eCommerce could be the driver of a new middle class surge in Southeast Asia

Photo: James McCauley/Harrods via Getty Images

Southeast Asia’s e-commerce market is expected to boom in the coming years, advancing at an estimated compound annual growth rate (CAGR) of 32% from 2015 to 2025, to reach $88 billion. In that region, Indonesia is the largest economy, boasting a population of 261 million and a burgeoning middle class. Although infrastructure is an issue, 73% of the population lives on two main islands — Java with 141 million people and Sumatra with 50 million — so inland transportation is the bigger hurdle.

Moreover, there is an opportunity for online retailers in that many people in second- and third-tier cities have very few shopping malls, and therefore limited product selections, especially compared with the capital, Jakarta. As Indonesia’s government continues to work on infrastructure improvements and decrease corruption, and mobile payment adoption increases, we expect to see huge leaps in e-commerce activity in the country.

Major E-Commerce Players In Indonesia

The e-commerce market in Indonesia is more fragmented than in most countries, with several regional players maintaining a foothold in the space.

  • Lazada. Singapore-based Lazada entered Indonesia in 2012, and currently has the most site visitors out of all e-commerce companies in the country. It boasted nearly 63 million visits from May 17 to June 17 of this year. Its presence in the country also gives Chinese e-commerce titan Alibaba a foothold in the market as it holds a majority stake in the company.
  • Tokopedia. Tokopedia — the most frequently visited Indonesian e-commerce company, with 54 million monthly visitors as of June 13 — was founded in 2009 and has raised $248 million in funding. It’s been rumored that Alibaba plans to lead a new round of $500 million into the company, while reports surfaced in April that JD.com is also in talks to make a major investment. Tokopedia itself is rumored to be mulling the purchase of smaller Indonesia e-commerce company Bukalapek, which had a valuation of around $200 million and 30 million site visits in June.
  • Elevenia. Elevenia, another Indonesia-based startup, is a joint venture between Korean retailer SK Planet and Indonesian telco XL Axiata. It launched in 2014, and announced it had $95 million in revenue just a year a later. The company had about 35 million visitors for the June period.
  • Blibli.com. Blibli.com is native to Indonesia — it was founded in 2011, and has a foothold among the rural population, with 35% of its customers located outside major urban centers. Blibli acquired online travel agent Tiket.com in June, as part of a broader effort to become a one-stop shop for all online commerce. The site had 31 million visits in the May to June period.
  • JD.com. The Chinese e-commerce company currently has four warehouses in the country, and plans to build another three by the end of 2017, while staffing has almost tripled to about 400 people in the past year. JD.ID, the company’s Indonesian arm, saw its gross merchandise volume (GMV) grow more than nine-fold last year, while its site saw about 12 million visits from May to June 2017.
  • Shopee. Shopee is another Singapore-based startup, and only entered Indonesia in 2015. Although it received just 10 million site visits from Indonesian shoppers in June, the company has considerable traction on mobile — it is the top shopping app in Indonesia’s Play Store and the Apple App Store.

E-Commerce Opportunities In Indonesia

Emerging middle class. Indonesia’s GDP has grown at an average rate of 5.5% over the past six years. Moreover, the unemployment and poverty rates fell from 7.1% and 13.3%, respectively, to 5.5% and 10.9% from 2010 to 2016. The rise in disposable income has increased internal demand for goods, creating new opportunities for e-commerce companies to sell there. For example, fashion e-commerce startup Berrybenka has benefited from the recent emergence of an online apparel market, growing its revenue at a CAGR of 100% since its founding in 2012.

Deregulation of the retail and e-commerce industries. Breaking out of the country’s long history of protectionism, President Joko Widodo announced last year that the government is loosening restrictions on specific industries — including retail and e-commerce — to promote competition and foreign investment. Along with the deregulation efforts, President Joko Widodo has been increasing efforts to build out infrastructure in the country, with government funding increasing sharply since he entered office.

Internet and smartphone penetration are increasing. Internet users in Indonesia increased 51% year-over-year (YoY) from January 2016 to January 2017. Meanwhile, Indonesian smartphone penetration is estimated to reach 35% by the end of 2020, which is critical for e-commerce to take off, as 69% of web traffic comes from mobile there. This factor is so crucial that JD.com is working with a telecom company in Indonesia to use cell tower construction data to plan when and where to expand in the country.

Challenges For E-Commerce In Indonesia

Cash-based society: Indonesia is the second-largest cash-based economy in the world. Even among digital shoppers, cash on delivery (COD) was the selected payment method for 65% of their online purchases in February 2017. While online purchases in Indonesia are typically small-value orders now, COD will become a larger risk as order sizes increase, leaving delivery couriers vulnerable to theft. Due to the use of smartphones, mobile wallets will likely leapfrog payment cards in this country. In fact, Alibaba is betting on this by partnering with Indonesian media firm and owner of Blackberry Messenger’s (BBM) Indonesian operations, Emtek, to create a payments platform for the chat app. BBM is very popular in Indonesia — claiming 63 million monthly active users.

Lack of infrastructure: Inadequate infrastructure makes logistics extremely expensive in Indonesia. Such costs can reach about 17% of a company’s total expenditures in the country, while peer economies are below 10%. Because most of the population is located in Java and Sumatra, lack of adequate roadways are the main concern in transporting goods. Roads are subject to frequent flooding during the rainy season, and because Indonesia is located on the Pacific Ring of Fire, roadways are vulnerable to damage from earthquakes and tsunamis. Additionally, many infrastructure projects require the government to purchase the land it needs to build on. The land is typically owned by farmers who are reluctant to sell for the development of initiatives like highways, or they demand very high prices.

Corruption remains a major issue: Corruption among government officials, such as tax and customs agents, is prevalent in the country, despite recent government efforts. In fact, it is the most problematic factor when doing business in Indonesia, according to a World Economic Forum survey. Moreover, 70% of entrepreneurs believe that corruption has actually increased in the country of late. Costs to corrupt officials for foreign companies investing in Indonesia can reach as much as 60% of the investment amount.

Catering To Consumer Preferences In Indonesia: The e-commerce market in Indonesia is currently is dominated by the electronics and travel categories, but fashion is slowly gaining traction. As such, companies looking to enter the market may want to focus their product selection initially on these categories. However, consumers are highly price sensitive, meaning that in order to win over customers, e-commerce companies will have to provide low-prices, and possibly more frequent promotions and discounts than usual. This could make the market extremely expensive to compete in.

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