E-commerce has grown to be a powerful distribution channel for goods, and I believe it will continue to grow in weight and influence in years to come. For many brands, this is an opportunity (to reach out to more customer and sell more goods), but also a serious threat: big ecommerce channels are not more benign than WalMart – they try to squeeze margins and grow private labels. 

Mama Bear – Amazon’s private label baby food

There is no reason to doubt, once the regional ecommerce giants have achieved some sort of dominance, they will repeat what Amazon has been doing in the US: steadily pushing private-label ranging from detergents to fashion.

 

Not much incentive to go online

As major ecommerce platforms such as Lazada spreads its tentacles across Southeast Asia, investing heavily into its supply chain, many brands seem to continue being comfortable where there are – traditional retail. Given that the online economy still commands less than 10% of total transactions in major Southeast Asian markets such as Thailand, Vietnam, Philippines, and Indonesia, it might perhaps make a strong case to not go all-in into online distribution?

While ecommerce in the US took years to evolve into a serious threat to traditional retail, China leapfrogged. One plausible reason was, China never had the level of large scale retail (either general or specialised) US enjoyed. When Taobao took off, hypermarkets such as Walmart and Carrefour were still expanding fast in the country and many tier-3 or tier-4 cities still saw such as novelty. The rest is history – Chinese consumers voted with their feet (and smart phones). The spread of smartphones accelerated this trend – by 2013-2014, many major retailers were already closing more stores than they were opening. And malls became dining and service (rather than shopping) destinations.

Siam Paragon – one of the more popular malls in Bangkok (there are about 179 malls in Bangkok alone!)

I would argue that Southeast Asia is slightly different. Malls are more omnipresent in big cities such as Kuala Lumpur, Bangkok and Jakarta, many developed way earlier than those in China; on the other hand, tier-2 and tier-3 cities (if we may borrow these ostensibly Chinese terms) are much smaller in size and consumption power to their peers in China. Just to give an idea: China has 102 cities with population more than 1 million; the Philippines has three and Thailand has one.  

In big cities or small towns in Southeast Asia, offline retail is actually not bad – people’s needs were met, and prices were mostly fair. This is why ecommerce growth is not exponential in south-east asia but only slowly picking up.

 

Spoilt for choice, but prices the main factor

If you can already get everything you want (or need), why would you switch to ecommerce? You either go for the price, convenience, or things you did not think you need or want. While we might be most familiar with the traffic jam in Jakrata, Manila or Bangkok, in most smaller cities getting necessities is not that difficult. I would argue that in most Southeast Asian cities people are spoilt with choice: both malls, other retail stores, and ecommerce. You might not think so but if you go to cities in the Middle East, Africa or even Latin America, you would know what I mean.

Shopee owned by SEA (previously Garena) launched 9.9

Our experience in running ecommerce in the region for the past couple of years told us price continue to be the primary factor people shop online. It is no surprise that consumers in Vietnam or Indonesia respond the most favorably when a sale is going on. Most e-commerce platforms still bleed money due to discounts, coupons, vouchers and shipping subsidies! In most cities outside capitals, the cost of delivery orders still outweighs the costs of traditional distribution methods. Only for niche SKUs it is the other way round – but you wouldn’t build a large, venture-funded business based on niche SKUs, would you?

Prices are kept low in most situations thanks to subsidies. Shopee (owned by SEA) for example, has been growing very fast but losing a lot of money – largely due to massive subsidies. For the past few months, they even subsidised shipping to some outlying islands in the Philippines.

 

Big market, but un-unified market

Southeast Asia is a huge market, twice the size of US in terms of population. However, it is also a region with many borders. Businesses cannot simply build centralised operations in one country and effectively cover the whole region. This creates huge efficiency issues, and this is known for sometime now. Often you can’t send orders from centralised location in one country directly to consumers in another – but traditional commerce has established ways of moving goods across the borders.

Lazada Express (LEX) bike fleet built by Lazada to provide on-time delivery to customers

Ecommerce platforms like Lazada are forced to operate multiple logistics hubs (and deal with multiple customs checkpoints) across the region. On top of that, due to the lack of reliable transportation providers, they were also forced to build fleets in many countries they were in. These are huge investments which not everyone can afford to undertake – except big brands or retailers.

Where does this leave us? Take a look at the recent JV between JD.com and Central Group in Thailand. Why would one of the biggest mall and convenience store operators able to offer? It seems that there may be a new sheriff in town who recognizes that physical retail may still have a lot of juice left. After all, people still visit malls and their local convenience stores, don’t they? Perhaps the brands will have the last laugh. Big ecommerce pushing private labels seems far off.

 

What are the real threats for brands

Borrowing experience from China (again), you would realise consumers who in a fast developing economy move upscale to (better) brands as soon as they can afford – and platforms such as Tmall actually encourage that. For example, P&G (known for mass and popular brands) took a big hit over the last couple of years while other, more ‘premium’ positioned brands, surged ahead. Even Louis Vuitton was impacted when it was not perceived as premium as more.

A typical Treveloka billboard

Another big threat we see is that, for many brands, the awareness and penetration are not yet present. It is easy for upstarts, or even ecommerce platforms, to build their awareness and recognition first. Think why Indonesians book their travel via Traveloka rather than established international brands such as booking.com (widely used in Malaysia where many were connected to the internet during the desktop era)? Maybe it is still time to lavish marketing dollars on TV ads and billboards? Or, as we previously argued, paint brushes.

 

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