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Southeast Asia E-Commerce: Opportunity and Optimism Abound

Southeast Asia digital spend by category, 2016 (US$ billions)

Rising internet penetration, a young population, and rising incomes are pushing Southeast Asian shoppers online, thereby opening exciting opportunities for business and investment.

Southeast Asia’s 655 million plus population is increasingly migrating towards a digital-centric lifestyle, going online to conduct day-to-day activities such as shopping, entertainment, payments, and transport. Driven by an expanding middle class and a youthful, tech savvy population (about 43% of Southeast Asia’s inhabitants are aged 24 years and below according to data from the CIA), this evolution of consumer culture is expected to drive the region’s internet economy in the years ahead and e-commerce has emerged as one of the top categories for digital spending according to Bain & Company; of the region’s estimated US$ 50 billion internet economy in 2016, e-commerce accounted for US$ 15 billion or 30%, second only to travel and tourism which accounted for US$ 22 billion (equal to about 44%) of digital spending.

Southeast Asia digital spend by category, 2016 (US$ billions)

The dynamism is reflected in the growth numbers with Southeast Asia’s e-commerce sales of first-hand goods reaching US$ 10.9 billion in 2017, up from US$ 5.5 billion in 2015, representing a CAGR of 41% according to data from Google and Temasek’s “e-Conomy SEA Spotlight 2017” report.

Yet, there is still plenty of growth potential. With just about 390 million people in Southeast Asia connected to the internet, (making it the world’s third biggest internet population), internet penetration in the region stands at about 59%, thereby offering an untapped market of over 200 million people.

Bar chart showing the population of internet users and non-internet users in Southeast Asia by country as at December 2017. Indonesia had the highest number of internet users (143.26 million people) as well as the highest number of non-internet users (123.53 million people). After Indonesia, countries with the highest number of internet users are as follows: Philippines (67 million), Vietnam (64 million), Thailand (57 million), Malaysia (25.08 million), Myanmar (18 million), Cambodia (8.01 million), Singapore (4.84 million), Laos (2.44 million), Brunei (0.41 million) and Timor Leste (0.41 million).

And among this army of internet users, just a handful of them are active online shoppers and e-commerce accounts for just about 1% of total retail sales for most countries in Southeast Asia according to a report by ResearchAndMarkets. In Singapore, one of the region’s most mature e-commerce markets, online sales made up just 2.1% of total retail sales in 2015 – the highest proportion among Southeast Asian countries according to a report by Google and Temasek. This compared with China where e-commerce accounted for about 12.1% of total retail sales in 2015, according to the National Bureau of Statistics.

Unsurprisingly, there is an air of optimism about Southeast Asia’s e-commerce growth prospects and the region is expected to be the next rising star of e-commerce in Asia. Asia-Pacific e-commerce sales grew 31.1% in 2017, according to data from eMarketer, however nearly 83% of those sales came from China alone, the world’s biggest e-commerce market. Japan, South Korea and India make up the top four e-commerce markets in Asia-Pacific, which leaves Southeast Asia as the next frontier for e-commerce growth thereby opening opportunities for business and investment in the region. BMI Research projects Southeast Asia’s e-commerce sales to explode from US$ 37.7 billion in 2017 to US$ 64.8 billion by 2021, representing a CAGR of 14.5%.

Indonesia

Boasting the fourth largest population in the world, the largest population of internet users and the largest economy in Southeast Asia, Indonesia is often touted as one of the most promising e-commerce markets in the region.

Indonesia’s e-commerce market was valued at US$ 8 billion in 2017 according to McKinsey and the market is forecast to grow eight-fold to US$ 55-65 billion by 2022, representing a grand CAGR of over 45% driven by increasing internet penetration and a growing consumer class; just about 53% of the country’s 260 million plus population is connected to the internet, leaving an unconnected population of over 120 million, and the country’s consumer class is projected to grow from 45 million in 2010 to 135 million by 2030 according to analysis by McKinsey Global Institute which represents huge potential for internet retailers.

