2C ecommerce market and generates more direct revenues than Alibaba. Google’s latest $550 million strategic investment in the company is the latest in a series of partnerships JD has orchestrated, as it seeks to challenge Alibaba and Amazon for ecommerce dominance in both China and the rest of the world.

JD’s Direct Retailing Model Gives it a Strong Competitive Advantage

JD’s business model is distinct from that of Alibaba’s in that it is a direct retailer – meaning that it purchases inventory wholesale and sells products directly to individual customers, rather than simply acting as an intermediary between buyers and sellers. Approximately 92% of its business comes from direct sales, whereas for Amazon this figure hovers around 50%.

JD stocks its own inventory in its vast proprietary network of nearly 500 warehouses across China, each of which is situated strategically close to consumers to ensure fast delivery. JD also employs an in-house delivery force of over 65,000 warehousing and delivery workers. During the 618 festival this year, JD was able to deliver 90% of its goods within two days.

This dedication to customer service requires a significant amount of capital to sustain, but JD has been able to stand out from its competitors.

JD claws its way up to a 33% market share in an industry where Alibaba was previously thought to be unbeatable.

Richard Liu, CEO of JD.com delivering goods during their ‘618’ Mid Year Sales Source: Internet

The Borderless Retail Alliance

To compete with Alibaba, JD has enlisted the help of numerous partners. In China, this includes internet giants Tencent and Baidu, in addition to its partnerships with the likes of vertical-focused ecommerce platforms Vipshop and Meili Inc. Tencent owns 18% of JD’s shares and partnered with JD to invest $864 million in China’s third largest ecommerce platform Vipshop this past December. JD made its claim to fame by selling electronics to a predominantly male user base, and such partnerships with Vipshop and Meili, both of which sell a combination of apparel and cosmetics, help the company appeal to a broader female base.

America’s largest retailer Wal-Mart owns 10% of JD’s shares and has been a strategic partner since 2016 when it first sold its ecommerce division Yihaodian to JD Google, despite having a limited presence in the China market, announced a $550 million investment in JD this past June. Both of these strategic partnerships will be key as JD prepares to expand its business overseas.

Google’s Data Will Help JD Catch Up Overseas

Ecommerce platforms such as JD spend an enormous amount of money on search ads every year, to ensure that their products show up in search results. As they grow bigger, however, internet users can go directly to ecommerce platforms to search for products, which presents a threat to Baidu’s and Google’s search ads business. Partnering with JD allows Google to hedge against this problem.

Google’s extensive ecommerce data can give JD better insights into the buying behavior of users, and JD will have a better idea of how to target users via Google’s broad ads network. This will be a significant asset as it attempts to catch up with local competitors in Southeast Asia, Europe, and the US.

Wal-Mart and JD Make the Perfect Couple

US retail giant Wal-Mart has been partners with JD since 2016 when it sold its online business Yihaodian to JD in exchange for a 5% equity stake worth $1.5 billion. That stake has since grown to 10%. In China, Wal-Mart leverages JD’s marketplace and users to sell directly to Chinese consumers online, complementing its offline business in the country. For JD, Wal-Mart is a key supplier for the JD Daojia platform, which is an on-demand delivery service that delivers groceries to customers within a one-hour time frame.

JD also sells its goods offline in Wal-Mart stores and uses them as distribution centers from which last-mile delivery can be carried out. Since JD is an online retailer without many offline retail stores, the addition of Wal-Mart’s physical locations across China is a considerable asset as it looks to expand its user base via omnichannel marketing strategies. JD is planning to expand to the US market by the end of this year, and the potential expansion of this partnership model means that JD may have a chance to catch up with Amazon, especially since the two can leverage economies of scale and source goods in bulk.

JD Dao Jia partnered with Wal-Mart on sales promotion Source: Internet

JD Goes Global

With an impressive set of partnerships under its belt, JD has the capability to challenge Alibaba and, potentially Amazon, on the global stage. JD has already set up international ecommerce site Joybuy in Spain this year and is looking to expand to Germany. JD has also launched local websites in Thailand and Indonesia under the JD brand. JD has publicly announced its intention to enter the US market by the end of 2018, with a beachhead office located in Los Angeles. The company plans to undercut its competitors and also help Chinese brands like Xiaomi expand to the US.

