Is Indonesia set for an e-commerce boom? Premium

Growth likely, but transport and payment infrastructure improvements still required

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  • With GDP growth slowing, e-commerce is one of the few sectors in Indonesia that is growing strongly.
  • Global and domestic players are jockeying for position in this under-tapped market.
  • Impediments to industry growth include limited online payment and delivery systems, although progress is being made.
  • Many domestic start-ups are focused excessively on volume, and the intensifying competition will inevitably lead to consolidation.
  • We expect e-commerce to continue to grow rapidly, however it is likely to still only account for 3-4 per cent of total retail sales by 2020.

At a time when private consumption is slowing, and capital intensive industries such as natural resources are facing uncertainty, e-commerce is one of the few fast-growing sectors in Indonesia.

The e-commerce sector in Indonesia is now one of the largest in Asean. Online sales in the country will hit $1.8bn-2.5bn this year, according to estimates, and revenues are expected to double within three years. The sector is actually flourishing across the region, with similar growth rates recorded in neighbouring countries.

Smartphone surge drives growth

As more people acquire smartphones and become comfortable using digital media, an array of domestic start-ups – both business-to-consumer (B2C) and consumer-to-consumer (C2C) – have sprung up to cater to their retail needs.

In a recent FT Confidential Research survey of 1,000 Indonesian consumers, more than 75 per cent of respondents – mainly higher-income urban residents – said they shopped online, the second highest percentage in the region (see chart), and 9.5 per cent said they bought goods through social media platforms like Facebook (see chart).

About 80 per cent of internet users in Indonesia have smartphones, according to independent estimates. Digital advertising spend, meanwhile, will grow 79 per cent year-on-year this year, according to eMarketer.

Untapped potential

The number of internet users in Indonesia has increased 1,500 per cent over the last decade and today an estimated 89m people – out of a population of 250m – log onto the web, with half of these under 25. Despite this expansion, the scope for growth in e-commerce remains vast, with just 11 per cent of internet users purchasing goods online last year, according to Indonesia’s Internet Service Provider Association, while smartphone penetration is still only 23 per cent.

The Indonesian government wants the number of internet users to increase to 150m by 2019.

Indonesia’s sprawling geography is conducive to the development of e-commerce, given that some of its more remote locations suffer from a lack of physical retail space. Lazada Indonesia and Tokopedia – two of the country’s most popular online retailers – report that 40 per cent and 60 per cent of their total sales, respectively, come from outside Jakarta. FTCR’s own research found rising awareness of e-commerce in secondary cities such as Medan and Surabaya (see chart).

Foreign firms increasing Indonesian presence

In addition to Lazada – owned by German start-up investor Rocket Internet – and Tokopedia, Indonesia’s best established e-commerce websites include online retailer Rakuten and classifieds site OLX. These portals each generate millions of transactions each month.

There has been an increase in foreign interest over the last year from Japanese telecoms companies (telcos), including NTT Docomo and SoftBank, in addition to moves by South African media group Naspers (see chart).

SoftBank has been the most active, as part of an aggressive acquisitions strategy across Asia, including in South Korea, India and China. In Indonesia, the Japanese firm invested $100m in Tokopedia in late 2014. In addition, it entered into partnership with domestic telco Indosat , financed several e-commerce ventures, bought a 20 per cent stake in Trikomsel – Indonesia’s largest mobile device retailer – and approached online trading portal Bareksa about a possible deal.

Chinese e-commerce giant Alibaba recently launched AliExpress, which mainly sells Chinese-made products, in Indonesia. AliExpress has a logistics partnership with Singapore Post , in which Alibaba recently invested $250m.

Singapore media groups Singapore Press, which owns the Straits Times newspaper, and Singapore Post (see chart) have also been aggressively expanding into Indonesia’s e-commerce space through acquisitions and private investment, including in Indonesian online auto retailers and financial services portals.

Local companies respond and innovate

In the face of rapid foreign expansion, many of Indonesia’s largest retailers are setting up e-commerce portals, including department stores Matahari Department Store and Mitra Adiperkasa, and convenience store chains Indomaret and Alfamart. Matahari, for example, has announced investment of up to $500m in an online portal named MatahariMall.