With e-commerce accounting for 1.6% of Indonesia’s total retail sales as of 2016 (compared with 13% in China the same year) according to a report by AusTrade, and with just 15% (equal to about 30 million) of Indonesia’s adult population of 195 million being active online shoppers as of 2017, Indonesia’s e-commerce market, already the largest in Southeast Asia, is still at an infant stage of development and these driving forces are expected to propel the number of Indonesian online shoppers to 43.9 million people by 2022 and Indonesia’s online sales are expected to make up about 20% of total retail sales by 2020 according to estimates by Indonesia’s Trade Ministry. ResearchAndMarkets released a year 2018 report which foresees Indonesia to have the highest e-commerce growth rate in the region through 2025, and the potential has lured the likes of e-commerce giants Amazon, Alibaba who are aiming to capture a slice of this ever-growing pie which is currently dominated by homegrown head honcho Tokopedia with a 14% market share according to data from CLSA. Tokopedia is followed by Singapore-rebased Shopee with a market share of 11%, Bukalapak and Alibaba-backed Lazada with 6% each. 28% is taken up by other e-commerce platforms (such as Zalora, Blibli, MatahariMall and China’s JD.com-owned JD.id) while 36% of Indonesian online sales is generated by social media platforms, (notably Facebook and Instagram) and messaging apps (such as Whatsapp).

Part of the reason for the rise of social commerce in Indonesia could be attributed to a few factors; Indonesians are avid social media users (according to Hootsuite, Indonesia has the world’s fourth biggest population of Facebook users, and the world’s fourth biggest population of Instagram users, and according to Twitter, Indonesia has the world’s fifth biggest population of Twitter users), and Indonesian online shoppers seem to have a preference for interacting one-on-one with the seller prior to making a purchase. Banking on this consumer culture, a number of Indonesian SMEs began selling their wares online using available online channels such as social media, way before e-commerce platforms became ubiquitous. As a result, social commerce developed before e-commerce websites became mainstream with social commerce accounting for as much as 50% of online sales in Indonesia before dropping to 36% in 2017 as e-commerce websites gained traction.

While e-commerce is gathering momentum among Indonesian online shoppers, quite the opposite is taking place in China, the world’s biggest e-commerce market, where social commerce is gradually taking root and finding its place alongside well-entrenched e-tailing websites. Barely three years old, Pinduoduo, a Chinese social commerce platform launched in 2015, filed for an IPO this year, raising US$ 1.6 billion in what was the second-biggest Chinese IPO in the United States.

Hence, if the ongoing evolution of the relatively more mature Chinese e-commerce is anything to by, social commerce is likely to remain a formidable channel in Indonesia’s e-commerce sector going forward. However, the growth opportunity for dedicated e-commerce platforms could be more exciting as they potentially continue taking up market share from social media platforms. According to McKinsey, Indonesian online sales through e-commerce websites is forecast to grow eight-fold from US$ 5 billion in 2017 to US$ 40 billion by 2022 while online sales from social media is expected to rise about five-fold or so from US$ 3 billion in 2017 to US$ 15-25 billion by 2022.

Bar chart showing Gross Merchandise Volume (GMV) in Indonesia’s e-commerce market in 2017 and 2022 (forecast) (US$ billions). In 2017, Indonesia’s total GMV was estimated at over US$ 8 billion with about US$ 5 billion being generated by e-tailing websites and over US$ 3 billion being generated by social commerce channels. By 2022, Indonesia’s GMV is forecast to grow to US$ 55065 billion with US$ 40 billion being generated by e-tailing websites and US$ 15-25 billion being generated by social commerce channels.

So far, certain categories have been high flyers in Indonesia’s e-commerce growth wave. Much like in other Asian e-commerce markets such as India, Indonesian online shopping baskets tend to contain products in Fashion (the leading product category as per one market survey); Electronics & Media; Furniture & Appliances; Food & Personal Care; and Toys, Hobby & DIY product categories.

Although integrated e-commerce platforms such as Tokopedia, Lazada, and Blibli have been taking the limelight, specialist e-commerce websites that cater to these popular product niches are also showing promise. Seven-year old Islamic fashion e-tailing startup Hijup for instance, was ranked 20th in the number of visits to e-commerce sites in Indonesia in the second quarter of 2018 with a monthly average of 930,000 visits and has topped the list as the most followed e-commerce business on Instagram.

Much like the ongoing evolution of mature e-commerce markets such as China and India, where a proliferation of specialist e-tailing websites such as China’s Gome and Vipshop (which specialize in home ware and fashion respectively), and India’s Pepperfry and Ajio.com (which specialize in furniture and fashion respectively) take market share from integrated e-commerce bigwigs such as Alibaba in China and Flipkart in India, there is tremendous long term growth opportunity for such specialist sites in Indonesia as the country’s e-commerce market matures.