While it is still early stages, what is certain is that JD’s global expansion will be very interesting to watch going forward.

Written by Don Zhao, Co-founder and Executive Director of Azoya 

 

What’s Pinduoduo?

Pinduoduo, or PDD, is a social commerce app founded by Colin Huang, an ex-Google engineer, in September 2015. Only a couple of years old, PDD has become the fastest growing ecommerce company in China. It raised $100 million in 2017, is backed by China’s Banyan Capital and Tencent, and valued at a whopping $1.5 billion.

Source: Crunchbase

As of Feb 21, 2018, PDD ranks #3 overall in the Chinese iTunes app store ranking for free apps, after popular apps like Tik Tok (Douyin) and WeChat, and ahead of other shopping apps like Taobao. PDD went from 100 million yuan ($16 million) GMV a month in early 2016 to 4 billion yuan ($630 million) GMV a month by 2017, putting it in fourth place behind Alibaba, JD and Vipshop.

How does Pinduoduo work?

Users can download the PDD app or access it within WeChat. Like any ecommerce platform, PDD offers products across a wide range of categories from food to fashion. However, unlike Tmall and JD, PDD incentivizes users with discounts to invite friends to buy in groups.

 

For example, one container of Similac Advance Infant Formula Powder costs 59 yuan if you buy alone but only 35.5 yuan if you can get one other person to buy it too. In the screenshot below, a total of 1,822 pairs have “group-purchased” this item already.

 

 

In addition to group discounts, PDD also incentivizes customer acquisition. Getting users to follow the PDD WeChat Official Account, install the app, and sign up via WeChat login will earn them free products.

PDD also offers cash red envelopes worth 5-20 yuan to users for each friend they get to download the app and register. The entire system is then gamified through a public leaderboard.

Wait, is this new? Didn’t Groupon invent social commerce?

Groupon did arguably pioneer the group buying concept. In its early days, a certain number of users had to sign up for the same deal in order for everyone to receive the voucher. But unlike PDD, there wasn’t a direct incentive; users had to sit back and wait for anonymous users to tip the scale.

This mechanism was quickly abandoned to scale faster with minimum thresholds that acted more like gimmicks.

Groupon was labeled “social commerce” at first but in its later years, lost its social aspect.

Source: wiredtech on Flickr.com

Let’s take a step back and look at the definition of social commerce, according to ConversionXl:

“Social commerce is defined as the ability to make a product purchase from a third-party company within the native social media experience.”

Groupon emerged in the pre-mobile age of 2008 when most consumers still transacted via desktop, especially in the company’s US home market. Back then, less than 1% of ecommerce transactions were via mobile acquisition channels.

In addition, the company’s main distribution channel was email newsletters, a slow and high-friction medium and payments weren’t seamless either as users relied on a credit card or PayPal.

Now looking at 2016 in China – PDD’s first full year in operation – WeChat is the country’s dominant “super app” and leading medium to socialize online with 889 million Monthly Active Users (MAUs) by year end.

71% of ecommerce now takes place on mobile, creating a flattering backdrop for the rapid rise of PDD, which started out as an app on WeChat.

Paying for products on PDD is also remarkably easy because the app makes it automatic. After the first payment, users can opt for one-click payment via WeChat Pay that don’t require passwords.

Desktop usage, clunky email newsletters, and credit card payments limited Groupon’s true social commerce potential. Where Groupon failed, PDD is succeeding because of an ecosystem of mobile-first users and WeChat’s features that make it a super app.

Will PDD come to Southeast Asia?

Why not? Southeast Asia ecommerce is already being carved up by Alibaba and Tencent. Lazada and Tokopedia, two companies owned and invested in by Alibaba, dominate the B2C and C2C space on one end and Tencent-invested JD, Shopee, and Go-Jek are on the other end.

