11 trends that will shape Southeast Asian eCommerce in 2017

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11 trends that will shape Southeast Asian eCommerce in 2017

While president-elect Donald Trump is working hard to stop China from becoming a global superpower, China hasn’t slowed its digital hegemony in Southeast Asia — and in Southeast Asia, China means Alibaba (of course). After identifying Southeast Asia as being on the cusp of an eCommerce golden age, Jack Ma and his team swooped in four months later and picked up Lazada, the region’s leading ecommerce marketplace, for a crisp $1 billion.

The Lazada-Alibaba deal, Alibaba’s largest overseas acquisition to date, is a pivotal event for Southeast Asia and its implications span the entire commercial value chain from digital advertising, logistics, finance, insurance and even healthcare.

A look back at 2016

Even without the Lazada deal, this year still proved eventful for eCommerce in the region: fast-fashion fizzled out and Rocket Internet’s Zalora ending up selling for peanuts to Thai retail conglomerate Central Group.

Singpost’s headaches continued after the sudden removal of its Group CEO Wolfgang Baier in 2015, the company also lost its COO, CFO and the group’s chairman stepped down amidst a corporate governance scandal. These events pushed back the company’s deal with Alibaba a third time and wasn’t closed until October.

Across the region, asset-heavy B2C eCommerce suffered. Singapore’s homegrown player RedMart was acquired by Lazada after it couldn’t bleed anymore money and Ascend Group’s iTruemart shut down in the Philippines only a few months after boasting that it would become the first regional eCommerce player by 2017.

Japan’s eCommerce juggernaut Rakuten withdrew from Southeast Asia and sold its Thailand business back to the original founder. Moxy moved away from traditional mass eCommerce while merging with Indonesia’s Bilna to become Orami, a female-focused content and commerce play that raised funding from Facebook co-founder Eduardo Saverin.

Borrowing Jack Ma’s terminology, if 2016 was the appetizer, then 2017 will be the main course for eCommerce in Southeast Asia. With a $238 billion grand prize and Amazon poised to enter Singapore in Q1, it’s already shaping up to be an interesting year.

Game on.

1/11

The giant finally awakens as Alibaba becomes more active

Launched in China seven years ago, the Taobao Partner program aims to enroll suppliers to provide e-commerce related services to Taobao’s merchants. Taobao Partners like Baozun and Lili & Beauty were offered store operations and fulfillment services through Taobao and Tmall that eneabled them to grow into two of the biggest e-commerce platforms in China.

The imminent launch of a similar program in Southeast Asia (ahem, Lazada Partners?) will create ample opportunities for an entire ecosystem ranging from digital agencies to delivery companies. Full-service eCommerce enablers such as aCommerce and SP eCommerce are well-positioned to further grow the $238 billion Southeast Asian eCommerce opportunity.

2/11

Alibaba’s Cainiao Network Will Accelerate Last-mile Logistics Consolidation

Logistics is often considered the biggest bottleneck to eCommerce growth in Southeast Asia, so there’s been plenty of venture capital funding spawning an army of last-mile and on-demand delivery startups such as Ninja Van, Ascend Group’s Sendit, and Skootar.

This nascent, fragmented, and hypercompetitive ecosystem is similar to China’s from a decade ago and what spurred Alibaba to launch Cainiao Network, an open platform that aggregates all last-mile vendors.

Over 70% of business for third-party logistics (3PLs) in China now come from eCommerce of which Alibaba drives the vast majority. This allows them to set industry standards and increase price competition among last-mile providers, essentially turning the latter into a race-to-the-bottom, commodity play.

Alibaba has already begun bringing in Alipay and Ant Financial and with Southeast Asia’s logistics ecosystem following China’s trajectory, the introduction of Cainiao Network is only a matter of time.

Cainiao Network is Alibaba’s missing piece of the puzzle to control the entire eCommerce value chain.

3/11

The battle for “first-mile" will bring new threats to Google and Facebook

Few people realize that eCommerce giants like Alibaba and Amazon aren’t only a threat to their direct competitors such as JD and Wal-Mart but also to the likes of Baidu and Google.

With product searches increasingly moving off search engines and directly on to eCommerce sites, Alibaba and Amazon are shaking up internet advertising. In China, the rivalry between Alibaba and Baidu has led the former to block Baidu’s search engine spiders from crawling and indexing Alibaba’s pages since 2009, effectively preventing users from going to Baidu to search for products.

Expect this battle for “first-mile” to kick off in 2017 in Southeast Asia when Alibaba migrates Lazada over to its Tmall platform and introduces Alimama, its proprietary self-service ad platform similar to Google Adwords.