Indonesia’s largest luxury retailer, Masari Group appears to have spotted one such gap; luxury fashion. Although Indonesia isn’t particularly noted for its affluent class (unlike India or China for instance where swelling high income consumers has given birth to a burgeoning luxury fashion e-commerce market), the country is seeing a steady growth in its population of affluent consumers. And yet, there is no clear e-commerce platform for luxury fashion and unlike in India or China where existing e-commerce players are adding a luxury fashion component to their respective websites (Indian e-commerce giant Flipkart’s fashion arm Jabong for instance is piloting a ‘Jabong Luxe Store’ while Chinese e-commerce behemoth Alibaba launched ‘Luxury Pavilion’, an invite-only platform for premium and luxury brands to strut their stuff) so far there has yet to be such a move towards a dedicated platform for luxury brands by Indonesian e-commerce websites. Sensing an opportunity to offer an avenue for the country’s affluent demographic to shop online for high-end fashion wear, accessories, and shoes, Masari Group launched an e-commerce website showcasing products from brands such as Les Petits Joueurs, Rodo, Dorateymur to name a few.

Malaysia

A young, tech-savvy population with relatively high incomes, and a strong infrastructure make Malaysia a potentially lucrative e-commerce market.

As Malaysians increasingly turn to online channels for their shopping needs, e-commerce has been steadily growing its share of Malaysia’s GDP; e-commerce’s share of Malaysia’s GDP stood at 6.1% or RM 74.6 billion in 2016 according to Malaysia’s Statistics Department, up from 5.9% or RM 68.3 billion of in 2015. Online sales made up about 2.5% of Malaysia’s total retail sales in 2015 and the figure is expected to reach 4%-5% this year according to online deal website 11street. A 2016 report by yStats foresees Malaysia’s e-commerce sales jumping five-fold by 2025.

Several factors suggest that Malaysia, Southeast Asia’s fourth-largest economy according to data from the IMF is at an inflection point of e-commerce growth; internet penetration stands at about 78% as at December 2017, according to data from Internet World Stats, the country’s middle class is expanding (Malaysia, ranked third among Southeast Asian nations in terms of GDP per capita by PPP as of 2017 according to figures from the CIA, and incomes are rising among Malaysia’s youthful population (the median age of the country’s population is 28.5 as of 2017 according to the CIA, making it the country with the sixth-youngest population in Southeast Asia, younger than Thailand (median age: 37.7), Singapore (34.6), Indonesia (30.2), Vietnam (30.5), and Brunei (30.2). And with about 45% of the country’s population aged 24 and below according to data from the CIA, the long term outlook for Malaysia’s online sales growth is bright as these tech-savvy youngsters rise up the income ladder.

Although pundits point out that Malaysia’s logistic infrastructure may pose a bottleneck to the country’s burgeoning e-commerce sector, it is still worth noting that regionally Malaysia’s infrastructure is second only to Singapore according to the World Economic Forum’s Global Competitiveness Index 2017-2018. This could make delivery quality, speed and costs relatively more competitive in Malaysia compared to regional peers, which could better enable Malaysian e-tailers to profitably offer free shipping (an important advantage in an era where free shipping is increasingly becoming a competitive necessity) which incentivizes buyers to spend more money shopping online and thereby propel the domestic e-commerce market forward.

Bar chart showing the World Economic Forum's Global Competitiveness Index, 2017-2018 Infrastructure score for selected Southeast Asian nations. Singapore ranks highest with a score of 6.5, followed by Malaysia (5.5), Thailand (4.7), Indonesia (4.5), Brunei (4.3), Vietnam (3.9), Philippines (3.4), Laos (3.3) and Cambodia (3.1)

With the e-commerce space in Malaysia seemingly ripe for the taking, competition is heating up among e-tailers both foreign and local for a share of the pie. The horizontal e-commerce space is crowded with well-established players dominating the arena such as Alibaba-backed Lazada, Singapore-based Shopee, and homegrown e-commerce pioneer Lelong. Competition could get stiffer in the years ahead with deep-pocketed e-commerce heavyweights such as Amazon (which has already established operations in neighboring Singapore) and Chinese e-tailer JD.com (which has tied up with retail giant Walmart to tackle the Southeast Asian market) potentially setting up shop in Malaysia.

