February 21, 2014 5:30 am

Indonesia’s ecommerce industry awakens

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Like other executives running fast-growing internet businesses in Indonesia, Rio Inaba has profited from the lackadaisical office culture in southeast Asia’s biggest economy.

With home internet access slow and expensive, the peak time for online shopping in this nation of 250m people is during office hours, when an increasing number of white-collar workers while away the day buying clothes, gadgets and airline tickets on their company PC.

“Our busiest time is still about 11am, before traffic dips at lunchtime and then picks up again when people get back to their desks,” says Mr Inaba, chief executive of the Indonesian division of Rakuten, the fast-expanding Japanese ecommerce group.

But the rise of cheap smartphones and tablets that sell for less than $100 is rapidly broadening internet access and pushing the nascent ecommerce market toward a “take off” point in terms of scale and profitability, in spite of significant challenges because of poor infrastructure and payment systems.

“We’re seeing phenomenal growth in mobile transactions,” says Mr Inaba, adding that order volume and revenue from Rakuten’s online marketplace in Indonesia are more than doubling every year, led by demand for gadgets, fashion accessories and toys.

Ellyana Fuad, Indonesia chief executive for credit card company Visa, says that the world’s fourth most populous nation is approaching a “big bang” for ecommerce, as the number of internet users doubles to 125m by 2017 and smartphone ownership rises from 20 per cent to 52 per cent in the same period, according to Redwing, an advisory group.

Although the ecommerce market is small and fragmented and there are no hard statistics, industry executives estimate that annual sales could rise from $1bn-$3bn now to $10bn by the end of 2015.

We have to find a way to lower the hurdles for new customers to try internet shopping

- Rio Inaba, Rakuten

Competition is heating up. A wide range of companies have entered the market in the past few years, from international market leaders such as Rakuten, eBay and Sumitomo to local start-ups, state-owned utility companies and the Hartonos – Indonesia’s wealthiest family and owners of classified website Kaskus.

“The market is growing faster than the industry,” says Natali Ardianto, co-founder and chief technology officer of Tiket.com, which sells airline and rail tickets. “There’s a huge opportunity so we don’t need to worry about eating someone else’s pie.”

Set up by seven young technology entrepreneurs 15 months ago, Tiket.com has since hired 89 staff and, with 3,000 transactions per day, recently turned its first profit.

But Mr Ardianto, who also runs his own incubator supporting other entrepreneurs, warns that it is not easy to succeed in ecommerce in Indonesia given poor physical infrastructure and the lack of efficient payments systems.

The country’s woeful transport connections make online retail more attractive both for big-city dwellers who want to avoid incessant traffic jams, and for residents in more remote locations that are far from the nearest shopping mall.

But getting goods to customers is tough, particularly in the “last mile”, due to a lack of detailed maps, unclear addresses and couriers not offering timed deliveries.

As a result, companies from fashion retailer Zalora to Sukamart.com, a grocery retailer owned by Japanese trading house Sumitomo, have been forced to set up their own delivery services in greater Jakarta, one of the world’s biggest and most chaotic metropolitan areas.

“In China and Japan the quality of courier services is quite good,” says Taketo Kokubo, Sukamart.com chief executive. “We tried to use local companies [in Indonesia] but we had problems, so we’re starting our own delivery team.”

Payments are also problematic, with low banking and credit card penetration and online payment systems still in the developmental stage.

FT Video

Mobile internet reaches rural Indonesia

February 2013: Only 40% of Indonesians have a bank account, but more than 90% have a mobile phone. For both entrepreneurs and multinationals, that represents a big opportunity. The FT’s Ben Bland visits rural West Java to see for himself how mobile commerce is spreading

Tiket.com has to offer 14 different payment methods, from bank transfers to various internet banking platforms to credit cards, the use of which is rising rapidly from a low base.

Websites delivering physical goods typically offer cash-on-delivery, too. For many companies, bank transfers are the most popular payment method but they require the customer to go to an ATM to complete the transaction before the goods can be delivered.

“The problem with this is that people can change their mind before they find time to go to the ATM,” says Rakuten’s Mr Inaba. “We have to find a way to lower the hurdles for new customers to try internet shopping.”

With many consumers forced to go to the bank to pay for online orders and companies required to build their own delivery networks, ecommerce in Indonesia still resembles the bricks-and-mortar retail industry in some important respects.

“In a complex market like southeast Asia, you need a presence in each country,” says Magnus Grimeland, the Indonesia managing director for Zalora, which is backed by German ecommerce group Rocket Internet and recently raised $112m from investors including billionaire Len Blavatnik. “Countries have different tastes and customs regulations and you need your own warehouse, local buyers and marketing department.”

As with many aspects of the Indonesia economy, it will be difficult to achieve the huge potential for growth in the long term without better infrastructure.

“No matter how many people want to buy a handbag online, the logistical and payment infrastructure is still not good, the mobile internet speed is not great and the fixed-line internet connections are slow and expensive,” says Mr Inaba.

Indonesia’s online retail market

New online shoppers need hand-holding

While the average European fashion website receives customer queries on only 5 per cent of orders, Zalora gets an average of one phone call or message per order from concerned customers confirming their request has been received. But the company says that is a decline from two queries per order when it launched two years ago, as Indonesians become more accustomed to shopping online.

Vast potential outside Jakarta

Although the capital city drove initial growth in the ecommerce market, both Rakuten and Zalora say that 70 per cent of their orders now come from outside Jakarta. Indonesia’s second- and third-tier cities are growing fast but many still lack shopping malls, presenting a big opportunity for companies that can deliver their products to these places. “We see a lot of demand for toys and musical instruments from outside Jakarta, where people can’t find these things,” says Rakuten’s Mr Inaba.

The bottom of the pyramid is large but orders are small

There are tens of millions of potential online shoppers in Indonesia, but the most successful sites are selling products with a value of less than Rp200,000 ($17), says Mr Ardianto of Tiket.com. Sukamart says that its average basket size is Rp300,000-Rp500,00. This compares with an average basket size of about £60 ($100) at Asos, the UK online clothing retailer.

Will other foreign groups join in?

Rakuten, Sukamart and Zalora have successfully negotiated Indonesia’s regulatory minefield and set up as foreign-owned companies. But industry executives believe the government is working on plans to restrict future foreign investment in the sector as part of a wider protectionist push that has already hit the bricks-and-mortar retail sector.

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