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Amazon’s rapid expansion into private label brands

Earlier today, TechCrunch published an article titled “Amazon to Expand Private-Label Offerings—From Food to Diapers” detailing Amazon’s successful push into private label brands covering lucrative categories ranging from batteries, mom & baby to even perishable food items. The concept of retailers selling their own private label brands has been around for ages, mainly adopted by grocery chains with the goal to increase margins for often low-profit consumer packaged goods (CPG) categories. It’s not so much players like Amazon are doing this but how and why they’re doing this that should ring some alarm bells with brands.

The ultimate bait and switch

Global ecommerce giants like Amazon and, increasingly, local Southeast Asian players like Lazada and MatahariMall are offering perks to entice brands to open stores and sell through their platforms. This strategy resembles Ladies Night at clubs, where women are offered free drinks to indirectly lure men, who, more often than not, end up with a headache, alone and having burnt a hole in their pocket at the end of the night.

With aggressive promotions and subsidies from their hosts, brands often see quick short-term gains in online sales. The extreme example here is 11.11, a man-made online shopping festival during which retailers compete in the Discount Olympics. Obviously, brands benefit from spikes in sales but little do they know that they’re actually selling their souls in the long-term. It’s like crack, it makes you feel great for a while but sooner or later it’s hollowing out your body.

With the massive amounts of data generated on a day-to-day basis, these ecommerce platforms can easily identify consumer trends, such as best selling products and categories beyond what brands are able to see themselves. This data is then leveraged by retailers to develop and introduce their own private label brands to compete with the brands they partnered with in the first place.

Once launched, these platforms could favor their own white-label brands by giving them more visibility through favorable product placements as well as top rankings on internal search result pages.

The bigger picture

Players like Amazon and Alibaba’s Tmall aren’t really traditional ecommerce retailers. Their main objective is to use competitive pricing, often subsidized, on retail products to acquire more and more users, which they then monetize through other means such as Amazon Prime subscription fees for Amazon and onsite advertising and Alipay transaction fees for Tmall.

Amazon’s new CPG brands like Happy Belly and Mama Bear are only available to Prime members in a move to incentivize joining its $99-a-year unlimited shipping program that’s fueling Amazon’s retail growth behind the scenes.

In a post-Alibaba acquisition world, ecommerce power-players like Lazada could potentially increase awareness of their own private label brands through better placements on their marketplace, eventually forcing other brands to pay more for advertising to rank higher and get traffic.

With private labels, Amazon and the likes of Lazada also have more “room” to play in terms of pricing, allowing them to maintain sustainable low prices, keep driving more users and spinning the flywheel.

Strategies for brands

Brands like P&G, Unilever and Nestle should look at ecommerce marketplaces as a relatively easy way to test selling online but in the long-term, brands are arguably better off selling direct-to-consumer where they have full control of the brand image, customer experience and, most importantly, user data.

A case in point is Coach. The luxury brand was one of the first brands to set up shop on Tmall in China but recently closed down its official flagship store, leaving the brand with only a brand.com and WeChat presence. Many luxury brands have expressed concerns about the mass-market image of some of the bigger marketplaces.

Brands don’t have to pick between marketplace and brand.com only. Some brands like L’Oreal have adopted a multi-channel approach where their marketplace presence generates sales for their more mass and lower price point items whereas their brand.com site sustains long-tail and higher average order value sales.

At the end of the day, marketplaces are a great way for brands to jump into ecommerce. However, brands should be aware of the pros and cons and especially long-term implications of such a decision.

BY SHEJI HO

Amazon just had its greatest quarter ever. Revenues hit $29.1 billion versus the projected $27.99 billion, citing a 28% year-on-year growth. More importantly, it marked Amazon’s fourth consecutive profitable quarter, reporting $513 million in net income, the highest ever in the company’s history.

As a result, Amazon’s stock price peaked at a record $767.74. Over the last two years, Amazon’s stock has more than doubled while those of its traditional retail peers like Macy’s have remained flat or even declined. And this is just the beginning of Amazon’s growing success and decay of the traditional retail model.

A colleague asked me a few weeks ago which stocks I would invest in. “One, Tesla, and two, Amazon,” is what I answered. Little did I know he had regrettably sold his Amazon shares a few years back expecting it to decrease in value.

Why would someone want to invest in Amazon stock at such a peak price? Very simple. Amazon’s dominance and stock value will only keep increasing with the ongoing global structural shift from offline retail towards ecommerce. Ecommerce penetration in the US today is “only” 7.7%.

Can you imagine Amazon’s stock price when this number hits 50%? Never mind economic recessions impacting people’s purchasing power, America’s consumers – Amazon’s home field audience – will keep on buying even if that means borrowing more money from the Chinese.

ecommerceIQ, 10-year returns for major retailers in US

10-year returns for major retailers in US. Amazon stock beat the Nasdaq index by almost 20x over the last 10 years whereas traditional retailers’ stock prices have remained flat or declined. $1,000 invested in Amazon stock in 2006 would have been valued $26,993 today (unadjusted for inflation). Source: Google Finance, August 2016

Short-term, traditional metrics impede long-term strategic vision for traditional retailers

When speaking to traditional retailers across Southeast Asia about doing ecommerce, the question that always comes up in one way or another is, “What’s the Cost of Sales (CoS) for investing into and growing my ecommerce business?”. In ecommerce and the tech space, many of us are familiar with using metrics like customer acquisition cost (CAC), customer lifetime value (CLV), and return on investment (ROI).

However, the metric that resonates most with offline retailers is cost of sales, which is essentially marketing investment divided by revenues. It’s the percentage of revenues that traditional retailers allocate for marketing spend in their annual budgeting.

CoS for traditional retailers often hovers around the 5% mark, driven by legacy organic offline traffic and brand awareness. For ecommerce, especially during the first few years and depending on how aggressively the business acquires customers to grab market share, this number can be somewhere between 50-150%. Obviously, this is much higher than the number traditional retailers are accustomed to and, as a result, is often a major deal breaker for offline businesses thinking of moving into ecommerce.