Vertical e-commerce however offers ample opportunity. Similar to most e-commerce markets, Fashion is the leading online shopping category in Malaysia, and there has been a blossoming of a number of local and international fashion and fashion-related platforms, the success of which minted a fair number of millionaire founders. Homegrown online beauty store Hermo was acquired by Japanese beauty portal iStyle, netting Gobi Partners (Hermo’s ex-investors) a 91% Internal Rate of Return (IRR) in just one and a half years. Meanwhile Fashion Valet, another homegrown fashion e-commerce platform successfully closed its Series C round this year with an investment from Malaysia’s main sovereign fund Khazanah.

Apart from Fashion, other popular categories include Electronics; and Sports & Hobbies. Opportunities exist in other verticals which are tremendously popular offline but have yet to established online. Furniture is one example; Malaysia’s furniture market has grown in along with the growth of the country’s middle class and the country’s has a vibrant furniture industry, currently ranked as the world’s eighth largest furniture exporter as of 2017 and has a target of being among the world’s top five furniture exporters by 2022.

While horizontal e-marketplaces such as Lazada and Rakuten sell furniture online, specialist online furniture marketplaces are a relatively new concept in Malaysia and there is so far no dominant specialist furniture e-commerce site in Malaysia as is found in other countries such as Pepperfy and Urban Ladder in India, and Wayfair(NYSE:W) in the United States. Malaysian furniture online stores iHias and Apver could be poised to ride this potential.

Vietnam

With its relatively high internet penetration rate, youthful, tech-savvy workforce, and rising status as a low-cost manufacturing hotspot, Vietnam’s e-commerce sector could be one of the hottest growth stories in the region propelled by domestic as well as cross-border e-commerce.

With about 64 million of its approximately 96 million population connected to the internet (reflecting an internet penetration of about 67% according to data from Internet World Stats) and about 40% of the population aged 24 and below (the median age is 30.5) according to the CIA, Vietnam’s e-commerce market, which accounts for a meager 1% of the country’s total retail sales is a growth opportunity. Online sales grew 25% in 2017 to US$ 1.75 billion up from US$ 1.4 billion in 2016 according to data from Statista, driven by its young, tech-savvy workforce who happen to be among the most frequent online shoppers in Southeast Asia. According to the Visa Consumer Payment Attitudes Study 2017, Vietnamese were the second most frequent online shoppers with 84% of the 517 Vietnamese respondents saying they shopped online at least once a month, behind only the Thai respondents, 85% of which shopped online at least once a month.

And although challenges such as a relatively weak logistics weak infrastructure network (Vietnam ranks sixth out of nine selected Southeast Asian countries in terms of infrastructure according to the world Economic Forum’s Global Competitiveness Index, and logistics costs account for about 21% of Vietnam’s GDP as of 2016 according to figures from the World Bank) and low online payments penetration continue to dog Vietnam’s e-commerce sector, they have not deterred e-commerce behemoths such as Lazada, Amazon, JD.com and Shopee who, clearly playing the long game, continue to invest heavily as they race to capture market share in the Vietnam’s burgeoning online retail market. Euromonitor projects Vietnam’s e-commerce market to expand from US$ 1 billion in 2016 to US$ 2.3 billion by 2020, representing a CAGR of over 23%.

Like most other e-commerce markets around the world, fashion is the leading product category, with Vietnam’s working class women who have money to spend but little time to stop by every store, instead peruse a variety of online stores at the convenience of their internet-enabled devices to hunt for clothes, handbags, shoes and fashion accessories. Fashion is the most product popular category not just on e-commerce portals but also on social commerce channels such as Facebook.

Bar chart showing the most popular categories among online shoppers in e-commerce platforms and social commerce platforms according to a 2017 survey by Q&Me Vietnam Market Research. Fashion was the most popular category with 73% of e-commerce shoppers and 68% of social commerce shoppers spending the most on fashion products over the past 12 months. Fashion was followed by IT / Mobile phones, Food and beverage, Cosmetics, Kitchen appliances, Books / Stationery, Sports goods, Ticketing, Supplements / Functional foods, Consumer electronics, SPA / Beauty services, Flowers and plants, Music / Video.

After fashion, IT products, cosmetics, food and beverages, and books and stationery according to a 2017 survey conducted by Vietnamese market research firm Q&Me. While there is clearly tremendous potential for Vietnam’s domestic e-commerce market going forward, the more exciting part of the story however is Vietnam’s rising status as a manufacturing hotspot and the implications this status has on e-commerce. As manufacturing costs rise in China as result of rising costs of labor and land among others, a number of China-based manufacturers are shifting some or all of their manufacturing facilities away to other countries, a strategy known as the “China+1” production model. Thanks to its geographical advantage of being located close to China, Vietnam (particularly northern Vietnamese provinces such as Hai Phong) has been a major beneficiary of this trend, which has had the effect of widening the country’s manufacturing base, and boosting the area’s GDP and real estate demand. Vietnam’s ascent has a manufacturing hotspot gives the country’s local businesses an advantage in selling to the global market, which suggests bright prospects for Vietnam’s cross-border e-commerce sector.