With Southeast Asia’s horizontal ecommerce market being consolidated into a few properties like Lazada, Tokopedia, JD and Shopee, there isn’t as much opportunity in the space as before.

New ecommerce players have to focus on dominating a specific, vertical category or provide a competitive advantage through means other than outspending peers in advertising and/or coupon subsidies.

This is where a model like PDD fits snuggly.

It also helps that one of PDD’s biggest investors is Tencent, which already has its eyes set on the rapidly growing Southeast Asian market.

Will the PDD business model work in Southeast Asia?

To determine if the PDD model would work in the region, we need to identify the criteria that were conducive to its success in China:

1. Lack of distribution channels / expensive distribution channels

If you strip away all the hype, PDD’s competitive advantage is in its customer acquisition strategy. Instead of relying on expensive channels like display advertising or paid search (e.g. Baidu ads), PDD is paying its users to get more users. For example, CPCs alone on Baidu can range from 5 to 25 yuan. Note these are clicks, not even users acquired.

Southeast Asia (excl. Singapore and Malaysia) is very similar to China in terms of lack of channels, due to a similar “no-tail” ecosystem. Whereas entrepreneurs in China had to pick their poison between Baidu, Sina and Sohu back in the day, startups in emerging Southeast Asia are limited to Facebook Ads, Google Search, and portals like Detik in Indonesia and Sanook in Thailand.

Early entrants like Lazada took advantage of low cost-per-clicks (CPCs) back in 2013 but given the raging ecommerce “bloodbath”, online ad CPCs have gone through the roof.

Having saturated online channels, Lazada started exploring offline advertising channels like TV and out-of-home media.

Others like Pomelo Fashion tapped into physical stores as a more cost-efficient way to acquire users and simplify last-mile logistics.

PDD social and viral customer acquisition strategies could work quite well.

2. High mobile commerce penetration

The majority of ecommerce transactions in China now take place on mobile. In 2016, 71% of ecommerce GMV was on mobile. In the US, this number was only 20% in 2016.

In Southeast Asia, companies like Lazada and Shopee today see over 65% of their orders coming from mobile (with 21.6% using both mobile and desktop to shop), according to a recent survey by ecommerceIQ.

Needless to say, high mobile penetration in Southeast Asia along with high mobile ecommerce usage will provide a fertile ground for a business model like PDD to gain traction here.

3. Frictionless mobile payments

One of the drivers of PDD’s success is its seamless payments through WeChat Pay.

This will be a challenge for PDD in Southeast Asia as only Singapore and Malaysia are credit card dominated whereas the rest of the region is mainly a cash-on-delivery market.

Source: ecommerceIQ

Despite efforts to come up with a universal mobile payment standard, no one has succeeded as of today. Efforts like Sea’s AirPay, Ascend’s True Pay, and LINE Pay have hit a wall due to lack of distribution, lack of use case, and a plethora of other issues.

Right now, most eyes are on Go-Jek’s Go-Pay, which has a massive distribution channel by leveraging Go-Jek’s 40 million install base and 10 million Weekly Active Users (WAUs). In addition, and more importantly, Go-Jek addresses emerging Southeast Asia’s unique lack of both credit card and bank account penetration — users are able to top up their Go-Pay accounts by handing cash to Go-Jek drivers that essentially act like mobile ATM deposit machines.

While still a poor-man’s WeChat Pay, Go-Pay offers hope for business models like that of PDD to thrive in Southeast Asia.

4. Attachment to popular social platform

Without the WeChat ecosystem, PDD wouldn’t have been the company it is today. Being embedded in WeChat, PDD was able to quickly get massive distribution by tapping into the potential 889 million MAUs of WeChat.

In Southeast Asia, Facebook, Instagram, WhatsApp, and LINE are highly popular, however, none are considered super apps that offer seamless integration.

The closest to WeChat in Southeast Asia would probably be Indonesia’s Go-Jek.

