Editor’s note: This is the first part of a post on Southeast Asian e-commerce by Sheji Ho, for the second part click here. Sheji Ho is the Group Chief Marketing Officer at aCommerce, an end-to-end e-commerce enabler in Southeast Asia. Currently based in Bangkok but having previously worked in China, Sheji writes about e-commerce, tech, the internet, and how Southeast Asia is the next China.
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 e-commerce 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 said 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 e-commerce 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 put $65 million into e-commerce ‘arms dealer’ aCommerce through Emerald Media 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 e-commerce 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 e-commerce will be increasingly factionalized into Alibaba and Tencent camps, and locals will pick sides
Given its similarities to China roughly 10 years ago, Southeast Asia has become a gold rush for Chinese Internet giants looking to expand beyond the mainland. It was Alibaba’s acquisition of Lazada last year that triggered an arms race between China’s #1 and #2 in Southeast Asia, and in turn, will cause local companies to choose sides.
Alibaba also led a $1.1 billion investment in Tokopedia in 2017, continuing to place its biggest bets on e-commerce. 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 e-commerce 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 kinds 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, said while speaking to Bloomberg.
With both Tencent and Alibaba market caps at all-time highs, we expect this trend to continue throughout 2018 with both sides gobbling up more local companies across the e-commerce ecosystem and upping shares in existing ones.
2. Facing slow organic growth, Amazon will acquire a company to fast-track its e-commerce expansion in the emerging region
Amazon’s “entry into Southeast Asia” was the biggest surprise and non-surprise at the same time. A non-surprise because Amazon’s long-awaited and rumored soft-launch into Singapore was widely covered by the media even before the company’s Prime Now services officially became available on July 26, 2017. A surprise because Amazon’s expected tour-de-force across the region ended before it even started.
“I was expecting more things that I can’t get in Singapore, for example, Sriracha or something small that’s not available in Singapore but most stuff on Prime Now are basic things you can get from Fairprice…” said Reddit user Ticklishcat.
But there’s a 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 are already buying from Amazon, without the latter’s full-fledged local presence: Singapore ranking only #29 in traffic to Amazon.com but #4 when normalized for population size (#1 in Asia)
The launch of Amazon Prime in Singapore earlier this month makes it even less likely for the firm to set up local operations beyond Amazon Prime Now. Amazon is no longer subsidizing the original free shipping for orders above US$125 to Singapore and Singaporean Prime members have free international delivery only on orders above S$60 on Amazon’s US website for S$8.99 per month in addition to other benefits.
Not much else has been heard about the company’s further expansion into the region, particularly Indonesia and Thailand, where markets are being rapidly carved up by Alibaba and Tencent. With time running out for a full-fledged, organic entry into the high-growth markets of Southeast Asia, its stock trading at all-time highs, and not too distant memories of failure in China, we expect Amazon to attempt at least one major acquisition in 2018 to accelerate regional expansion.
3. Offline is the new online: pure-play e-commerce 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 e-commerce is expected to make moves offline. With online customer acquisition channels like Google and Facebook rapidly reaching saturation and diminishing returns, e-commerce 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 $19 million Series B financing round, recently launched its biggest pop-up to date in Siam Square, the fashion center of Bangkok. The store applies “click-and-collect”, enabling customers to order online and try items in store before deciding which ones to keep or return.
“In fashion, the number one barrier to purchase is still the need to try the 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,” said David Jou, co-founder and CEO of 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 e-commerce pure-play.
Lazada, on the other hand, may follow Alibaba’s moves in China where the e-commerce juggernaut launched Hema supermarkets in Beijing and Shanghai. In addition to reinforcing a positive brand experience and customer acquisition, these new offline stores serve as fulfillment centers, effectively making up for Southeast Asia’s lack of logistics infrastructure.
Lazada Group CEO Max Bittner already hinted at the possibility physical stores in Indonesia at a conference earlier this year.
Over the last decade in China, Alibaba rode 50%+ year-on-year e-commerce 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 e-commerce 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 e-commerce 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 e-commerce 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 $25 million 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 e-commerce ICO. Already a startup called HAMSTER is selling HMT tokens to develop a decentralized marketplace that promises “no fees, no brokers”.
Revolutionary e-commerce platform funded by ICOs or a Ponzi scheme?
Expect e-commerce 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 e-commerce 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 e-commerce 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 Philippines 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 e-commerce website Cipika. Alfamart, Indonesia’s second largest convenience store chain also had to downsize operations to pivot its e-commerce 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 e-commerce plays. As Alibaba and Tencent up the ante, there will definitely be more casualties in the new year.
Opinions expressed are solely my own and do not express the views or opinions of my employer.