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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 

 

Indonesia is arguably the most important internet market in Southeast Asia as a result of its sheer size, emerging middle class, and digitally savvy population.

The annual global digital ecosystem report by We Are Social says Indonesia has 132.7 million internet users, which points to a penetration rate of 50% of the population. 130 million of these use some form of social media, showing how plugged in Indonesians are when it comes to documenting their lives online or using platforms like YouTube to consume content.

Source: We Are Social

With half of the Indonesian population still offline, there’s massive potential for ecommerce ventures, smartphone manufacturers, as well as brands building products to appeal to millennials in the country.

Other countries in Southeast Asia – Malaysia, Singapore, Thailand, and the Philippines for example – may have higher internet penetration rates but their smaller populations can’t compete with Indonesia in terms of volume.

It’s these numbers that have forced investors to take notice.

study by Google and AT Kearney indicated that venture capital activity in Indonesia has grown 68X in the past five years, driven mainly by growing interest in ecommerce and ridesharing.

Total VC activity in the first eight months of 2017 was recorded at US$3 billion – more than double the number for the entirety of 2016, which was US$1.4 billion.

The same study predicted the volume of investments in Indonesia will continue to grow in the foreseeable future because VC investment as a percentage of GDP in Indonesia is actually lower than its Southeast Asian counterparts.

Source: Google / AT Kearney

What are Indonesians doing on the web?

Indonesian residents love the internet. 79% of survey respondents in the We Are Social report said they logged on to the web at least once a day. The average daily time spent online was almost 9 hours with approximately 5 hours dedicated to social media and streaming music.

Source: We Are Social

The majority of web traffic in Indonesia comes from mobile phones, facilitated by the availability of cheap smartphones to the Indonesian population coming online for the first time; sidestepping desktops and PCs directly.

Access to mobile has also caused excitement around fintech as only 36% of Indonesians possess bank accounts and only 3% have credit cards. If e-wallet platforms get it right, there are 125 million mobile internet users waiting for easy banking.

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Indonesians are also increasingly using the internet to embark on their product buying journeys. 45% of Indonesian netizens search online for a product or service to buy with a similar number landing on an online store and 40% make ecommerce transactions at least once a month.

Source: We Are Social

Fashion & beauty categories attract the highest amount of spend online, almost double that of electronics despite having a lower basket size than consumer appliances like mobile phones, cameras, and wearable gizmos.

It was estimated that Indonesians spent close to US$10.3 billion online in 2017.

Source: We Are Social

Dizzying statistics aside, the Indonesian market still has plenty of space to grow.

Expect heightened competition in the years to come as incumbents jostle for space and keep raising large war chests to outmuscle opponents. VCs, especially with an entrenched position in the market, can’t afford to back down now – there’s too much skin in the game for them to consider any hasty exits.

Recent developments already demonstrate how investors are taking a long-term view of the market. Alibaba injected over a billion dollars in local ecommerce marketplace Tokopedia last year. JD.com, Alibaba’s direct rival in China, has opened fulfillment ccenters across Indonesia with a view to keep expanding. And homegrown unicorn Go-Jek is rapidly transforming into a Wechat-esque ‘super app’ with users able to do everything from hail motorbikes to get their plumbing fixed, and pay for it via e-wallet.

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

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.

Image source: Sohu

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.

Tencent and Alibaba share price increase over last 7 years compared to Amazon and NASDAQ composite
Source: Yahoo Finance (December 4, 2017)

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

Image source: Getty Images

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.

Amazon fanboys celebrated the initial launch of a scaled down, poor man’s version of Amazon — Amazon Prime Now — offering a measly one million household items and daily essentials.

“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)

Source: SimilarWeb, World Bank

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.

Image source: Pomelo

“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.

Image source: Love Bonito

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.

Alibaba’s Hema supermarkets in China. Image source: Quartz

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”.

Revolutionary ecommerce platform funded by ICOs or ponzi scheme?

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 Thailand, Ascend Group put its assets WeLoveShopping and WeMall on life support to focus on fintech.

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.

Source: Global Findex, World Bank

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.

Top up your Go Pay mobile wallet by handing cash to a Go-Jek driver

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.

There were even rumors of Zalora Indonesia exiting to local retailer MAP, which were swiftly denied.

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.

Althea private label product sold on their website

“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.

 

Shopee Malaysia offering wholesale feature

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).

Written by: Sheji Ho, aCommerce Group Chief Marketing Officer

Opinions expressed are solely my own and do not express the views or opinions of my employer.

As more Thai people shift online to conduct their shopping – 14 million by 2021 – there is little doubt that the country will reach its projected ecommerce potential of over $11 billion.

The government’s roadmap for Thailand 4.0 is another boost for the digital habitat as investors often see bureaucracy in the region as a hinder to business.

So now the path is smooth to promote growth and money is coming in from the Chinese, how has the ecommerce landscape in Thailand changed over the last year?