Merchants on Lazada will have access to a variety of PPC (Pay-Per-Click), CPM (Cost-Per-Thousand Impressions) and CPS (Cost-Per-Sale) based advertising such as Tmall’s P4P “Express Train” PPC search ads. These ads command an impressive 25% of China’s total online search traditionally dominated by Baidu. To give an idea of Alibaba’s progress in search advertising, Google China’s search ad market share peaked at 30% before throwing in the towel and exiting the Chinese market.

Media companies better brace themselves for new competition and digital agencies should start learning how to buy and optimize media on the Lazada platform in 2017.

4/11

Alipay’s introduction will drive consolidations in the online payments sector

The new year will mark the beginning of consolidation in the payments space in Southeast Asia. Cash-on-delivery (COD) dominance—75% of eCommerce transactions in the region—has inspired a plethora of startups like Omise and DOKU and established telcos and banks to build the next PayPal.

But most of these initiatives don’t address the core of the issue—a lack of credit and the large population of underbanked people throughout Southeast Asia. For example, LINE Pay, the Apple Pay equivalent solution from one of Southeast Asia’s most popular messaging apps, only works with credit cards. While great from a PR perspective, these initiatives have yet to shift consumers away from COD.

Most of the fintech ‘solutions’ have been created to do “technology for technology’s sake”— building a faster car when what is really lacking are more roads.

Lacking what’s most important—scalable distribution channels—we expect these payment companies to struggle throughout 2017. With Lazada, Alibaba pulled off the ultimate trojan horse strategy to bring in Alipay and Ant Financial into the region. The marketplace offers a massive user base and distribution channel that most Southeast Asian payment startups envy.

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5/11

Ecommerce 1.0 to eCommerce 2.0

The eCommerce space is consolidating. Alibaba’s presence and the rumored Amazon launch in Singapore in Q1 2017 closes the window of opportunity for “Ecommerce 1.0” plays — those that peddle other people’s products to a mass audience. Even MatahariMall, the “anti-Lazada” eCommerce initiative launched by Indonesian conglomerate Lippo Group, has re-positioned itself as an online-to-offline eCommerce play rather than a direct competitor to Lazada.

As we enter 2017, the opportunity in eCommerce will increasingly shift from “eCommerce 1.0” towards “eCommerce 2.0” where firms will base their competitive advantage not on traditional economies of scale but on a mix of what Bonobos’ founder Andy Dunn calls proprietary pricing, selection, experience, and merchandise

In Indonesia, one startup has taken a cue from the Facebook and Instagram seller playbook and put it on steroids. Sale Stock, a fast-fashion startup based in Jakarta, has taken a similar path to Pomelo Fashion with its own unique, experiential angle.

With an increasing amount of Sale Stock orders coming from chat sessions on its mobile website, the company has invested in and launched the region’s first ecommerce chat bot to process mobile chat orders on Facebook Messenger, built by former Google, Palantir, and NASA engineers.

6/11

Expect more casualties from a potential Alibaba and Amazon face-off

2016 was a big year for consolidations in the Southeast Asian ecommerce space:

 

• Zalora Thailand and Vietnam sold for scraps to Thai retail conglomerate Central Group

 

• Cdiscount was picked up by Thai tycoon Charoen Sirivadhanabhakdi’s TCC Group

 

• Female-focused eCommerce player Moxy re-emerged as Orami after merging with Indonesia’s Bilna

 

• Japan’s Rakuten shut down its Indonesia, Malaysia, and Singapore marketplaces as well as returning its Thailand business to its original founder

 

• Singapore-based online grocer RedMart sold for less than it raised to Lazada on the heels of a rumored Amazon entry into the market with AmazonFresh

 

And they will continue throughout 2017, especially in the hyper-competitive “eCommerce 1.0” space. One of the big victims could be Thailand-based Ascend Group, which owns a portfolio of eCommerce and fintech assets such as Wemall (B2C) and WeLoveShopping (C2C). There have already been signs.

7/11

Brands go direct-to-consumer or multi-channel

There are many benefits for brands to sell on the likes of Lazada, MatahariMall, and 11street—relatively quick setup and access to “free” traffic generated by the host marketplace. And that’s why 2016 saw many brands like L’Oreal and Unilever setting up shop on these platforms.

However, brands are gradually discovering that the cons outweigh the pros. Marketplaces collect huge amounts of data that pinpoint exactly which product categories and brands sell well, at what time and which location, and to whom. Amazon has leveraged this valuable information to introduce its own private labels to compete with its merchants.