Fortunately, CoS goes down when the number of SKUs online increase, leading to more organic traffic, higher basket size, and more frequent repeat purchases. In the long run, as ecommerce businesses are able to build up their customer database and find multiple ways to monetize it (more on this later), CoS will decrease and potentially be comparable to comfortable offline retail channel values. aCommerce internal data shows an example of a multi-category online retailer in Thailand starting at approximately 25% CoS and trending down to 5-10% at the end of year one and 5-8% by end of year two.

Unfortunately, most of the traditional retailers in Southeast Asia fail to adopt a long-term vision and never make the initial jump into ecommerce. The lack of talent in the region exacerbates the issue as many retailers have no choice but to put offline retail people into ecommerce positions whose mindsets aren’t wired to think beyond the next holiday season.

In year one, CoS is a whopping 30% but trends down towards 15% by the end of year two, indicating an alignment with offline retail costs in the long term. Source: aCommerce Internal Data, May 2015

In year one, CoS is a whopping 30% but trends down towards 15% by the end of year two, indicating an alignment with offline retail costs in the long term. Source: aCommerce Internal Data, May 2015

Controlling the last-mile: It isn’t about selling more physical products, it’s about who owns the customer

Traditional retailers often see ecommerce as just another store but online. This legacy mindset prevents them from seeing the grand scheme of things.

Unilever didn’t buy Dollar Shave Club (DSC) for $1 billion for better razors, it bought the direct relationship DSC has with more than 3 million male dominant members and the potential to sell them adjacent products and services. Rather than going through retailers like Walmart, Unilever can now go direct to its consumers with all the benefits including higher margins and deeper customer insight.

Alibaba didn’t buy Lazada as a distribution channel for more Chinese products, it bought the direct customer relationships and distribution power to bring in higher margin products and services such as payments and insurance.

It’s only a matter of time before Jack Ma brings his trojan horse Ant Finance and all its associated products such as Alipay (third-party payment platform) and Yu’e Bao (online mutual fund) into Southeast Asia. Alibaba’s foray into insurance through Zhongan and its recently announced partnership with AXA shows us a future where Alibaba can increase its average revenues per user through selling non-physical products online.

Xiaomi pretty much gives away its smartphones for free by selling it at close to bill-of-material prices. Their goal is to amass a huge user base and monetize through selling them peripheral products, plush toys, software, and online and mobile advertising. With over 170 million users as of 2016, Xiaomi has more users than Snapchat (70+ million) and is catching up to LINE (220 million).

The Procession of the Trojan Horse in Troy by Domenico Tiepolo (1773)

The Procession of the Trojan Horse in Troy by Domenico Tiepolo (1773)

Pure-play, Internet first retailers are bringing their game to traditional offline retailers

Traditional retailers still believe they have one unique advantage over pure-play retailers: their physical stores. All the hype and buzz about omnichannel retailing has been a ray of hope for the Macy’s and Walmarts of our world. Even as Macy’s shuts physical stores, it has been ramping up its omnichannel game by transforming the surviving ones into show rooms and mini-fulfillment centres for in-store pickup of online orders.

Today, the company no longer breaks out online sales in its investor reporting, arguing the lines have blurred between website and stores. Walmart, having missed the ecommerce boat, has doubled down on omnichannel as well, expanding its ‘buy online and pick-up in store’ initiatives to around 30 markets in the US.

Unfortunately, even that advantage is slowly being eroded as pure-players are quickly moving offline, not so much for distribution but more as an extension of their online brand.

“By opening stores, brands have increased consumer awareness and subsequent site traffic. These disruptors saw the Internet as a way to establish a proof-of-concept and access cheap capital before making the leap to retail.” — L2 Inc

Warby Parker has 12 retail locations across the US, with plans to open seven more. The same applies to Birchbox, the online subscription beauty retailer, which has a flagship store in SoHo in New York and is planning to open at least two more by end of 2016. Even Amazon launched its first physical store in Seattle in late 2015 with a second one planned for Southern California.

Online player Warby Parker has 12 offline stores in the US.

Online player Warby Parker has 12 offline stores in the US.

Contrary to traditional retail merchandising strategies, these stores typically go beyond the “big head” of products and focus on displaying as many product variations as possible, including “long tail” SKUs. The objective isn’t to sell in the store; the goal is to get customers to experience the brand and the products so they’re more likely to buy online.

“These stores carry little physical inventory onsite and are instead designed to help customers zero in on their ideal sizes and fits. This approach echoes that of the company’s website, giving every single item its own opportunity to shine.” — Erin Ersenkal, Chief Revenue Officer of Bonobos.com

It’s not hard to imagine Alibaba and Lazada opening offline stores across Southeast Asia to serve as marketing and branding channels. With the shortage of online and offline customer acquisition channels and increasing cost-per-clicks in emerging Southeast Asian markets like Thailand, Indonesia, and Vietnam, having your own proprietary offline channels provides a strong competitive edge over traditional retailers as well as online peers.

Debunking the omnichannel advantage myth for traditional retailers, pure-play, Internet first retailers going offline are seeing better store efficacy. Source: L2

Pure-play ecommerce going offline has better efficacy than many traditional retailers. Debunking the omnichannel advantage myth for traditional retailers, pure-play, Internet first retailers going offline are seeing better store efficacy. Source: L2

 

Pure-play, Internet first retailers opening offline stores see a significant lift in organic traffic to their websites. Offline stores are more than just another fulfillment centre; they’re becoming a proprietary branding and customer acquisition channel. Source: L2

Offline stores serve as a branding and marketing channel. Pure-play, Internet first retailers opening offline stores see a significant lift in organic traffic to their websites. Offline stores are more than just another fulfillment centre; they’re becoming a proprietary branding and customer acquisition channel. Source: L2

The role of ecommerce for traditional retailers

Traditional, offline retailers are left with two choices when it comes to ecommerce adoption:

1. Ecommerce as another store branch

Treat the online store as another physical store and benchmark it based on the same cost of sales metrics (Eg. 5%), or in Jack Ma’s terms, “Ecommerce as a dessert, not the main course.” Don’t expect hypergrowth with this approach due to short-term metrics ruling out any big, upfront investment. The long-term threat here is that brands being sold by the retailer will cut the retailer out and go direct to consumer themselves as they get the upside of higher margins, customer data, and transparency. Unilever’s move to buy Dollar Shave Club is to do just that, and razors are just the beginning.

