Unpacking Indonesian ecommerce: winners & losers in the coming showdown

Fierce competition between Lazada, Shopee, Tokopedia and Bukalapak is driving up costs and accelerating consolidation. Chinese buyers are staking their turf.

Elsa Rosidah’s convenience store serves villagers and visitors to a nearby mosque in the sprawling and sparsely forested outskirts of Pekanbaru city on the tropical Indonesian island of Sumatra. She exclusively traded in cash until October when a sales team from an ecommerce start-up persuaded her to venture online.

Rosidah says that since then she regularly fills her daily credit limit of Rp1 million ($70) by buying such items as electricity vouchers and cigarettes online for her customers and charging the digital retailer a small commission. The 28-year-old said the ecommerce site’s special offers were a clincher. 

“They offered many discounts and other marketing gimmicks. They were also explaining the technical details and all the benefits. It’s a new thing and sounds very interesting for me,” said Rosidah, who opened the store three years ago with her husband Rifai.

Indonesia is the fourth-most populous country in the world after China, India and US. But only a third of its 260 million citizens have hooked up to the internet, mostly in the capital Jakarta on the island of Java, and roughly only half of its over-15-year-olds have a bank account. That is changing rapidly and creating a vast new market for ecommerce. 

A widely referenced report dated November by Google and Singaporean sovereign wealth fund Temasek forecast that the Indonesian ecommerce market will be worth $53 billion by 2025, a blistering pace of growth from $12.2 billion in 2018.

Much of this boom has been driven by the proliferation of smartphones across this vast archipelago and by more convenient payment options for ordering online such as e-wallets. Indonesia’s government is also smoothing the way for start-ups that boost economic productivity and help make money flowing through the informal economy more traceable. 

There is a catch in this rosy outlook: the ecommerce players don’t charge commissions for the bulk of sales on their platforms and the cost of subsidising growth across Indonesia’s 17 thousand islands is ballooning for ecommerce start-ups. As a result, they are unprofitable and burning through venture capital at a fast clip.

Many of them are turning to international investors to foot their bills and, so far, investors have been willing to step up.

Founded in 2010, Jakarta-headquartered ecommerce brand Bukalapak is now a unicorn, worth over $1 billion, while its cross-town rival Tokopedia’s valuation is closing in on $10 billion, according to market sources.

China’s Alibaba and Tencent are among the largest investors in Southeast Asia’s budding online shopping platforms. Given Indonesia is by far Southeast Asia’s largest economy, building a presence there is a critical step in their expansion plans.

“You cannot win Southeast Asia without Indonesia,” said co-founder and president of Bukalapak, Fajrin Rasyid during an interview with FinanceAsia in Jakarta.

Alibaba, the world’s largest online marketplace, has so far built up a majority stake in Singapore-headquartered Lazada, while its payments affiliate Ant Financial bought stock in Bukalapak in January. In December, Alibaba also invested in Tokopedia with its long-term investment partner, Japan’s SoftBank, topping up an investment it first made in 2017.

“It’s like having LeBron James as your coach,” Tokopedia’s president, Patrick Cao, comparing Alibaba’s capital and ecommerce expertise to the formidable skills of the American basketball player. 

In the opposing faction, Tencent is the common shareholder in Singapore-headquartered Sea and’s Indonesian arm JD.ID, as well as in Jakarta-headquartered ride-hailing firm Gojek, which is diversifying into ecommerce.

Such big-name investors are giving others the confidence to pile into market leaders even as smaller ecommerce players struggle to fund themselves.

“There is a level of robustness in the Indonesian private financing market and the big guys have continued to get funded,” said Sushil Bathija, co-head of Southeast Asia Investment Banking at Goldman Sachs. “However, you have not seen as many new unicorns emerge as you might expect for the size of the economy.”

While Tokopedia and Bukalapak will likely continue to tap private investors as long as possible the next major step for them could be an initial public offering in Jakarta. Executives at both firms say they have no concrete plans for such a move just yet.

Sea, whose ecommerce arm Shopee has a substantial presence in Indonesia, already made its debut on the New York Stock Exchange in October 2017 and continues to tap investors for capital. It said on March 11 that it had raised $1.5 billion. 