While Go-Jek hasn’t entered ecommerce yet (it’s positioned only as a services marketplace and offers delivery for partners through its GO-MART product), it wouldn’t be surprising if PDD decided to leverage the Go-Jek platform, given the similarities to WeChat in China. Like PDD, Go-Jek also counts Tencent as an investor.

With an estimated third of ecommerce in markets like Thailand happening on Facebook, Instagram and LINE, the user behavior of buying through social channels already exists.

5. Access to cheap product sourcing

If you browse through PDD, you’ll notice that most of the products sold bear similarities to many of those sold on Taobao. In other words, a lot of “mass” and non-branded products. PDD thrives in China because of easy access to a supply of these products manufactured locally.

However, in Southeast Asia, these kind of products (typically sold on social media and C2C platforms) are imported from China, which leaves less margin for PDD to play with in terms of discounts and customer acquisition.

To sum up, emerging Southeast Asia meets several of the criteria behind PDD’s success in China but poses some unique challenges:
ecommerceIQ

What will happen next?

In the analysis, we’ve identified some of the drivers of PDD’s rapid rise in China and also their presence in emerging Southeast Asian markets at an earlier stage.

Given this opportunity, we can expect the following scenarios to play out over the next few months and years:

1. Local and Chinese entrepreneurs will launch PDD clones across the region

Ever since opening up to the world in the 80s, we can describe China having gone through the following three stages, with the third one still progressing as we speak:

1. Made-in-China (1980-2000)

China perceived as manufacturing base for (often cheap, low-quality) export products

2. Copy-to-China (2000-2015)

Chinese entrepreneurs, some foreign educated, bring back models that worked in the US, e.g. Search (Google -> Baidu), Portals (Yahoo -> Sina, Sohu)

3. Copy-from-China (2015-2030)

Birth of unique Chinese Internet business models (e.g. bike-sharing, payments, live streaming, social commerce, O2O). Increasing media focus on Chinese tech innovation and locals outside of China looking for Chinese models to copy

We are witnessing stage 3 happening right here in Southeast Asia. Below is a Thai post on Facebook looking to recruit staff to work on what looks like a PDD clone:

It doesn’t have to be local talent copying PDD from China to Southeast Asia. With the influx of Alibaba, Tencent and JD into the region, there are plenty of Chinese employees who’ll be noticing the similarities between Southeast Asia today and China, and jump on new opportunities.

2. PDD will enter Indonesia through Go-Jek (helped by common investor Tencent)

If PDD were to follow Alibaba and Tencent’s steps and enter Southeast Asia, we expect them to join forces with Go-Jek. By embedding itself inside Go-Jek, PDD is executing the same game plan that led to its rapid initial growth within the WeChat ecosystem. Fostered by a shared investor — Tencent — Go-Jek would be the perfect launch partner for PDD in Southeast Asia.

3. Existing players will adopt the PDD business model to compete against horizontal ecommerce plays

Local ecommerce players like MatahariMall, Konvy, and Orami could pre-empt PDD by adopting its customer acquisition strategies to compete with regional giants like Lazada and Shopee.

For Konvy and Orami, two female-focused ecommerce platforms, this move could make a lot of sense since the majority of PDD’s users in China are female, over 40 year old, and living in smaller cities.

Play on players.

This is Part 2 of an article by Jeffrey Towson about the aspects of Alibaba’s “new retail” strategy.

In Part 1, I discussed uni-marketing and how the view of new retail for merchants and brands is very different than the view for consumers. A quick summary:

  • For consumers, the view is great. They are going to get what they want, where they want it and when they want it. New retail is a purification of demand.
  • For Alibaba, the view is spectacular. Their huge online marketplace is going to be merged with parts of the physical marketplace. The number of users and the amount of activity on their platform is going to increase dramatically.
  • But the view for merchants, brands, and retailers is more confusing. New retail upends many of their businesses, strategies, customer relationships and maybe even their brands.

In this part, I take an asset and resource view of all this, which I think is a much easier way to understand it.

Point 1: Digital competition is a lot about key resources, which are usually intangible assets.