2. Ecommerce as the channel to own customers

Use ecommerce as a scalable and cost-efficient channel in the long term to acquire and own direct customer relationships. Later, use these relationships to sell more products, both physical and non-physical, especially higher-margin products like financial services (insurance, loans) and advertising. By owning more customers, retailers increase their bargaining power vis-à-vis brands that increasingly take the option to cut out retailers and go direct.

Not all retailers in Southeast Asia are settling for ecommerce as just another store branch. Lippo Group’s MatahariMall is one example. With top-down support and a long-term outlook from John Riady, heir to the Lippo empire, MatahariMall.com is quickly becoming the number one competitor to Lazada in Indonesia. Moving beyond only retail, MatahariMall is also going into payments and financial services through a partnership with Grab. In Thailand, Central Group is stepping up its ecommerce game with the recent acquisition of Zalora Thailand and Vietnam, and Cdiscount Vietnam.

It’s evident that in order to survive, traditional offline retailers like Matahari, Central Group, or The Mall Group need to successfully reinvent themselves to take on the foreseeable onslaught of pure-play, Internet-only retailers like Lazada moving into their territory.

Traditional retailers also need to worry about online brands cutting them out entirely and adopting a direct to consumer model, something already bubbling in the works for brands like Nike. However, the best bet is on the smart retailers who can carve their own ecosystem, own customer relationships – most of which are increasingly digital, and monetize through a multitude of ways (eg. insurance, advertising, services) and not by peddling products at increasingly low margins. Then, and only then, will the traditional retailer as a distributor survive the disintermediation brought upon them thanks to technology. 

Don’t suffer the same fate as Circuit City.

By Sheji Ho

Share your feedback to @ecomIQ and @sheji_acommerce

Indonesia and New Zealand have agreed to cooperate in the ecommerce sector following the signing of an agreement between MatahariMall.com and Fishpond. The agreement is expected to open a broader market in this digital era.

“Through this cooperation, we want to be the number one, and our consumers will be able to access more quality products. At this time, we will focus first on the consumers in Indonesia,” Hadi Wenas, the CEO of MatahariMall, remarked here on Monday.

According to Wenas, Indonesia’s current challenge is the shift from offline to online trading.

Once the local products are marketed at the national level, then the global market will be the next target.

“Our focus now is to bring the product into Indonesia and will aim to sell Indonesia’s products in the global market,” Ben Powles, the CEO of Fishpond remarked.

Powles affirmed that this form of cooperation will offer a wide selection of quality products to customers, especially in Indonesia. This time, the focus will be on how to bring quality products to the domestic market.

More information regarding the agreement has not been released, stay tuned for more updates.

A version appeared in Antara News on July 18. Find the full version here.

ecommerceIQ Summit panel

Pioneers of ecommerce in Thailand at the ecommerceIQ Summit in Feb 2016. Tarad, Kiehl’s, Lazada, aCommerce discuss the difficulties of moving online.

In the era where two-thirds of the world are going online, a phenomenon known as FOBO, or the Fear Of Being Offline, is becoming a real one. People panic when they lose access to the internet, no matter how temporary those situations might be. But did you know the reverse is experienced by companies in emerging markets?

Despite the massive opportunity of ecommerce in Southeast Asia ($70  billion by 2020, according to Bain and recent Amazon and Alibaba forays into the region), only 3% of total retail sales come from the online channel. What’s going on? In order to understand the apparent slow migration into online retail,ecommerceIQ surveyed 132 senior level retail executives in February 2016 at the eIQ Summit in Bangkok.

The Summit was attended by Director and C-level executives from a majority (67%) of top brands, retailers and e-tailers in Thailand such as L’Oreal, Essilor, LINE, Central Group, Casino Group, P&G and more. Here is the result of their survey responses.

ecommerce research Southeast Asia


1. Limited internal know-how (47.7%)

Forming an ecommerce team to build an online strategy is one of the most strenuous bottlenecks encountered in Southeast Asia. The region remains low tech intensive and resources are so scarce that Lazada, Southeast Asia’s largest online marketplace, has taken the talent challenge into its own hands by educating the first ecommerce generation and generating local expertise out of fresh graduates.

Sheji Ho, aCommerce Group CMO, explains, “Because of the lack of talent, companies are constrained to hire ex-digital marketer or brand managers as to run ecommerce divisions but the scope encompasses warehouse management, delivery, fulfillment, reverse logistics, it is a much broader set of activities than what they are used to.”

2. Cannibalizing offline sales (24.2%)

Channel conflict is when online sales cut from offline sales or if you’re a brand looking to sell direct to consumer, you immediately create a channel conflict by putting yourself in competition with your distributors. In Brand Commerce, channel conflict can be crippling, as retailers can sometimes punish brands offline positioning due to ecommerce promotions or perceived exclusive offers. To overcome this, brands like L’Oreal are creating coordinated online and offline promotional campaigns that compliment and encourage each other. 

3. Not enough demand (23.5%)

With ecommerce slated as less than 3% of all retail sales in Southeast Asia, businesses simply do not think the market is ready yet. But as the Bain report showed above, the market is evolving rapidly. Others believe that the demand is there, but because the customer experience is so poor, Southeast Asians are not compelled to repeat purchase. The internal ecommerceIQ Beauty Report findings in Thailand showed that only 20% of top global brands have a customer experience rated higher than 70%. 

II.What are the top in-demand services?

offline business fear of going online

Source : ecommerceIQ Thailand 2016 Survey

Interestingly, strategy and consulting is the top sought after service for ecommerce in Southeast Asia. This reflects the very nascent level of ecommerce development for the vast majority of retailers in the region still who are not ready to get operational and is very much indicative of an emerging market. Below is a ranking of the top ecommerce services businesses are looking for in Southeast Asia:

#5 Web Development

A website serves as the first touchpoint with customers in an online world so an experienced team dedicated to its development is key to a successful strategy. It helps the company reach millions of internet users who may become potential customers. UX, UI developers are highly sought after. 

#4 Fulfillment, Logistics & Delivery

The ecommerce ‘business-to-consumer’ model requires a different set of systems and mindsets. In Southeast Asia, the complexity of deliveries due to the region’s poor infrastructure, difficult geography, complex cross-border commerce, high rates of cash on delivery all take the challenge to an entirely foreign level. The company must also take into account the customer demand for visibility and transparency. Reverse logistics in case of returns must also be taken into account.