Investors say these digital marketplaces are worth billions of dollars given changing shopping habits in the country. During Ramadan’s month-long period of fasting during daylight hours, Indonesians munched on late-night snacks and shopped online in record numbers. The world’s largest Muslim population surfed the net to buy presents for family members and pick out clothes for religious festivals.

Shoppers in Jakarta, the world’s third-most congested city, are flocking to ecommerce websites rather than brave the clogged streets around shopping malls. They are discovering and experimenting with apps, many transacting for the first time.

Internet users in Indonesia spent four hours a day on mobile internet in 2018, even higher than the three hours a day that US citizens passed browsing websites, according to research by San Francisco-based mobile data and analytics platform App Annie.

To capture as much of this growth as possible ecommerce companies are jockeying for position in particularly active demographics such as “young females” and higher-margin product verticals such as “apparel”; Shopee has been particularly successful in this regard and as a result is able to monetise its platform in Indonesia more than its peers, according to brokerage CLSA.

They are also adopting differing business models. Consultancy Euromonitor looks at companies that have adopted an “Amazon B2C model”, where the merchant sells directly to the consumer. It predicts that this particular segment will grow swiftly, by a current value compound annual growth rate of 29%, to hit Rp216.0 trillion ($15 billion) in 2023, up from Rp61.4 trillion ($4.3 billion) in 2018.

Euromonitor estimates Alibaba, including its unit Lazada, had a 21.2% market share of internet retailing in Indonesia in 2018, with Shopee on 10.8%, Tokopedia on 4.8% and Bukalapak on 1.7%.

However, CLSA estimates that B2C accounts for less than a third of online retail in Indonesia and a wider definition including consumer-to-consumer (C2C) sales shows a different picture.

That’s backed by data from App Annie, which shows Tokopedia consistently in pole position in the 15 months to March-end in terms of daily active users – slightly ahead of Shopee, followed by Bukalapak, Lazada and finally JD.ID.

Most investors use gross merchandise volume (GMV), the total value of merchandise sold over a given period of time, as a yardstick to measure the pace of growth enjoyed by digital retailers. Tokopedia said in December that its GMV increased fourfold in 2018. During Ramadan, Tokopedia’s GMV hit an all-time monthly high of $1.3 billion in May. 

Three-year-old Shopee does not breakout growth by country but said it generated $10.3 billion in GMV in 2018 across its six markets, of which Indonesia is its biggest.

Paul McKenzie, an analyst at capital markets and investment group CLSA, told FinanceAsia on June 24 that he forecast Indonesian GMV for B2C and C2C businesses at Tokopedia hitting $30 billion by 2022, up from $5.9 billion in 2018. Over the same time frame, he expects Bukalapak’s GMV to rise to $5.5 billion from $1.6 billion and Shopee’s to climb to $24 billion from $3.85 billion.

Investors also use GMV as a tool for comparing companies’ valuations. Walmart bought Indian ecommerce company Flipkart for $21 billion last year or 2.8 times its GMV of $7.5 billion at the time; while in Latin America, MercadoLibre has an enterprise value of roughly $22 billion, 1.8 times its GMV of $13 billion, according to equity analysts.

On the face of it, investors could be forgiven for thinking Indonesia’s budding ecommerce companies look undervalued. Lazada will generate roughly $14 billion to $15 billion in GMV this year, analysts at Baird Equity Research have estimated. As such, they think a $25 billion to $30 billion valuation is reasonable.

But GMV is fraught with problems. Frustratingly, each company measures it differently, making them hard to compare.

Chinese shopping site changed its method of calculating GMV seven or eight times, groaned one private equity investor that invests in Asian ecommerce but declined to be named. has tweaked its criteria for calculating GMV for various reasons, according to a person briefed on the thinking behind the changes, without giving the exact number of times the definition has changed. Among them, the person said, was the because its business had morphed and it discovered it was using a stricter definition of GMV than its peers,

GMV can also be grossly inflated because digital retailers often include cancelled purchases in their calculations, which are a particularly big issue in Southeast Asia where a lack of payment options and slow mobile data speed frustrates consumers during the acquisition process to the point where they drop the order. The private equity investor estimates cancellations are as high as 50% of all regional transactions.