1. Strong players emerge in fashion ecommerce  

After acquiring Zalora in Thailand and Vietnam last year, Central Group finally shed the old image to relaunch as LOOKSI earlier in June this year in attempts to revive the brand.

The change wasn’t only in the name, fashion labels housed by Zalora were cut by half to about 1,000 brands. The company also moved away from discounted products and began offering seasonal products instead.

But it was Thai-bred fashion startup Pomelo that created buzz after raising a $19 million Series B led by Chinese retail giant JD.com and participation from ally, Central Group.

Pomelo currently operates local ecommerce websites in Thailand and Indonesia but with new funds, the company is eyeing further expansion in Southeast Asia and even Europe. It’s also a firm believer in a multi-channel retail strategy, launching a offline store in Bangkok’s fashion hub Siam to offer click & collect

2. Global fashion and beauty brands get local

This year, more notable global brands launched local ecommerce websites to penetrate the Thai market.

Global fashion retailer Zara officially unveiled its ecommerce website and mobile application earlier this year, and integrates online and offline shopping by providing a pick-up service and return in-store for online purchases.

Thailand ecommerce landscape 2017

Thailand ECOMScape in 2017 (right) see more beauty brands launch their own ecommerce website than in 2016 (left).

Global beauty brands such as Lancome, Biotherm, and YSL have also launched local ecommerce websites in hopes of capturing the growing online segment.

3. The long-standing battle for logistics dominance continues

To talk about the rise of online shopping in the country isn’t complete without mentioning the vital and often forgotten pieces of the ecommerce value chain such as logistics.

The red ocean sector still draws new players despite the handful of names already dominating the space i.e. lalamove, Kerry Express, etc. One of the new additions includes Singapore-headquartered online food and grocery on-demand provider honestbee.

honestbee launched its logistics service called Goodship earlier this year to capture the growing demand, focusing on last-mile and same-day delivery services.

Thailand Ecommerce landscape 2017

General Manager of honestbee Thailand Bounthay Khammanivong at the Goodship launch.

Singapore-based NinjaVan also entered the Thai market in August and hopes to raise a $60 million Series C round. Who can bleed the longest?

4. JD gets its grips on Thailand

Chinese companies have certainly made some aggressive moves in Southeast Asia, and JD.com has chosen to make waves in Thailand this year.

The company announced a $500 million joint-venture with Thai conglomerate Central Group earlier this year that will be spent on ecommerce and fintech development, as well as promising the latest technologies to woo the country as its hub for Southeast Asia.

The ecommerce lovechild of the joint-venture, called JD Central, is expected to launch by April next year.

Thailand is JD’s second major investment outside of China after plans to win Indonesia hit a roadblock. The company lost the bid for leading C2C player Tokopedia to Alibaba and its own ecommerce site JD.id has yet to push top five in the country in terms of web traffic.

Thailand Ecommerce landscape 2017

Are we missing any key players or do you have an opinion on the 2017 Thailand ECOMScape? Let us know via Linkedin | Facebook | Twitter

Download the high-resolution of ECOMScape Thailand 2017 here.

Here’s what you should know:

1. Indonesia is the largest Instagram users in APAC

Instagram claims it records more than 45 million active users every month in Indonesia and a user growth of more than 100% since last year, from 22 million in early 2016 to 45 million as of July 2017.

Instagram has 700 million active users globally and Indonesia is one of its most exciting markets with the most active users for ‘Instagram story’ feature, using it twice more frequently than the average user. The company also has the largest Instagram community in Asia Pasific.

 However, Facebook remains the most favored social media platform for Indonesians, where it is also the biggest Facebook users in Southeast Asia.

Read the full story here.

2. Walmart and JD.com launch an omni-channel shopping festival

Walmart and JD.com aim to intensify integration of bricks-and-mortar stores with ecommerce platforms through their launch of a new omni-channel shopping festival on August 8 in Mainland China.

The event will be supported by their expanded cooperation to combine domestic supply chains, operating platforms and customer resources.

The JD-Walmart 8.8 shopping festival is expected to help Walmart extend its reach to the 99% of the country’s population covered by JD.com’s delivery network.

With their combined resources, the two firms could “define the future of retail in China”, said Carol Fung, the president for fast moving consumer goods at JD.com

Read the full story here

3. Malaysia Digital Economy Corporation will launch ecommerce academy

Malaysia Digital Economy Corporation (MDEC) chief executive officer Datuk Yasmin Mahmood said an ecommerce academy tailored to the industry would be launched later this year.

The initiative is important as Malaysian retail industry is the largest segment within the small and medium enterprises’ (SMEs) market. She was heartened by the growth of Malaysian SMEs’ online presence to 26% last year from 7% in 2014.

The Internet is also disrupting business models that rely on the ownership and control of physical infrastructure.

“Digital innovation is an opportunity first and foremost, but also a threat if not embraced,” she added.

Read the full story here