#3 Omnichannel enablement

The omnichannel experience leverages customer behavior across all relevant sales and distribution channels, online and offline. It is basis for a consistent, personalized interaction between brand and customer. Having an omnichannel strategy is the next step to reaching your customer and providing them with convenience to shop anywhere at anytime. 

#2 Performance Marketing

Data collected online is a powerful tool to enhance marketing to a level that cannot be reached with offline tools. A combination of new advertising tools and innovation makes performance marketers able to help retailers and affiliates grow their businesses and drive online sales. Performance marketing done right creates win-win opportunities for both retailers and affiliates.

#1 Strategy and Consulting

It is necessary in today’s digital age to have an online presence if businesses want to continue growth. In order to get pass the fear of going online, finding the right ecommerce service partner to provide strategy and consulting will take the brand to the next stage of ecommerce maturity and rid them of FOGO once and for all.

III. Value of the ecommerce B2B landscape

The good news is that these potential ecommerce businesses are willing to invest into the process, although almost a quarter of participants are not willing to spend more than $20 thousand annually. In ecommerce terms that’s barely enough for a website and fulfillment of very few items per week, according to The Evolution of Brand Commerce in Southeast Asia, which gives a cost breakdown of ecommerce.

ecommerceIQ Summit budget survey questions

Ecommerce in Thailand and Southeast Asia is being restrained by a lack of expertise and fears of offline retail legacy politics. But as the region wakes up to the opportunities inherent in online, much like the US and China before them, businesses will find a way to overcome the bottlenecks.

By Alexandre Henry

Tweet your feedback to @ecomIQ and @alex_Nry

Why We’re Heading Towards a Bloodbath and 4 Strategies to Avoid it

Being the new kid on the block means that ecommerce ventures in Southeast Asia have the luxury to learn from the mistakes of others from mature ecommerce markets like the US and China. It has been over 20 years since Amazon (1994) and eBay (1995) were founded, Jack Ma started Alibaba in his Hangzhou apartment in 1999, right before the Internet 1.0 bubble burst.

A lot has happened in global ecommerce since then, including the slow but steady march of Amazon, the quick rise and fall of daily deals and flash sale sites, and Alibaba’s blockbuster IPO in 2015. What’s next? This historical review creates the two frameworks, the Ecommerce Lifecycle and Ecommerce 1.0/2.0, to help predict the future opportunity of ecommerce in Southeast Asia.

1. The Ecommerce Lifecycle – How Ecommerce Models Evolve Over Time

There is a distinct pattern that has emerged from the more mature ecommerce markets’ evolution that offers a degree of prescience for ecommerce in Southeast Asia. This follows the trajectory of Classifieds and C2C to B2C to eventually Brand.com. The US went from Craigslist, eBay and Amazon to brand sites like Nike, J.Crew and Gap. China went from Taobao, Tmall and JD to the many standalone and marketplace brand sites, like Estée Lauder, Burberry and Coach.

Today’s Southeast Asia is following a similar pattern but at a much faster pace due to “1 to n,” horizontal progress and the resulting leapfrogging behavior. In our region, we have Classifieds (OLX), C2C (Tarad, Tokopedia, Shopee), B2C (Lazada, Zalora, MatahariMall) and Brand.com (L’Oreal, Estée Lauder, Adidas) all happening at once within a very short time frame.

The Evolution of Ecommerce Business Models in Southeast Asia

Figure 1: Ecommerce Lifecycle Model

LIMITATIONS TO THE MODEL

Local nuances give rise to unique ecommerce business models

eBay could only have been invented in the US because of its auction-driven model in a consumerist culture characterized by excess goods and plenty of hobbyists (think baseball cards and Pez dispensers). eBay didn’t work in China for many reasons, one being the auction model was not appealing to Chinese users who preferred to buy first-hand goods and to negotiate person-to-person via chat.

Tmall’s B2B2C model originated in China because of the bazaar-like, hustle and bustle shopping environments that many Chinese were used to in their offline world.

HOW SOUTHEAST ASIA ECOMMERCE IS DIFFERENT

Southeast Asia is a hybrid between the US and China

Lazada, the dominant ecommerce platform in Southeast Asia, is both an Amazon and a Tmall. Founded in 2011 by Rocket Internet as the “Amazon of Southeast Asia”, Lazada today gets 70% of its GMV from third-party, marketplace transactions, with the remaining 30% generated through “traditional” Amazon-style direct retail. Post-Alibaba acquisition, it’s likely that Lazada will follow the Tmall model and move towards a 100% marketplace with all the model’s inherent scaling benefits.

Compare this to Amazon, which traditionally used to be 100% direct retail but has been moving towards a marketplace model. Today, Amazon gets 59% of its GMV from B2B2C.

B2C, B2B2C and Brand.com all happening at the same time

In China, brands progressed from selling via Tmall as a stepping stone towards operating their own brand.com site. A case in point is Uniqlo, which started selling through a Tmall flagship store and then later added their own brand.com webstore.

In Southeast Asia, we see brands doing both at the same time, selling via Lazada as well as their brand.com stores, in addition through distributing through e-tailors like Central Online and MAP. This is driven by technology making it much easier to sell through different channels but also necessitated by the high degree of fragmentation in the ecommerce market. Consolidation is expected to happen soon.

Southeast Asia is mobile-first, C2C ecommerce is jumping straight into mobile marketplaces

Whereas in mature ecommerce markets desktop C2C still plays a pivotal role, in Southeast Asia the leapfrogging towards mobile is disrupting traditional, desktop-first marketplaces. Mobile-only C2C marketplaces like Carousell and Garena-backed Shopee are making aggressive moves against their older desktop counterparts like Tarad in Thailand and Tokopedia in Indonesia. With an estimated 85% and 79% of online shopping outside of the major metro areas in Thailand and Indonesia happening on mobile, it’s not surprising that companies like Facebook are also betting on mobile C2C. The ad giant recently launching mobile payments in Thailand where an estimated 50% of C2C transactions are happening on social networks.