GMV is also commonly bloated in emerging markets by a trick known as “brushing”, where sellers fake orders to boost their website ratings.

A few of the savviest investors are starting to look more critically at the digital retailers’ growth numbers, looking more closely at unit economics and seeking out firms able to gather customers at a lower cost.

Regional players Shopee and Lazada appear to have a natural advantage over their domestic rivals since they can use the cash generated in less competitive markets to subsidise growth in Indonesia. Sea’s Shopee is likely to be profitable in Taiwan in the second half of this year but leaned heavily on shipping subsidies a couple of years back to build market share in Indonesia, say industry sources and analysts. Sea’s operating loss widened in 2018 to $989 million from $502 million in 2017. 

Local entrepreneurs have struggled to compete with such an onslaught.

Bukalapak wants to avoid going head-to-head with its rivals in Indonesia’s metropolitan cities and is striking out into the hinterlands where swathes of the population are digitally unconnected. It is using word of mouth among shopkeepers such as Rosidah to spread its network without having to splash out on expensive marketing campaigns.

Rosidah says she bought gold ingots and a motorcycle at deeply discounted prices in a flash sale on Bukalapak during Harbolnas on December 12 – Indonesia’s equivalent of Cyber Monday in the US and Singles’ Day in China. She talked about her bargains to local peers who are now also hankering to sign up with Bukalapak:

“All the villagers knew and got really excited about Bukalapak. All of the warung owners are eager to be a Mitra Bukalapak [partners of Bukalapak] ever since,” Rosidah said.

Mom-and-pop shop in Indonesia

Bukalapak, which literally translates as “open a stall” in Indonesian, is capitalising on the fact that over 70% of retailers in Indonesia are mom-and-pop stores. To do this, it has partnered with 500,000 of these shopkeepers, called warungs in Indonesian. These store owners take cash from customers who don’t have an internet connection and order products for them online while pocketing a commission from Bukalapak.

“We are sort of taking the “e” out of the ecommerce” because now we're also present in offline as well,” Bukalapak’s Rasyid said in his interview with us in Jakarta while explaining why the internet start-up sees value in old-fashioned bricks and mortar shops to extend its reach.

Bukalapak is effectively adapting for Indonesia the online-to-offline tactic taken in more mature markets by retail giants Alibaba and Amazon to give customers the choice of browsing a physical store combined with a digital offering.

Some investors have calculated that Bukalapak’s “cost of acquiring” customers is lower than that of its peers.

"We believe one of Bukalapak's competitive advantages is its grassroots online-to-offline agent network of warungs as points of sale to tap into a large segment of potential customers who have otherwise not been exposed to ecommerce. This model allows the company to acquire and aggregate loyal customers on a cost-effective basis and offer additional services such as financing to these unbanked consumers,” David Shen, regional managing director at private equity firm Olympus Capital Asia, told FinanceAsia. Olympus Capital invested in Bukalapak last June. 

To be sure, it’s not clear if Bukalapak is making money from acting as a digital middleman between the warungs and their suppliers as yet. The cost of supplying warungs is also creeping up. Airline companies, including flag carrier Garuda Indonesia, have jacked up their cargo fees. “It may impact the price of delivery to different islands,” Rasyid said.

But in terms of boosting GMV and delivering digital products such as mobile phone top-ups and Rosidha’s electricity vouchers the tactic broadly appears to work. Bukalapak’s online-to-offline strategy contributes 40% to 50% of its transaction volume, a company spokesperson told FinanceAsia.

“They are kind of like the Pinduoduo of Indonesia,” the first private equity investor in Asian ecommerce enthused. Shanghai-headquartered Pinduoduo, which raised $1.6 billion in a US stock listing last year, generates a higher proportion of its sales in smaller Chinese cities compared to Alibaba and, which focus on the country’s conurbations.

Another advantage Bukalapak enjoys is that its largest shareholder, Jakarta-headquartered media conglomerate Emtek with a 35.52% stake as of December, likely helps Bukalapak tamp down marketing costs even further.

“The fact that we are spending less [on marketing] is probably true,” Rasyid said, citing insights gleaned from shared vendors.