Global e-tailing giant Amazon has clearly noticed Vietnam’s potential in this space. This year, Amazon announced a partnership with the Vietnam E-Commerce Association (VECOM) to allow local and small and medium-sized enterprises to sell and export Vietnamese-made goods through the platform. Alibaba-backed Lazada has also jumped into the ring with the company revealing that it was developing tools to help sellers peddle their wares to Southeast Asian countries in which Lazada has operations such as Malaysia. Tiki.vn, backed by Chinese e-tailer JD.com has launched a cross-border e-commerce channel, “Tiki Global”, to enable consumers to purchase foreign products directly from foreign manufacturers.

Philippines

In a country where logistics infrastructure is lacking and shopping malls function as “destinations” whereby they represent more than just places to shop, dine and entertain friends, but also serve as places of worship, workout classes and more, e-commerce may not necessarily displace Philippines’s plethora of shopping malls in the near term. The long term outlook however for online retailing in Southeast Asia’s second most populous country is a lot more exciting.

Retailing is big business in the Philippines with the country being home to three of the top 10 largest malls in the world in terms of Gross Leasable Area according to a ranking compiled by WorldAtlas. For Filippinos however, shopping malls are not just places to shop, dine, watch movies and hang out with friends; shopping malls also function as places to pay bills, worship, workout (such as Zumba classes), conduct government transactions (such as applying for driver’s licenses and business permits) and more.

With shopping malls performing an ever-growing list of functions to cater to a shopping lifestyle somewhat unique to the Philippines, the rise of e-commerce may not necessarily spell the demise of the country’s shopping malls (at least in the near term) as has been the case in the west. Furthermore with Philippines being a notable infrastructure laggard (the country’s logistics infrastructure network that is among the weakest among Southeast Asian nations), the resulting relatively uncompetitive delivery charges could be a turn off to the country’s price conscious shoppers (at about US$ 8,300 per person Philippines’ income per capita is also among the lowest in the ASEAN region according to data from the CIA) which means online retailers may be compelled to absorb bulk of the delivery cost at the expense of their bottom lines. This challenge may impede Philippines’ e-commerce sector from achieving its fullest potential going forward.

Bar chart showing the 2017 GDP per capita (Purchasing Power Parity) among Southeast Asian nations according to data from the Central Intelligence Agency. At US$ 93,900 per person, Singapore had the highest GDP per capita. Singapore was followed by Brunei (US$ 78,200), Malaysia (US$ 29,000), Thailand (US$ 17,900), Indonesia (US$ 12,400), Philippines (US$ 8,300), Laos (US$ 7,400), Vietnam (US$ 6,900), Myanmar (US$ 6,200), Timor Leste (US$ 5,400) and Cambodia (US$ 4,000).

Although the near term view for Philippines’s online retail market may not appear to be as potentially lucrative compared to regional peers such as Indonesia or Vietnam, that however does not necessarily reflect a lack of long term potential. With just about 1% of Philippines’s total retail sales coming from e-commerce in 2017 according to The Philippine Retailers Association, and with the country expected to overcome its infrastructure inadequacies over the next decade through development programs such as the ‘Build, Build, Build’ program, Philippines’ e-commerce businesses could be set to ride a wave of growth in the long term in a market that could prove to be one of the biggest in Southeast Asia; among Southeast Asian nations, Philippines has the second largest population (estimated at over 100 million in 2017 according to data from the CIA), the second largest population of internet users (estimated at 67 million in 2017 according to Internet World Stats), and the second-youngest population with a median age of 23.5 (behind Timor Leste where the median age is 18.9 according to data from the CIA).

Like many other e-commerce markets in Southeast Asia, Philippines’ online retail sector is driven by its youth and as this tech-savvy generation climbs up the income ladder in the years ahead, there is tremendous growth potential for online consumption growth. Unsurprisingly, a report by Google and Temasek projects Philippines’ e-commerce sector to be worth US$ 19 billion by 2025, overtaking Malaysia and Singapore.

 

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