2. Ecommerce 1.0 to Ecommerce 2.0: 4 Strategies to Avoid the Imminent Ecommerce Bloodbath in Southeast Asia

Southeast Asia is the next ecommerce gold rush. For this very reason, it’s also quickly becoming the next ecommerce bloodbath. We’ve already seen many casualties, especially in the B2C space of selling third-party brands. As we previously predicted, Rocket Internet’s Zalora had to sell their Thailand and Vietnam businesses for chump change to local retailer Central Group. This same year, Cdiscount Thailand, part of French retail conglomerate Groupe Casino, was sold for $31.5 million (28 million EUR) to TCC, a local Thai company that also owns the popular Chang beer brand. 

Ecommerce 1.0: Selling other people’s stuff to the masses at low margins

Ecommerce guru Andy Dunn adopted a strategy that allowed his business to stand a fighting chance in the Amazon bloodbath of the US.

“If you’re selling other people’s brands, you are competing not via a local group of competitors but with everyone. In this type of market, you might imagine having one large national winner. You might imagine that winner is ruthless about scale and cost, and is run by a visionary leader who with an extreme long-term focus. Such a company might not make real money for a long time — but when it does — it will be incredibly powerful.”

With Alibaba coming into the region through the $1 billion Lazada acquisition, it increasingly looks like ‘Alizada’ is becoming the big threat for other retailers in the market, both in the pure-play and omni-channel space. Expect the bloodbath to intensify and more consolidation to happen over the next few years.

Today, none of the B2C / Ecommerce 1.0 players in ASEAN have dominant market share yet.

Granted, Lazada has a headstart with an alleged 20% market share (2014) but this number pales in comparison with Amazon’s 60% in the US, Tmall’s 50.6%, and JD’s 51.9% (direct retail B2C market) in China.

ecommerce 1.0, The Evolution of Ecommerce Business Models in Southeast Asia

The Ecommerce 1.0 Goliaths

Over the next 5-6 years, Southeast Asia B2C will go through further consolidation to end up in a 1-2 player game

There is no better way to visualize the ongoing consolidation in Ecommerce 1.0 than with ‘search interest’ data from Google Trends. The graph for Thailand shows the rise and fall of desktop C2C and daily deals, the fragmentation in B2C, and the rapid ascension of Lazada.

google trends, The Evolution of Ecommerce Business Models in Southeast Asia

Figure 3: Google Search Interest Showing Ongoing Consolidation in Ecommerce 1.0

This is where things start to get interesting. Whereas Ecommerce 1.0 is a game of brute force and strength, Ecommerce 2.0 exploits 1.0 loopholes in many creative ways in order to avoid the zero-sum game against the likes of ‘Alizada’.

“This next generation of ecommerce companies is as much about what you exclude as what you include. It is a paradox that excluding some things takes more time than including everything. The new models are fundamentally — whether the merchandise is proprietary or not — about merchandising.” — Andy Dunn on Ecommerce 2.0

The Evolution of Ecommerce Business Models in Southeast Asia

Figure 4: Ecommerce 2.0 – Four Strategies for Avoiding the Bloodbath

Gilt, the posterchild of Ecommerce 2.0, rose from the ashes of the 2008 financial crisis with a unique business model that offered high-end luxury goods at a fraction of their original price through time-sensitive flash sales. One of New York City’s first unicorns at a point in time, Gilt later struggled as the economy recovered and brands no longer needed a distribution channel for clearance stock.

While Gilt played the pricing angle, others like Birchbox and Rent the Runway innovated on the product side by offering a unique shopping experience. Birchbox started the monthly beauty subscription commerce craze and inspired countless “Birchbox for X” clones. Rent the Runway is basically fashion on-demand by providing users rental access to high-end, designer fashion.

Ecommerce 2.0 in Southeast Asia: A glimpse of hope for aspiring ecommerce entrepreneurs?

With the Ecommerce 1.0 bloodbath in Southeast Asia still ongoing as we speak, a few entrepreneurs have realized that it’s futile to compete against the Lazada’s and MatahariMall’s of the region without deep pockets or any other strategic moat. Instead, they are focusing on emerging opportunities in Ecommerce 2.0 by positioning themselves in a unique way.

Proprietary Merchandise

Pomelo Fashion

Founded by the ex-Thailand Lazada founding team, Pomelo Fashion is one of the first Ecommerce 2.0 companies in Southeast Asia. Rather than selling other brands’ products with low margins, Pomelo Fashion has taken a M2C/D2C (Manufacture / Direct-to-Consumer) approach, focusing on building its own fashion brand and vertically integrating its supply chain, going as far as manufacturing its own clothing and apparel.

The Evolution of Ecommerce Business Models in Southeast Asia

Glazziq and Franc Nobel

Inspired by Warby Parker’s success in the US, Glazziq and Franc Nobel are applying the proprietary merchandise model in the eyewear space in Thailand and Indonesia, respectively. Glazziq adds a local spin by positioning itself as prescription eyewear for Asians.

The Evolution of Ecommerce Business Models in Southeast Asia

Sale Stock

In Indonesia, another startup has taken a cue from the Facebook and Instagram seller playbook, and scaled it 10x. Sale Stock, a fast-fashion startup based in Jakarta has taken a similar path to Pomelo Fashion, with vertical integration of design, manufacturing, and supply chain.

Proprietary Selection

Motif Official

Motif Official is a fashion retailer based in Bangkok focusing on proprietary merchandise and selection. Their ‘Motif Official’ label is designed and manufactured in-house. For their ‘Motif Select’ range, they select and curate minimalist brands from across the world. Motif’s ecommerce strategy eerily resembles that of Nasty Gal in the US, where founder Sophia Amoruso started the business in 2006 by curating vintage clothing sourced from second hand stores.

The Evolution of Ecommerce Business Models in Southeast Asia

“We are an online concept store specializing in women’s apparels and accessories; from our own in-house label ‘Motif Official’ to our ‘Motif Select’ range, where we curate the best pieces from brands all around the world to your everyday wardrobe. We believe in the concept of minimalism, with attention to details, shapes and silhouettes.”

Motif proves that you can still compete with the big retailers by focusing on a niche and dominating a category through curation. Many of the premium brands on Motif would never sell on Lazada, let alone Zalora.

