INTRO TO VENTURE CAPITAL – Article #3 Ecommerce in Southeast Asia

Benjamin Fong, Business Development

In this series, I will cover short and simple thoughts on the Venture Capital (VC) industry from the perspective of someone new to it, to get you from 0 to 1.

For this article, the team is looking into the ecommerce scene in Southeast Asia.

1. E-commerce in SEA boasts the fastest market growth in the world, particularly in homegrown e-commerce platforms like Tokopedia and Shopee, due to rising internet penetration and high e-commerce adoption rates.

According to a Statista report, Thailand, Malaysia, Vietnam, Singapore, Indonesia and Philippines were within the top 10 countries displaying the highest year-on-year growth in total spend from 2017 to 2018, with the global top performer Thailand displaying a 25% increase in e-commerce spend in 2018.

This strong growth could be due to the existing foundation of high internet usage in digitally developed countries like Singapore and Brunei, with reports showing penetration rates of 95% and 85% respectively. Additionally, the exponential increase in digital penetration in other SEA countries like Indonesia with 20% internet penetration growth from 2017 to 2019 has seen the number of SEA internet users exceed that of North America and Europe with 483 million unique users in 2019.

Beyond the accessibility of such platforms to SEA consumers, the preferences of SEA consumers are also highly aligned with e-commerce, with e-commerce adoption rates in SEA (83%) exceeding the global average of 75% and SEA’s largest population Indonesia reporting the highest rates of online shopping across a global survey conducted by GlobalWebIndex.

2. There are mainly two types of e-commerce, business to consumer(B2C), such as Lazada, Shopee, Zalora and consumer to consumer(C2C), such as Carousell, eBay and Kaidee.

While some B2C e-commerce firms operate purely as a fashion retailer like Zalora and Love Bonito, others like Shopee and Lazada operate as a marketplace for online retailers, providing ecommerce capabilities like a website, delivery services, etc. to businesses, even facilitating C2C sales. Whereas C2C operate by allowing customers to sell goods and services to other customers, utilizing the C2C platform to facilitate their business’ marketing, logistics and transaction needs.

For B2C firms like Lazada, Shopee, they mainly rely on commissions from sellers on their sites as well as ad revenue to boost their revenue. On the other hand, C2C firms like eBay also similarly take a cut from the transactions made on their platform but newer C2C models like Carousell and OLX diverge from this traditional monetization strategy, instead opting to leverage on their user base to garner ad revenue, as well as the use of premium in-platform services like Carousell’s Bump.

3. How do industry entrants like Love Bonito, Zalora, Lazada and Shopee measure up to industry giants like Amazon, with much stronger logistical capabilities, marketing power and product range? They do so with a firm understanding of the target market.

A classic example would be Amazon’s entrance into SEA via Amazon Prime in Singapore, an app boasting its Prime Now function, which offers a free 2-hour delivery service for order above $40. Despite its brand name, it was unable to surpass other competitors like Redmart and Shopee, with an App Annie ranking of 17 on the Appstore in 2017, compared to Redmart’s 7 and Shopee’s 4.

This could be due to several factors, the brand entrenchment and wide localized product offering of local e-commerce platforms like Shopee and Lazada, as well as a well-aligned platform to Southeast Asians’ preference.

Due to the longer market presence and stronger local networks of local platforms, the product offerings on these platforms often far surpass those on larger international players, displaying an edge in their offerings of small ticket household goods and consumables, specialised product segments which Amazon can only offer more generic versions of. The establishment of strong ties with local sellers through perks like Shopee’s 0% seller commission and Fulfilment by Lazada logistics service also enable local e-commerce access to a wide network of sellers and partners, further boosting their product offerings and brand name.

4. Opportunities and markers for venture capitals

While there are currently many late stage incumbents in the SEA e-commerce industry, the industry has not reached its peak and market opportunities and demand for innovation within is still strong. The growth in the e-commerce industry has provided strong demand not just for consumer good retailers but for industry verticals as well. Vertically relevant industries like fintech payment companies, discount and cashback platforms have all risen sharply due to the e-commerce boom. Venture capital firms on the lookout for opportunities within e-commerce industries can also expand their horizons to include companies situated elsewhere on the value chain that play a supportive role, such as logistics, e-payments and BPO sectors.

For instance, Lazada and Shopee’s delivery options support only two delivery mediums, NinjaVan and government postal service Singpost, ensuring a constant stream of revenue for homegrown logistics companies like NinjaVan.

In the area of loyalty platforms, Shopback and FavePay have been extremely popular recently, especially with their partnerships with major e-commerce companies, such as Shopback’s partnerships with Taobao, Lazada and Zalora.

Notwithstanding, there are certain key markers and issues worth analyzing about the company before choosing to invest in them.

Firstly, a common issue across e-commerce, especially with newer C2C e-commerce companies, is the problem of monetisation. The promise of a free marketplace with full seller autonomy is what companies like Carousell offer their users but this often results in monetisation problems.

While majority of the revenue are from ads, beyond ad revenue, the provision of in-app or in-platform premium functions, such as Carousell Coins, might also serve as a source of revenue for the company. However, this is likely to be a fraction of the revenue compared to ads, due to consumers’ contentment with the core features of the service. As such, the main source of revenue remains to be from ads, and this is contingent on the brand’s scale and reach, on the basis of cost metrics like cost per click(CPC) and cost per impression(CPM). A successful example of this would be OLX, which managed to break even in 2018, relying mainly on their monetization of Google Ads.

Furthermore, while ad revenue might seem the route to take, there needs to be a fine balance of ad listings on the platform to ensure targeted and beneficial ads for users, or risk losing the users’ support and membership, especially in a low switch cost environment like e-commerce. Therefore, the company needs to have a viable strategy for its revenue growth, ideally innovating beyond ad revenue, due to the hypothetical nature of the company’s ability to acquire scale sufficient enough for profitability.

A second pertinent issue the company needs to be able to address effectively is that of fraud. For companies like Carousell which offer high levels of transaction autonomy, leaving the payment, delivery and transaction terms up to the parties, the issue of buyer or seller fraud is highly prevalent, even giving rise to trending phrases like ‘Carouhell’, describing the dubious or shady nature of certain Carousell transactions. The e-commerce company would have to find an effective method of reducing such fraud risk, either by requiring payment to be done via accredited channels, a fixed delivery option, as well as clear and structured refund policies for buyers. Lazada has managed this well, providing fixed payment options via credit card, instalments and cash on delivery, as well as NinjaVan and Singpost delivery options. Lazada also reimburses buyers subjected to fraud or dissatisfactory products with their 100% Buyer Protection and/or Satisfaction Guaranteed policies. Measures such as these should ideally be in place to ensure that the company’s core service is able to be scale sustainably, without compromising on consumer satisfaction and hurting the company’s user retention.

5. Conclusion

Overall, given the fast-developing digital landscape of Southeast Asia, as well as the rising affluence of SEA consumers, the market opportunities for venture capital within SEA’s e-commerce industry are endless. Investors seeking a slice of the pie should nonetheless be wary of potential ‘unicorn’ level companies, via a thorough product and commercial due diligence process to ensure potential issues are pre-empted and planned for.

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