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What startups need to know about doing e-commerce in Southeast Asia

Some trends and perspectives for businesses looking to engage with customers through online and mobile channels

By Babar Khan Javed

E-commerce

For retail businesses, there are six reasons businesses need to invest in e-commerce as an additional channel to reach and engage customers.

From a business standpoint, here are some advantages:

  • Profitability. Whereas brick and mortar deals only give the brand 60 per cent margins on products sold, e-commerce offers up to 75 per cent in margins.
  • Scale. Serve a potentially unlimited number customers at once, instead of allocating human resources to man stores, especially during the weekend/holiday rush.
  • Mobility. Brands can now be discovered by consumers across geographies, optioning the brand to reach segments and markets beyond one’s own locale.
  • Data. Analytics and business intelligence through data enable retailers to access data about consumers, do remarketing/retargeting and engage users with better deals to improve sales and conversions.
  • Lean. An online channel is an overall more cost effective means of displaying, proposing, selling and fulfilling consumer demand.
  • Speed. It’s easy to set up, learn, apply and earn from.

According to Danish Ayub of MWM Studioz, there are six equally important reasons consumers would opt to buy through e-commerce platforms than physical stores.

From a consumer standpoint, the advantages of eCommerce are:

  • Time. No more worrying about your commute time, being stuck in traffic, finding the products, and dealing with pushy sales people or other shoppers.
  • Convenience. Online shopping can be done at any time of the day, even when all brick & mortar stores are closed.
  • Variety. E-commerce provides a range of choices that cannot be found at brick-and-mortar outlets. Stores like Sephora struggle to stock & display all their SKU’s and in countering the issue resort to eCommerce as a channel for products display and sales.
  • Flexibility. E-commerce gives customers the ability to make purchases from remote areas. Rural citizens can now access the same range of products as their urban counterparts and are no longer limited by the options or monopolistic pricing of their local store.
  • Ease of browsing. In contrast to the brick-and-mortar experience of browsing, there is no shopkeeper or attendant hovering the online shopper.
  • Transparency. Online shoppers gain instant price comparison access and can make the choices that suit them best.

Also Read: These 3 freemium tools will help you understand e-commerce consumer behaviour so you can optimise for profit

Behind the Scenes

In its path to being regarded as a flourishing eCommerce marketplace, Southeast Asia (as a region), lacks the following, however:

  • A solid regional payment and logistics infrastructure, which are ingredients that have served as the foundation for China’s astounding growth in digital retail.
  • Trust in e-commerce platforms, wherein customers are concerned about the lack of touch-and-feel inherent in digital commerce and report having trouble finding the products they want.

In the past 10 years, Southeast Asia has seen the entrance of e-commerce business models inspired by successful approaches utilised in regions such as North America and Europe. While we know of the handful awarded with billion dollar valuations, we also know that over 90 per cent have failed for failing to localise their strategies to match local market gaps.

For instance, while general stores in Europe close by 8:00 pm, their sister concerns in Malaysia stay open 24/7. So a startup being operated with the European clone model fails to add value in a nation that is not affected by the inconvenience of labor laws that protect work-life balance.

In a similar manner, whereas urban planning in western nations maintains barriers between suburbs and commercial areas, the same is not applicable in Singapore where the two worlds are not only minutes apart but often easily accessible by reliable public transport. So e-commerce businesses entering or operating in Southeast Asia must reassess the market gaps they intend to fill and then localise their strategy accordingly.

It’s also worth mentioning that nearly all billion dollar startup acquisition deals being closed in the Southeast Asian region mirror those being closed in the western world in an important way: golden handcuffs.

This means that in most cases, the founder is not (contrary to media reports) walking away with all the money promised. The reality is that the founders are locked into the company for a period of three to four years and are assigned targets. The reward for meeting those targets at incremental stages leads to the remaining 80 per cent of the acquired valuation paid out and also brings them closer to retirement.

These deals are also predicated on a clause limiting the founder from starting a similar company for a period of time or in some cases limiting them altogether from founding or investing in one.