Following pure play ecommerce companies in the US like Warby Parker and Birchbox who went offline to augment their brand, Motif also operates physical stores in Central World and Siam Discovery in the heart of Bangkok.

 

The Evolution of Ecommerce Business Models in Southeast Asia

Figure 5: Ecommerce 2.0, Global vs SEA Comparison and Opportunities

The Future of Ecommerce in Southeast Asia

Applying either the Ecommerce Lifecycle or Ecommerce 1.0/2.0 framework makes it easy to see where ecommerce in Southeast Asia is headed.

The B2C war will continue to wage for the next 4-5 years until some run out of money and throw in the towel. In China, this process took almost a decade with Tmall going from 0% to 50.6% market share from 2008-2014. In the direct retail B2C space, JD went from 15% to 51.9%. In the same period, previous leaders like Dangdang (16.2%) and Amazon China (15.4%) faded into irrelevance with 4% and 3.5% market share remaining as of 2014.

During this time, we will also see more startups and venture capital going into the Ecommerce 2.0 space. Ecommerce 2.0 isn’t new to Southeast Asia— many have tried to bring the Birchbox model into the region but failed due to the immature market. However, the next few years may be a fertile time as evidenced from the traction that companies like Pomelo Fashion, Sale Stock, and Motif are getting.

Does this mean we can go ahead and copy something like Gilt into Southeast Asia? It really depends. A model like Gilt needs access to old inventory of premium brands which in markets like Thailand and Indonesia are controlled by 1-2 distributors such as Central and MAP. This is the same issue that caused the downfall of Zalora in the same markets. Any Ecommerce 2.0 model launched in Southeast Asia will need to be customized for the local market.

Ecommerce in Southeast Asia is still relatively young, with only 1% of total retail GMV being generated online compared to 7.1% and 15.9% in the US and China. However, the region is already widely being touted as the next frontier of ecommerce opportunity, or the next ecommerce gold rush and recent research predicting the market to grow 32% year-on-year to reach $88 billion by 2025 (6.4% penetration), up from today’s $5.5 billion (0.8% penetration). As shown in our analysis, there are plenty of opportunities in ecommerce for those with deep pockets as well as those who adopt unique and local strategies.

“Don’t always go through the tiny little door that everyone is trying to rush through… maybe go around the corner and go through the vast gate that no one’s taking.” — Peter Thiel

By Sheji Ho

Share your feedback to @ecomIQ and @sheji_acommerce

Following in the footsteps of China and the U.S., Southeast Asia is on the cusp of an ecommerce golden age. With online shopping accounting for only 1 percent of retail today, the region is slated to reach double-digit China-esque numbers within the next 4-5 years.

With a population of 600 million — twice that of the U.S. — Southeast Asia is poised to eventually become the third-largest ecommerce market in the world, second only to China and India (and ultimately surpassing the U.S.).

But enough of the macro overview. How did 2015 turn out? And what will 2016 bring to ecommerce?

Local, regional and global players stepped up their games. In particular, we saw Indonesia rise this year: MatahariMall launched with big fanfare as the nationalist answer to Rocket Internet’s Lazada; Lazada, in turn, doubled-down on Indonesia with the return of previous CEO Magnus Ekbom; for the first time, aCommerce Indonesia surpassed Thailand in order volume; and, recently, China’s Alibaba competitor JD snuck into Indonesia and surprised everyone with the launch of JD.id. This has served to add to an immense amount of pressure and competitiveness in the pure B2C space.

2015 also was the year of M&As, as other players allied together or were absorbed in order to arm themselves against the behemoths mentioned above. First, Ardent Capital-backed WhatsNew acquired lifestyle vertical site Moxy in Thailand in January.

More recently, we witnessed an encouraging ecommerce exit as beauty site Luxola was acquired by French luxury superstar LVMH. And in December, aCommerce gave a 20 percent stake to a 150-year-old Swiss retail distributor, giving it access to more than a hundred of its Western brands and physical infrastructure in the region.

Unfortunately, the year did not pass without its share of casualties due to the hyper-competition in B2C ecommerce in Southeast Asia. Fashion retailer Paraplou Group shut down in October after two years (and having raised $1.5 million) due to lack of focus and deep pockets.

In March, SingPost and Indonesia’s mobile phone retailer Trikomsel announced a mysterious ecommerce partnership — only to have reports pop-up of the telco’s dire financial situation three months later, in addition to the sudden removal of Wolfgang Baier as Group CEO of SingPost in December.

If 2014 was the year of unprecedented capital injections to build Southeast Asian ecommerce businesses, 2015 was the year we saw the early rise, fall and transmogrification of players in the fragmented landscape as they vied for a piece of the rapidly growing ecommerce pie.

We expect to see serious movement in the region from offline players moving online.

In line with our annual tradition, we are giving you a sneak peek at what will be on the menu for next year. The conclusions were determined through extensive investor and executive interviews, as well as internal data and secondary sources from January 2015 to December 2015.

Because we work for a major Southeast Asian service provider, with the biggest ecommerce names in the region (such as Lazada, MatahariMall, L’Oreal and more), we are privileged to sit at the intersection of tech, logistics, retail, marketing and VC. We see where our partners are putting their money and where the investors are willing to follow.

As such, we are able to see with acuity where the growth will be. There’s no crystal ball or trusting a gut feeling here; we simply have the privilege of a bird’s-eye view that most players don’t have, and we’re providing projections here in the form of predictions.

1. Brand.com Is Poised To Be The New Black

The evolution of ecommerce commonly follows the trajectory of P2P and C2C to B2C to eventually Brand.com. The U.S. went from Craigslist and eBay to Amazon to brand sites like Nike, J.Crew and Gap. China went from Taobao to Tmall and JD to the many standalone and marketplace brand sites, like Estee Lauder, Burberry and Coach.

Today’s Southeast Asia is following a similar pattern, yet at a much faster pace due to “1 to n,” horizontal progress and the resulting leapfrogging behavior. In our region, we have P2P (OLX), C2C (Rakuten, Tokopedia, Shopee), B2C (Lazada, Zalora, MatahariMall) and Brand.com (L’Oreal, Estee Lauder) all happening at once within a very short time frame.

