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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.

What’s Pinduoduo?

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

Source: Crunchbase

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

How does Pinduoduo work?

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

 

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

 

 

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

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

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

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

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

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

Source: wiredtech on Flickr.com

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

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

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

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

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

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

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

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

Will PDD come to Southeast Asia?

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

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

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

This is where a model like PDD fits snuggly.

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

Will the PDD business model work in Southeast Asia?

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

1. Lack of distribution channels / expensive distribution channels

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

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

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

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

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

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

2. High mobile commerce penetration

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

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

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

3. Frictionless mobile payments

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

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

Source: ecommerceIQ

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

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

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

4. Attachment to popular social platform

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

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

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

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

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

5. Access to cheap product sourcing

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

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

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

What will happen next?

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

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

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

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

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

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

2. Copy-to-China (2000-2015)

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

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

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

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

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

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

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

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

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

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

Play on players.

THE BACKGROUND

Named after the biblical strongman Samson, travel luggage manufacturer and retailer Samsonite was founded in Denver, United States in 1910 and since been renowned for its high-quality and durable luggage.

With over 100 years of experience, the company is known for its high-quality and durable wide selections of innovative luggage. Samsonite also owns several other popular brands including American Tourister, High Sierra, and Lipault, making it the global market leader for travel luggage.

Samsonite Southeast Asia

Global market share of travel luggage in 2015. Source: Quartz

The company has changed ownership a few times, counting former Louis Vuitton’s CEO, Marcello Bottoli, as one of its past owners. In 2007, Samsonite was bought by private equity firm CVC Partners for $1.7 billion and the company raised $1.25 billion in an IPO in 2011 in Hong Kong.

But no company is without its own struggles to the top.

THE CHALLENGE

Samsonite counts Asia as its biggest market as China alone contributed to a quarterof the group’s sales ($124 million) in the first half of 2016. However, that number was 5.2% lower than the same period last year due to an economic downturn, and the shift to ecommerce.

Samsonite Southeast Asia

Samsonite sales in China are not growing as fast as it was before.

“In many of our key markets, our traditional channels of distribution have begun a painful process of adjustment to the shift in business online, and the implications for scale and type of retail estate,” said Samsonite’s Chairman, Timothy Parker.

Working with third-party platforms also proves to be tricky for the company as it attempts to protect its brand value by limiting the discount tactics used by ecommerce platforms to entice buyers to shop.

“We don’t want to grow ecommerce at the cost of our current model,” explainedSamsonite International CEO Ramesh Tainwala.

“We have to explain to the ecommerce players that they are offering enough advantages to consumers through convenience, through range shopping.”

The company is also aiming to double its luggage market share, where 50% of the volume is dominated by private label and unbranded sellers, by diversifying its portfolio and shed its stiff luggage manufacturer image.

“It’s [Samsonite] synonymous with luggage but we’re diversified into business backpacks, casual backpacks, and accessories. But we haven’t done a good job of telling that story,” said Stephanie Goldman, Senior Director of Brand Communications. Samsonite needs to find a better strategy for its marketing and distribution channels.

THE INNOVATION

“Consumers are spending, but they are spending more carefully, and looking for value. And one place that value is available is online,” said Samsonite’s Chairman, Timothy Parker.

Using China’s favorite messenger app WeChat, Samsonite utilizes social media to drive traffic to its brick-and-mortar stores and offer discount coupons to its followers. The initiative has succeeded in boosting 5% in offline sales.

Samsonite Southeast Asia

Samsonite joins a list of other global brands that utilize WeChat to attract consumers in China. Source: FashionChinaAgency

The company launched a marketing campaign with a tagline “We Carry the World” where it featured travelers using Samsonite products to show audiences its universal definition of “travel gear”.

Working with Connelly Partners, Samsonite USA also featured various influencers to advertise its business bag collection in its #WorkNotWork campaign and chose individuals with unconventional jobs like athletes, chefs, artists, and fitness gurus as brand ambassadors.

“Work nowadays can look much different from a typical 9-5, and we demonstrated the love that people actually have for their craft, and the hard work they put into it on a daily basis,” said Alyssa Toro, Chief Creative Officer of Connelly Partners.

Samsonite Southeast Asia

The ads for Samsonite’s campaign ‘We Carry The World’.

And in terms of corporate management?

“Samsonite has no head office — I am a CEO but I have no head office. I just have a room everywhere I go. Our business is not top-down. Our business in Japan is headed by Japanese and 100% of employees are Japanese. Our business in China is run by Chinese, 100% Chinese. We never move people from one country to another. So it is only myself — I am an Indian and work everywhere,” tells CEO Ramesh Tainwala to Nikkei Asia Review.

THE STRATEGY

To boost its digital retail distribution in Asia, Samsonite launched what it called a “three-pillar” strategy.

The company works with popular third-party sellers in the region such as Tmall and JD.com – these platforms now account for 60% of Samsonite’s online sales in China. In Southeast Asia, the company is selling its product in the region’s biggest marketplace Lazada. The company also selling through the digital outlets of shopping malls and department stores.

The third phase of its strategy is to further expand its own direct channels so more consumers in Asia can shop directly via the brand. As of right now, the company’s online channel only available in developed markets such as North America, European countries, Australia, and Japan. In June 2017, the company has acquired eBags, a Colorado-based online bag retailers, for $105 million to accelerate its direct-to-consumer plan.