In 2017, we will see brands getting smarter and leveraging a marketplace presence as an initial and short-term strategy. The long-term strategy is to sell direct-to-consumer via their brand.com sites where they own all the customer data, control of brand image and can offer features like subscription commerce.

8/11

Entrepreneurs and established firms will explore insurance, finance and healthcare

Like the US and China, startups in Southeast Asia will gradually move into insurance, finance, and healthcare. The underlying concepts are the same — use the internet and technology to create marketplaces or go direct-to-consumer for non-physical products such as loans, life insurance, and even data.

 

2016 saw new fintech startups such as EdirectInsure—with frank.co.th in Thailand and frankinsure.com.tw in Taiwan—trying to change the way car insurance is being sold as well as incumbents such as Asia Insurance offering Pokémon Go and mobile phone micro-insurance direct-to-consumer and exclusively online.

 

Alibaba’s acquisition of Lazada wasn’t so much about growing retail gross merchandise volume as it was about getting a scalable distribution channel for Alibaba’s other, higher-margin products. Jack Ma publicly alludes to it in his 2015 letter to shareholders:

“Alibaba group’s strategy is to build the infrastructure of commerce for the future. Ecommerce is only the first step. […] Around half of Alibaba Group’s workforce and our affiliated companies, including Ant Financial and Cainiao, are working on important areas of our ecosystem, including logistics, Internet finance, big data, cloud computing, mobile Internet, advertising and the so-called double H industries—Health and Happiness.”

“Alibaba group’s strategy is to build the infrastructure of commerce for the future. Ecommerce is only the first step. […] Around half of Alibaba Group’s workforce and our affiliated companies, including Ant Financial and Cainiao, are working on important areas of our ecosystem, including logistics, Internet finance, big data, cloud computing, mobile Internet, advertising and the so-called double H industries—Health and Happiness.”

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9/11

Companies begin to focus on Myanmar

Businesses will be exploring new markets geographically in Southeast Asia as large markets become saturated making greenfield ones like Myanmar more appealing.

 

With 53 million people, Myanmar is the fifth largest country in Southeast Asia. The country is also very unique compared to its neighbors as the country was shut off from the world until 2011 and is currently leapfrogging straight into the mobile era. Unlike its cousins who are “mobile-first”, Myanmar is mostly “mobile-only”—an estimated 20% of the population is online, most of which happened in the last two years.

 

Rocket being Rocket, the company went into Myanmar as early as 2012 launching classifieds sites like Work.com.mm and Ads.com.mm. Its first proper eCommerce venture in Myanmar called Shop.com.mm got its start in late 2014. With an average of 90,000 sessions per month for the last six months and flat growth, Shop.com.mm doesn’t exactly paint a positive picture of the eCommerce opportunity in Myanmar.

 

However, given that Myanmar has 10 million Facebook users in the country, perhaps marketing an eCommerce business the traditional way isn’t the right approach. With so much of Myanmar’s internet usage attributed to social channels, starting out on Facebook shops may be a better way to tap into what could be one of the most interesting future eCommerce markets in Southeast Asia.

This has already been proven effective in Thailand where an estimated one-third to half of eCommerce transactions are happening on Facebook, Instagram and LINE. One would expect chat commerce to be even more pervasive in Myanmar.

“Facebook’s influence in Myanmar is hard to quantify, but its domination is so complete that people in Myanmar use “internet” and “Facebook” interchangeably.”— wrote Sheera Frenkel in a BuzzFeed report on Myanmar.

10/11

Darwinian economics will thin the on-demand startup herd in Southeast Asia

Poor unit economics, platform leakage, and a stronger economy are all issues that have plagued on-demand startups over the past year.

 

In Southeast Asia, things haven’t been much brighter for on-demand startups. Happy Fresh, a groceries on-demand service, recently shut down its Taipei and Manila offices while going through a round of layoffs. It also quietly replaced its former founder and CEO Markus Bihler with a new guy. In Thailand, Inspire Ventures-backed Tapsy, a personal services marketplace, also shut down only few months after launching.

 

Go-Jek, Indonesia’s bike-hailing and now on-demand everything unicorn, suffered through an exodus of founders, with both its co-founder and VP of product leaving the company in October, triggering suspicions of internal turmoil.

 

While general sentiment for on-demand startups has taken a hit both globally and across Southeast Asia, in reality this is only the start of a natural process of weeding out all the “me-too” players in verticals where the on-demand model doesn’t make sense.

11/11

Amazon finally enters Southeast Asia

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