Even Unilever in Thailand has created an ecommerce division with revenue targets they expect to start hitting in 2016. We are seeing brands going online much earlier than one would normally expect.

It was no big surprise, then, when aCommerce recently landed a strategic investment from Asia’s biggest retail distributor, DKSH. Swiss-based DKSH owns distribution rights for some of the biggest brands in the region, such as P&G, Unilever and Johnson & Johnson.

This partnership validates the growing demand for brand ecommerce in the region, and will further expedite the process at which brands go online, whether on their own brand sites or on the many marketplaces in Southeast Asia.

10 Trends That Will Shape Southeast Asian Ecommerce in 2016

2. Omni-Channel Awakens: “There Will Be No More Ecommerce, Only Commerce”

This is what aCommerce Group CEO Paul Srivorakul said when ecommerce logistics player SingPost announced it would create a futuristic mall that combined online and offline shopping, in pursuit of the omni-channel retail dream — a dream that is quickly becoming a reality in the U.S. and China.

Referring to a seamless shopping experience across stores and the online channel, omni-channel retail is considered the elusive Holy Grail in retailing due to the politics and logistical challenges of integrating often independent online channels with their brick-and-mortar counterparts. But so far, Southeast Asia has been late to the game, with its focus (reasonably so) on building up pure-play ecommerce first.

In 2016, we expect to see serious movement in the region from offline players moving online, and vice versa. 2016 will be the year in which offline brands will go online due to the plethora of online marketplaces available, as well as the presence of full-service ecommerce enablers.

Southeast Asia is on the cusp of an ecommerce golden age.

For B2C players, the appeal of adding offline operations to the mix includes enabling faster last-mile fulfillment and delivery. In Southeast Asia, Vietnamese electronics retailer Nguyen Kim (acquired by Central Group) is able to pull off same-day, 4-hour deliveries because of the massive offline retail footprint it has.

Ecommerce players with a traditional offline arm, such as MatahariMall, Cdiscount and Central, will be in an advantageous position to execute on this. However, 2016 will also have B2C pure players looking into this, as logistics and last-mile in Southeast Asia increasingly struggles with industry-wide capacity bottlenecks.

10 Trends That Will Shape Southeast Asian Ecommerce in 2016

3. Niche-Commerce Models Will Evolve To Avoid The B2C Bloodbath

In our 2015 predictions, we discussed how B2C ecommerce is a long-term, cash-intensive, winner-takes-all game. Companies trying to battle it out in this space better have deep pockets (see Lazada, MatahariMall, and JD) — or face extinction (see Paraplou Group).

In his seminal essay “Ecommerce is a Bear,” Andy Dunn, founder and chairman of Bonobos.com, elaborates on why B2C ecommerce is a winner-takes-all game, and what options remain for other players who don’t have the luxury of deep pockets or a sugar daddy.

Much of this comes down to a “David versus Goliath,” Peter Thiel-esque contrarian approach to ecommerce. The U.S. ecommerce scene has been dominated long enough by Amazon to witness some of these models coming to fruition over the last several years: 1) Proprietary Pricing (think flash sale, Gilt Groupe), 2) Proprietary Selection (ModCloth, NastyGal), 3) Proprietary Experience (Rent the Runway, Birchbox), and 4) Proprietary Merchandise (Warby Parker, Bonobos).

This will be the year where more creative ecommerce models emerge. Companies like Pomelo and Sale Stock Indonesia have already adopted the proprietary merchandise approach toward achieving a competitive advantage. They do this by designing their own fashion and gradually moving upstream to include manufacturing.

Moxy has staked their flag as the “Everything Store,” but focused on women. We also may see the return of subscription-commerce business models with retailers like Central, impacted by a dip in foreign shoppers, seriously considering a Gilt-style flash sales model to get rid of excess inventory.

10 Trends That Will Shape Southeast Asian Ecommerce in 2016

4. Cross-Border Ecommerce Will Be Driven By Silk Road 2.0, Not AEC

Despite all the media hype and lofty expectations (even our own predictions last year), the ASEAN Economic Community (AEC) will not have a significant impact on ecommerce in 2016.

Governments are too fragmented on policy; coupled with the immediate growth opportunity within the domestic markets, it doesn’t make sense to focus on cross-border within ASEAN, as evidenced by companies such as Lazada and MatahariMall doubling-down on Indonesia’s ecommerce opportunity.

Cross-border ecommerce in 2016 will be driven mainly by what we call “Silk Road 2.0.” These are Greater China-based companies that will bring their products into Southeast Asia, laying the foundation for our generation’s version of the Silk Road and attempting to expand China’s soft power and hegemony through commerce and digital.

Southeast Asia is poised to eventually become the third-largest ecommerce market in the world.

China’s JD is a classic example. The No. 2 online retailer in China just recently set up shop in Indonesia and will be expected to leverage their 40+ million SKU product assortment and China-Southeast Asia supply chain to compete with the likes of MatahariMall and Lazada. Alibaba investing almost half a billion into SingPost clears the way for Alibaba, Tmall and Taobao packages to smoothly enter Southeast Asia.

5. Payments: COD Will Continue Its Reign While Third-Party Payments Struggle

The next double-digit billion dollar opportunity in Southeast Asia ecommerce is the third-party online payment space. U.S. has PayPal and China has AliPay; what does Southeast Asia have?

Contrary to what many people believe, building a successful payment product isn’t about technology, it’s about distribution. Payment technology is a commodity; everyone’s building the same thing, including banks (SCB UP2ME), telcos (TrueMoney, PAYSBUY), media (Line Pay, AirPay by Garena), retailers (helloPay by Lazada) and payment-focused startups (2C2P, Omise).

The hard part is distribution. How do you reach critical mass in order to cruise off network effects? Until this happens, COD will remain the dominant payment method in Southeast Asia. Based on aCommerce’s latest aggregated numbers, COD made up 74 percent of transactions in Southeast Asia, up from 53 percent the year prior. This validates the importance of COD to ecommerce in our region, and already exceeds the COD penetration rate at the height of its popularity in China back in 2008.

Eventually, COD will naturally reach its shelf life and be replaced by a “modern” third-party online payment product. Even then, the most likely scenario will be one leading payment product per country in Southeast Asia due to the region being fragmented.

Until then, good luck “killing off” cash on delivery, Mr. Jon Sugihara.