“We are finding more and more that the online and offline shopping experience for consumers is getting blurred,” Samsonite CEO Ramesh Tainwala says. “eBags is strategically the most important acquisition for Samsonite over the past 20 years.”

Samsonite Southeast Asia

eBags platform

Through eBags, the company will expand to Europe and Asia and launch in India next year.

“At present, we have over 350 stores in India. We plan to open additional 50 stores by the end of this year. We are expecting a 12-15% growth in sales. This will be in line with our past growth trends,” said Samsonite President, Asia Pacific, Subrata Dutta.

Not only does omnichannel seem to be in Samsonite’s cards, the company has been busy acquiring other brands as acquisition seems to be the company’s favorite strategy to grow its portfolio.

Last year, Samsonite acquired luxury bag maker Tumi in its biggest deal to date for $1.8 billion following its acquisition of Hartmann in 2012.

“When we acquire a brand, it must have a very clear DNA, clear story and clear strength of its own,” said CEO Ramesh Tainwala.

THE FUTURE

The American major is expecting a 20-25% sales contribution from its ecommerce channel in the next few years as it undergoes the same business evolution that many traditional retailers have faced in the age of Amazon.

It’s also looking to emerging markets such as India and the Philippines.

“The Philippines is the No. 1 growth market for us. They all speak English, they travel abroad and their income level is increasing. Their governance has improved, and that makes people more confident to spend. That’s helping our business a lot,” said CEO Ramesh Tainwala.

The company has clearly demonstrated that it isn’t afraid to try.

Samsonite Southeast Asia

Lipault, Samsonite’s 2014 acquisition to appeal to more women.

By owning brands that speak to a variety of consumer segments such as luxury travel, everyday work bags and a line dedicated to offset its masculine brand and attract females, Lipault Paris, Samsonite is very likely to grab even more market share, especially seeing as there is no close competition in sight.

Here’s what you should know today:

1. President of Indonesia signed the ecommerce road map

President Joko “Jokowi” Widodo has signed the long-awaited ecommerce road map that was expected to be issued at the end of this year

The road map will provide guidelines for the country’s digital economy sector, including issues such as payment, logistics, cyber securities, taxation, human resources development and consumer protection.

The ministry was also designing a measure to record online transaction information from the marketplace, in coordination with the Finance Ministry, Central Statistics Agency (BPS) and Bank Indonesia.

Read the full story here.

2. Facebook enters China with photo sharing app

Facebook is testing a photo-sharing app called Colorful Balloons in China after banned in the country since 2009.

Colorful Balloons works like Facebook’s Moments app by allowing users to share photos with friends and family members.

However, instead of using Facebook’s interface, it relies on WeChat, and was released by a local company called Youge Internet Technology.

Read the full story here.

3. Indonesia’s niche ecommerce players attract JD.com 

Chinese internet giant JD.com continues to show its interest in the market by pursuing new partnership with niche ecommerce players in Indonesia. The company is also said to be open to making an equity investment.

JD.com is learnt to be interested in partnering with Laku6 although that relationship may not be an equity based one. The firm aslo recently participated in Traveloka’s $500 million funding round.

The rumour of its talks for investment in Tokopedia has been around for months with its rival Alibaba also showing interest in closing the deal.

Read the full story here.

Here’s what you should know today.

1. Nike will soon sell you shoes on Instagram

Nike revealed its plan during an earnings call last week. It’ll join other select brands like Kate Spade and Warby Parker in using Instagram-style posts to advertise its products and make it simple for people to buy them.

Partnering with the social media platform seems like a sensible strategy for a brand that seeks to reach young consumers. Instagram’s popularity with “tweens” and other highly sought-after demographics is fairly well established at this point.

Nike has been zoning in on digital sales, most recently confirm that it will soon sell on Amazon.

Read the rest of the story here.

 

2. Amazon adds South Korea to international expansion plans

Amazon is poised to disrupt South Korea’s ecommerce, the seventh largest market globally and the third largest in Asia.

A great majority (60%) of online shoppers in South Korea use mobile to get online. These days, beyond Amazon, e-commerce in the country is dominated by daily deal site WeMakePrice, eBay-owned Auction Co and 11Street.

Some observers believe Amazon is more likely to expand into large markets with fewer logistical barriers, as with its March acquisition of Middle East e-commerce marketplace Souq for an undisclosed sum and its recent move to set up operations in Australia.

Read the rest of the story here.

 

3. Gucci now lets consumers in China shop its collections online

Gucci revealed to its Chinese fans this week it’s now giving shoppers in China access to purchase its full range of fashion, handbags, accessories, and jewelry directly from its online store.

Gucci’s revamped ecommerce site, which heavily focuses on visuals and product story-telling to engage the consumer, lets shoppers make purchases online using localized forms of payment, including Alipay and WeChat.

On WeChat, Gucci has been leveraging the platform’s online-to-offline capabilities to grow its following and learn more about its customers. This year, the brand has hosted several events across Asia, including the recent art exhibition “Blind for Love” that gave Gucci fans a look into the world of the brand’s creative director Alessandro Michele.

Read the rest of the story here.