Other digital platforms are looking to catch up. Tokopedia told FinanceAsia that the firm has over 5.9 million merchants on the platform, around 70% of whom are first-time entrepreneurs spread across 97% sub-districts of Indonesia.

“These mom and pop stores are the new battleground for digital products in Indonesia,” said CLSA’s McKenzie.

Even if digital retailers try to clamp down on marketing costs, making money in Indonesian ecommerce could remain tough going as the major players do not charge any commission on their C2C platforms and the country is dominated by small- and micro-enterprises with limited budgets who lack experience in online advertising.

Bukalapak made a loss as of Rp119 million ($8,407) on revenue of Rp69.9 million ($4,942) in the first six months of 2017, the last time that Emtek revealed the start-up’s bottom line.

Leading players say they are trying to wean themselves off subsidies. This chimes with investors who are increasingly concerned that if the digital retailers don’t make a profit per customer then there is no point in financing their drive for scale.

“Today we don’t do any cash-on-delivery, we don’t do global shipping subsidies, we don’t discount the marketplace; that’s crazy behaviour,” Tokopedia’s Cao told the Credit Suisse Asian Investment Conference in Hong Kong. The firm is also striving to cover at least its operational expenses with the commissions they earn off each transaction – their so-called take rate. “Our only burn is around sales and marketing and we can turn that on and off,” he added.

In a potentially game-changing move, Shopee is planning on charging a small amount of commission on its C2C platform later this year. “It will be interesting to see whether the others follow suit,” said CLSA’s McKenzie.

Ecommerce companies are also starting to supplement revenues by selling services to merchants such as data analytics on shoppers’ habits, logistics, targeted advertising tools and financial products. It is also offering some of warungs credit, shouldering the working capital burden for them.

“Before we just had physical goods, but we expanded the offering into digital goods like pay-your-bills, train tickets, flight tickets and many other products including investment products,” Rasyid said.
Bukalapak started offering insurance in May in partnership with Germany’s Allianz; it even ventured into mutual funds and set up a gold investment platform in 2017.

Bukalapak tends to have more advertising on its website, it also charges merchants for higher value services such as subscriptions to dashboards.

But even with these bolt-on-services, CLSA said it will be a challenge for these digital retailers to push revenue/GMV above the 4% to 5% level required for Ebitda to breakeven, without widespread consolidation in the industry.

As major shareholders, Alibaba and Tencent could encourage a wave of consolidation in Indonesian ecommerce if growth stumbles or global investor sentiment sours.

Rival camps are already starting to coalesce around China’s two biggest internet conglomerates. Industry sources in Jakarta expect the ties within each grouping to gradually tighten into cross-shareholdings in the coming years or even turn into outright takeovers.

“Lazada-Bukalapak makes the most sense to me because Lazada has historically been very B2C-focused but they want to have more exposure to smaller sellers and they could get that with Bukalapak,” said CLSA’s McKenzie.

Some analysts suspect that smaller players who have been able to raise less capital from international investors could be heavily subsidising growth to boost their GMV in order to command a higher valuation once they sell out.

In a potential early sign of the mooted consolidation to come, various market sources have told FinanceAsia that Gojek has already acquired a minority stake in JD.ID from Provident Capital, paying for it using its own shares. Spokespeople for JD.ID and Gojek each declined to comment on the matter.

In another tie-up, Tokopedia said on June 20 it had acquired another Indonesian start-up, online wedding marketplace Bridestory.

At the moment, Indonesian executives appear relaxed and stress that they are still in the driving seat, despite multiple rounds of fundraising. Tokopedia and Bukalapak both have a dual-class share structure giving the founders extra voting powers.

“Pretty much everyone in the market has come to us asking to consolidate, but it has to be 1+1 is greater than 2,” Tokopedia’s Cao told FinanceAsia.

What could shake such complacency is the arrival of an even more fearsome competitor such as Amazon. The Seattle, Washington-headquartered retailer entered the neighbouring market of Singapore last year. The world’s largest retailer also gained a toehold in Indonesia on April 3.

Amazon Web Services said it would open a cloud service over Jakarta by the end of 2021 or early 2022, allowing customers to store their data in Indonesia.

“If Amazon comes to Indonesia we’ll be out-gunned by multiples of cash,” Tokopedia’s Cao said.


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