6. The Fizzle Of Fast Fashion E-Tailers

We’ll see mass, fast-fashion players like Zalora struggle and either fizzle out or be rolled into cousin Lazada. People familiar with the history of ecommerce in China will see similarities between Zalora and VANCL. VANCL, a mono-brand fast-fashion retailer founded by Chen Nian (who sold his previous business, Joyo, to Amazon), rose to prominence in 2009, raised up to $570 million and even planned for an IPO, but then gradually faded away. Selling your own fashion products is less about retail economics and much more about brand building.

In addition, VANCL suffered from competition from Taobao merchants who sold similar products for higher quality at lower prices. Replace Taobao with Instagram and Facebook and you’ll understand the pain that Zalora and other mono-brand, mass-fashion retailers are going through in Southeast Asia.

Ecommerce companies need to understand that this is a long-term game.

Following the natural progression of ecommerce, fashion will start becoming a more popular category for online shoppers, especially with the rise of richer female consumers in Southeast Asia. Fashion brands currently have the choice of selling on the many marketplaces in Southeast Asia and/or selling via their own brand sites. We’ll expect them to set up shop on their own brand sites or specialized, fashion-friendly marketplaces.

However, premium fashion brands may be hesitant to set up shop on mass marketplaces like Lazada and Rakuten because of the risk of being perceived as a mass brand. After many years of courting fashion and luxury brands, Amazon is still struggling. Don’t forget, most of Amazon’s premium fashion sales today are generated via Shopbop, a fashion-only destination that the company acquired in 2006.

7. New Channels Will Emerge To Challenge Google And Facebook’s Dark Side

When you’re digging for gold in the remaining ecommerce gold rush on the planet, you better be equipped with the best picks and shovels available. Unfortunately for ecommerce players in our market, the range of weapons available is quite limited due to historical and socio-economic factors unique to Southeast Asia. The appearance of a “no-tail” landscape in terms of publishers severely hampers the effectiveness of traditional tools, such as affiliate marketing and programmatic display.

In Southeast Asia, players are already exhausting the “usual suspect” channels, such as Google Search, Facebook and Criteo, with the result being CPCs rising to all-time highs and companies tapping into offline marketing to seek better returns. This is Andrew Chen’s “Law of Shitty Clickthroughs” in full effect.

Companies and savvy entrepreneurs will start addressing this gap by designing and building new demand-generation platforms to offer an alternative to the Googles and Facebooks out there. Expect to see more ecommerce firms adding channels such as price comparison, coupon sites and cash-back sites, as well as innovative affiliate marketing solutions to balance their media mix. 2016 will give us the excavators and bulldozers to complement today’s picks and shovels.

8. The Battle For The Last Mile Continues As 3PLs Fail To Adapt

In 2016, we will see companies like Lazada (LEX), MatahariMall and aCommerce investing in building out their own delivery fleet in order to help relieve the industry-wide capacity issues and serve the anticipated record-breaking transaction volume. The pressure will only become bigger in 2016 as transaction volume is expected to hit record highs in Southeast Asia.

Challenges with last-mile delivery in Southeast Asia, if not addressed properly, will become the biggest bottleneck to ecommerce growth in the region. The industry is currently witnessing industry-wide capacity bottlenecks beyond what the JNEs, Kerry Logistics and DHLs of this world are able to handle.

Part of this is the poor infrastructure to begin with. China, the world’s largest ecommerce market, never really had this issue because of the socialist and central government mindset of prioritizing infrastructure investments. By the time ecommerce took off, the infrastructure was already there, which resulted in last-mile delivery becoming a commodity service.

Also, many existing delivery companies were never built for B2C deliveries to begin with. Their core competencies are in B2B deliveries, which typically don’t face B2C headaches, like returns management, reverse logistics, pre-calling, multiple delivery attempts and cash on delivery.

10 Trends That Will Shape Southeast Asian Ecommerce in 2016

9. Channel Management Will Be The New “Programmatic” Ad Agencies Still Stuck In 2011

Year in, year out, brand advertisers, agencies and adtech sales execs rave about programmatic display advertising and DSPs being the future of digital marketing. However, few actually have been outside their ivory tower in Singapore long enough to realize that “no-tail” has essentially killed off any promise of “programmatic” advertising in Southeast Asia outside of Singapore and Malaysia.

The real “programmatic” opportunity in Southeast Asia will be in ecommerce, not in display advertising. With the advent and fragmentation of online marketplaces, the challenge for brands will be to choose on which channels to be present and what products to push in each of these channels.

One of the biggest issues faced by all ecommerce players in Southeast Asia is the lack of talent.

2016 will see the emergence and adoption of next-generation channel management platforms, which are essentially “ecommerce DSPs.” These products will help brands enable omni-channel retailing across all major marketplaces, while also offering traditional programmatic benefits such as a dynamic optimization engine and plug-and-play integration with multiple first- and third-party data sources for better targeting, personalization and optimization.

10. The Talent War Will Inflate Salaries Faster Than Uber’s Valuation

One of the biggest issues faced by all ecommerce players in Southeast Asia is the lack of talent. In 2015, it was common to see employees being poached left and right with new salaries of 1.5-3x. Obviously, this isn’t sustainable, but it is the current foundation of the talent war in Southeast Asia.

Opportunistic professionals, often young, jump to roles where their skills, experience and leadership don’t match the package and title. “The most important thing to optimize for on your first job is growth. Growth is king, queen, and emperor combined. Optimize for growth above compensation, above location, above lifestyle, and above anything else,” says Auren Hoffman, former LiveRamp CEO who founded and sold five companies.

Ecommerce companies need to understand that despite all of us being in the midst of a Gold Rush, this is a long-term game. To attract and retain the best talent, more and more ecommerce companies will be buckling down on culture and building an appealing work environment. aCommerce in 2016 will be relocating its headquarters to the Ecommerce Valley of Bangkok — Emquartier (also home to Lazada’s regional headquarters).

11. Amazon Will Enter Southeast Asia

Not. Sorry, Jeff.

By Sheji Ho & Felicia Moursalien

Please share your feedback to @ecomIQ@sheji_acommerce and @LilFel

This article originally appeared on TechCrunch Dec 24.