Also Read: Southeast Asia is the next e-commerce wonderland: DHL eCommerce CEO Charles Brewer

Pop goes the bubble

Earlier this year, Morgan Stanley devalued Flipkart by 27 per cent, following which T Rowe Price marked it down by 15 per cent. HSBC slashed the valuation of online restaurant research platform Zomato by 50 per cent. Twitter, Dropbox and Snapchat have also been devalued. Industry experts speculate that the lack of profit making metrics and goals played a huge role in the devaluation, something internet startups are simply not focused on.

A big reason for this stems from the top, with investors hiring bankers and management consultants with no e-commerce experience to lead an internet business, focusing on the vanity metrics they banked on in the past. The message is clear, unless startups redefine the success metrics to provide investors with a sizeable return on their trust, future funding rounds could be unsuccessful which hurts employee loyalty and merchant trust.

Strategy bubble confirmed

Alibaba Group Holding Ltd., China’s biggest e-commerce company acquired a controlling stake in Southeast Asian online retailer Lazada Group for US$1 billion in April this year. Alibaba confirmed the company is bleeding money and has halted international hiring, refocusing on a localisation strategy focusing on quality metrics rather than quantity metrics.

While players like Lazada and its backers have been fixated on growing the perception bubble by focusing on an acquisition strategy rather than a retention strategy. The acquisition strategy backed by European startup developers led by bankers and management consultants rewards vanity metrics such as application downloads, site registrations and growth in gross merchandise value.

Also Read: Hold your breath: Alibaba just acquired controlling stake in Lazada

The absence of the right metrics has contributed to the bubble, which in turn has hurt investor trust and merchants willingness to subjugate customers to experience their products via e-commerce.

Whereas Alibaba’s approach has been on making money, plain and simple. This means the company rewards successful remarketing, increments in the average order value, improvement in unit economics such as lifetime value of a single customer account and reducing the cost of customer acquisition.

Speculation 2.0

A recent report by Temasek and Google, Singapore’s eCommerce market was valued at US$1 billion in 2015, with online shopping making up 2.1 per cent of retail sales. By 2025, Singapore’s e-commerce market is expected to make up 6.7 per cent of all retail sales and exceed US$ 5.4 billion.

According to Statista, by 2020 revenue from eCommerce will amount to:

  • US$2.7 billion in the Philippines*, with an annual growth rate of 20.67 per cent
  • US$2.8 billion in Malaysia , with an annual growth rate of 24.30 per cent
  • US$5.8 billion in Thailand, with an annual growth rate of 17.95 per cent
  • US$6.6 billion in Hong Kong, with an annual growth rate of 11.04 per cent
  • US$16.1 billion in Indonesia, with an annual growth rate of 18.82 per cent.

Market reality

While it’s true that the rate of digital adoption in Southeast Asia has been unexpected, it’s also true that the offline shopping experience in and of itself has also boomed in the past decade. Just because Jakarta is the number one city for tweets doesn’t correlate that it’s a good market for e-commerce.

Just because the Southeast Asian population is diversely over 600 million with 250 million smartphones doesn’t mean it justifies the claims in online commerce. The channel in itself facilitates under 4 per cent of total retail commerce, representing only about US$6 billion in sales. The channel facilitates just 15 per cent of total retail commerce in the US and in China, representing US$289 billion and US$313 billion, respectively.

Success formula

Founders of online marketplaces will have to reassess their goals towards aiming for a profit as well as growing sales, customer retention being twice as important as customer acquisition and a direction that increases the shareholder value. Advertisers and agencies will have to tap into e-commerce as an additional channel for engaging via online marketplaces but also as means of utilising social commerce to drive footfall for the offline experience.

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The views expressed here are of the author’s, and e27 may not necessarily subscribe to them. e27 invites members from Asia’s tech industry and startup community to share their honest opinions and expert knowledge with our readers. If you are interested in sharing your point of view, submit your post here.

Featured Image Credit: 123rf Stock Photos

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