You can look at competition with various frameworks.

  • Michael Porter famously described five economic forces, which tend to play out over the longer term in more stable industries.
  • Columbia Business School Professor Bruce Greenwald argued that one force, competition, is actually far more important than the other four.
  • Warren Buffett focuses mostly on competitive advantages and their durability.
  • Wharton’s George Day writes about dynamic competition and the constant move and counter-move of many businesses.

I focus mostly on digital competition (note: China is the global epicenter for this). This is a lot about how new digital tools and data are changing the competitive dynamics of traditional industries. For example, retailers traditionally compete on fixed costs and fixed assets (lots of stores, get bigger than your competitor). But ecommerce has a different dynamic. There is a lot more focus on the degree of participation of consumers, merchants and other users.

It can get confusing. And a useful approach is just to take a resource and asset view. Stop looking at the economic forces and competitive advantages, and just look at the assets used to compete. One company has 10 factories and the other only 5. One company has a famous brand that everyone knows and the other is unknown outside of one region. In digital competition, this usually means comparing intangible assets like technology, IP, captured customers, business linkages, and data.

If you take an asset view of competition in ecommerce and new retail, I think there are three big things that jump out as particularly important in a marketplace platform. Note: Alibaba is a marketplace and a pure digital competitor. JD is more of a hybrid of a marketplace (enable transactions but don’t take inventory or be the seller of record) and a direct retailer (buy and sell the goods yourself). For marketplace platforms (like Alibaba and VIP.com), the resources that matter are:

  • Captured online consumers. Their number, time spent, money spent and their participation on the site. And your degree of capture.
  • Captured online merchants and brands. Their number, their percent of business on the site, the integration of their operations into the site and their marketing activity on the site.
  • Content creators. Although this can be done as another type of retail (like Amazon’s digital media) or as an audience-building platform (like Youku)
  • Data from ecommerce, entertainment, social media and other sources.

These assets (both the users and the degree of activity) on the platform enable virtually everything else.

  • You can add new services and products.
  • You can add new types of revenue streams (transaction fees, marketing services, operational services, gifting, advertising, etc.).
  • And hopefully, you can use these assets to build competitive barriers. Network effects are the most desired. But there are also data network effects, MSP advantages, softer data advantages and linked businesses.

I view Alibaba as a particularly powerful version of this with three interconnected platforms: a marketplace platform, an audience-building content platform, and a payment platform.

These core assets cost a certain amount of money to acquire (plus time and difficulty). It’s a useful way to look at a company. But it’s also important to remember that these asset costs are different from the value they can then create. Similarly, the cost of a factory is different that the market value of the products it creates. And the cost of a college degree is different than how much you will make from it.

If you take an asset view, the sequence for marketplace platforms is usually:

  • Get an initial critical mass of users, merchants and data. There is usually a chicken-and-egg problem to get started (to get the consumers you need merchants, but to get merchants you need consumers).
  • Grow the number of users and their activity, mostly by data and digital tools. In marketplaces, personalization and curation are two of the big guns for this. Ancillary moves into new products and services or into new geographies (cross-border ecommerce) also really work.
  • Try to protect the platform with network effects, linked businesses, softer advantages and assets that are difficult to replicate.

Point 2: How these assets change over time is really important.

Alibaba is a virtual marketplace (so far). There are lots of supporting and complementary services (entertainment, payments, logistics / delivery, credit, etc.) but the core business remains connecting consumers with merchants and brands. And then making money from their transactions – and also from the marketing and other spending by merchants and brands on the platform. It’s a virtual shopping mall (Tmall) and a virtual trading bazaar (Taobao).

So what is the big difference between the intangible assets that create virtual marketplaces and the tangible assets that create real shopping malls? One of the most important differences is how these assets change of time.

If we were looking at a real shopping mall or bazaar, we would depreciate the PP&E over time. There would ongoing capex to maintain and maybe additional to grow. And in times of higher inflation, these assets can be a big problem as they really increase the cost structure. Plus there is also the real estate and land price aspects, which can be particularly important in downtown locations and in places like China.

But a marketplace made of intangible assets doesn’t necessarily decay over time. It certainly doesn’t straight-line depreciate. You may have to spend to keep it running (a type of maintenance capex, operating cost and customer retention cost) and for required upgrades – but the economic goodwill (not accounting goodwill, which is nonsense) should increase over time. And it doesn’t get hit by inflation (although labor costs can be a problem).

The same process can be true for other businesses that rely on intangible assets. Share of consumer mind (a Buffett term) is a big deal for Coca-Cola. Intellectual property and data / claims history can be important in technology and insurance. And so on.

But two differences I think about for intangible assets versus physical assets are:

  • Intangible assets can increase in real economic value over time – and often quite powerfully. This is good news.
  • Intangible assets are easier to replicate and often do not offer the types of competitive protection you get with physical assets. This is bad news (and why network effects and soft advantages can be critical).

Here’s how this can play out in marketplace platforms:

  • The more customers that come, the more valuable (and necessary) it is for merchants and brands to participate and compete with each other through marketing.
  • The more stores that arrive the more options consumers have and the richer their experience.
  • The more transactions and data from transactions, browsing and others sources (entertainment, etc) the more personalized and engaging the experience. This can enable more spending and engagement.
  • The more this ecosystem grows, the more difficult it is for a new competitor to replicate the entire ecosystem. The assets grow organically and become harder and harder to replicate.

Note: Parts of this can be described as a network effect. But it’s more about the degree of participation. Most MSPs do not have network effects and derive their value from their intangible assets.

Additionally, you get some competitive protection from an ability to cross-subsidize different parts of the platform (girls get free drinks at bars, men pay more). You can create complementary networks (Taobao helps Alipay and vice-versa). Yu can get linked businesses (Amazon’s cloud business subsidizes its logistics). And so on.

Question 1: How does “new retail” change a resource view of ecommerce?

This is the question I have been thinking about a lot. And a lot of this article is me thinking out loud.

But new retail is clearly a massive jump in the assets on the marketplace platform. And while all the talk is about physical retail, is Alibaba actually adding physical assets to their platform? I don’t think so. I think they are just leveraging in the intangibles of the tangible assets.

To me, new retail looks like it adds two big assets to the platform that Alibaba doesn’t have today. These are offline sales data and physical retailers, merchants and brands as users.

Take the “new retail” initiative in convenience stores. Alibaba is providing digital tools that transform mom-and-pop convenience stores in China. They plug in the tools and the stores gets three basic benefits.

  • Online customers can be driven into the stores from the local area (maybe). The merchant gets access to local online customers the same way an online merchant does. And they can market to them. Although in this case you are fighting for the customers in your neighborhood, not nationally. And you are fighting against other digitized local merchants, not every merchant in China.
  • They get digital tools that upgrade their payments, inventory, and supply chain. They get a bit of a store tech upgrade. Ideally, they get more efficient operations. Although adopting these tools also creates switching costs.
  • They get data that helps them choose their inventory for what people in that neighborhood actually want. This is hugely important and is part of Alibaba’s “uni-marketing” initiative.

And what does Alibaba get?

Well, the physical merchant just became as user in their marketplace platform. They add the transactions, the user and the data of the physical merchant without adding the physical assets. And they also probably got some new offline customers, but most everyone in China is already on Taobao.

So Alibaba is not going to own a lot of stores, such as Hema supermarkets or convenience stores. They are going to perfect the various business models and franchise out the system, the data and the technology tools. And for the hypermarkets, they will likely put that in a separate, associated and asset-heavy partner. And they will remain the data / tech partner for this, as they has done in logistics with Cainiao. The core marketplace, the engine of Alibaba, is going to remain tangible asset-lite and intangible asset-rich.

Now imagine they roll this out to 100,000 convenience stores in China? How many of those stores can be moved onto their ecosystem in this way? And then supermarkets? And then department stores? With a resource view, the size of the “new retail” opportunity is massive

Question 2: Who will own the customers in “new retail”?

This strikes me as a big question. Merchants are on Taobao and Tmall because they have to be. That’s where the customers are. They may also have their own branded website but they are also on Taobao and Tmall. And they can drive their customers to their stores and their own websites from here to a certain degree. But if they leave the Alibaba ecosystem customer retention is a problem. Famous companies like Zara and Apple have their own brands and customers. But most small merchants do not have this type of loyalty.

So this raises a question for new retail: if a physical merchant unplugs from the platform, do they take their customers with them? Or do those customers start getting directed to a different convenience store down the street? Who owns the customer in new retail?

WRITTEN BY: Jeffrey Towson

Recently in the news, Starbucks opened a new Roastery outlet on Nanjing Road in Shanghai last week begging the question, so what?

There’s nothing surprising about a new Starbucks in China, except this is now the world’s largest one at 30,000 sqm, twice the size of its counterparts in the US and will be the first-ever to incorporate in-store augmented reality (AR), thanks to China’s most influential internet company – Alibaba.

What can consumers do in this store powered by Alibaba’s technology and Mobile Taobao app?

  • Access a detailed map of the floors and menu with Alibaba’s location-based technology
  • Save favorite Starbucks products to their Mobile Taobao account
  • Scan key features around the Roastery to get information on coffee bars, brewing methods via animations
  • Earn a customized photo filter for sharing on social media
  • Ultimately, appeal to the digitally savvy Chinese audience

Sure, China is an attractive market to invest in but what is Starbucks planning with its“most ambitious project ever”?

An augmented reality app is used in the new Starbucks Roastery in Shanghai, China. Photographed on Friday, December 1, 2017. (Joshua Trujillo, Starbucks)

Slow Growth Around the World

Starbucks second quarterly earnings reported $5.29 billion, short $120 million of the expected $5.41 billion. While the coffee giant has found great success in its 46 years because of its consistent and convenient services and products, the company has felt the squeeze of rising competition from convenience stores and fast-food chains like McDonalds aggressively improving the quality and pricing of its beverages and menu.

And so, to capitalize on a blue ocean, the company decided to focus on a region where coffee culture is only emerging

Revenue from Asia Pacific makes up almost 15% of Starbucks’ annual revenue, a 5.5% increase from five years ago.

It’s obvious to us that the holding power of China for Starbucks is going to be much more significant than the holding power of the US,” — Starbucks’ founder and Chairman Howard Schultz.

As the Chinese economy grows, Starbucks’ success does as well in a country where disposable incomes increase and the younger generation is attracted to quality-driven and unique brands that speak to who they are.

“For coffee, there’s a certain kind of ‘in-the-know’ from consumers who seek out these good boutique shops,” said Jack Chuang, partner at OC&C Strategy Consultants who studied the Chinese coffee market.

Although still predominantly a tea-drinking nation, China is rapidly developing a taste for coffee, an activity previously thought was for the affluent or Westerners.

Jack Ma’s New Retail Vision Reinforced Through Coffee

What does Alibaba get out of it?

It was as recent as Single’s Day when Jack Ma announced the ‘New Retail’ concept that aims to blur the line between conventional brick-and-mortar retail and ecommerce with the help of technology and data.

In the coming years, we anticipate the birth of a re-imagined retail industry driven by the integration of online, offline, logistics and data across a single value chain,” — Jack Ma.

Alibaba’s HEMA Supermarkets already blur the line where consumers can shop for groceries online via the HEMA app and receive them within half an hour, or scan barcodes at the store, pay via the app, and set up delivery.

A shopper can easily scan barcodes in the store and pay for the products through the HEMA app before having them shipped home. Source: Alizila

Partnering with a highly influential brand like Starbucks and providing them with the right technology is Ma’s push for even faster digital adoption..

A survey has shown that 40% of consumers are willing to pay more for a product if they could experience it through AR, and 71% claim that they would shop at a retailer more often if they offered AR.

Seems like Starbucks and Alibaba will be brewing some heavy money in China.