A number of mid-size e-commerce ventures have been launched in recent years, including:

  • Elevenia, a B2C joint venture (JV) between SK Planet and Indonesian mobile provider XL Axiata, which has 20m monthly visitors.
  • Qoo10, a C2C JV between South Korea’s Gmarket and eBay, established in 2012.
  • BukaLapak, a C2C site, in operation since 2010, with funding from Japan’s Rebright Partners and GREE Ventures.

Many domestic e-commerce start-ups have been gaining traction. They include Bilna, which sells baby products, HappyFresh, which sells fresh food produce, and GO-JEK, a popular taxi app that connects ojek (motorbike) drivers with passengers. It has been very successful in Jakarta because of the city’s frequent traffic jams. Blue Bird, an established Jakarta taxi operator, has set up a similar mobile app.

Shift towards travel, finance and property

Many domestic online ventures are industry-specific but offer a combination of services. For example, as Indonesia’s insurance industry booms, websites that offer a mix of financial products have proliferated.

Websites like AturDuit, RamaPremi, CekPremi, and CekAja – the latter owned by Compare88, which operates a similar service in the Philippines – allows consumers to compare a variety of financial products using interactive simulations. They also employ consultants that provide financial advice to customers, and assume responsibility for creditworthiness and data collection. Only 5 per cent of Indonesians actively manage their personal wealth, according to experts.

Travel is another big growth area, as the country’s aviation and leisure industries continue to expand. “Travel is a fast-growing area in e-commerce, particularly when it caters to specific areas like luxury and adventure travel, Islamic tourism or eco-tourism, combining flights with hotel bookings and tours,” Sachin Gopalan, CEO of media group BeritaSatu Media, told FTCR.

Industrial developer Surya Semesta Internusa recently launched its first foray into the tourism sector with Travelio, an online hotel booking service. It competes with rivals like Tiket, GoIndonesia, PegiPegi and Traveloka – the latter funded by Rocket Internet – that allow consumers to negotiate room rates and hotels to change prices based on occupancy rates.

Other growth sectors for e-commerce include healthcare, e-books and entertainment, and the lack of established real estate agents in Indonesia has supported demand for secondary market property sites such as Rumah 123, Urbanindo, Ddproperty and Rumahdijual.

Regional M&A intensifies

Mergers and acquisitions (M&A) activity connecting Indonesia with other Asean e-commerce markets is also increasing.

At the end of last year, 701Search, which counts Singapore Press and Telenor among its shareholders, merged its Berniaga online C2C forum with OLX, owned by Naspers, which operated the C2C site TokoBagus. In Indonesia, OLX now competes directly with Kaskus, a popular C2C forum that generates revenue through online classifieds.

Singaporean media giant MediaCorp, controlled by Temasek, in early 2015 acquired a 52 per cent stake in KapanLagi Network. The company owns C2C forums Kapanlagi and Merdeka, which attract a combined 6m monthly visitors.

As competition in e-commerce subsectors intensifies, success for most companies will depend on the ability to deliver original services adapted to local tastes that integrate technological and business innovations.

Rapid expansion in logistics industries

While we are confident that growth in the e-commerce sector will remain strong, the cost of shipping across Indonesia’s sprawling archipelago is high and the country’s limited infrastructure slows distribution, which may hinder the sector’s development and weigh on margins. Many companies have been forced to invest in their own logistics supply chains, or link up with existing logistics firms.

Rocket Internet’s Lazada and Zalora, for example, are rapidly expanding their vehicle fleet and will double the number of delivery staff in an effort to expand coverage to 40 cities nationwide by 2016, up from 15 currently. Tokopedia, meanwhile, has formed alliances with eight independent logistics providers.

Indonesia’s logistics market leader is JNE, which has 3,500 storefronts and thousands of vehicles and boats. It delivers an average of 4m e-commerce packages daily – about 50 per cent of which are outside Jakarta.

Other companies are attempting to cash in on growing demand. For example, Modern Internasional, which operates the 7-Eleven convenience store franchise in Indonesia, recently launched a logistics business and forged tie-ups with several e-commerce players. “While many mainstream businesses have halted new investment, logistics businesses are expanding to cater to e-commerce”, Indonesia Retailers Association head Tutum Rahanta told AC.

Foreign entrants to the e-commerce sector are also helping to spur greater competition in logistics.

Recent entrants in the logistics industry include aCommerce, a pan-Asean logistics firm that counts NTT Docomo and the Sinarmas Group among its financiers. Senior management at aCommerce recently said growth in its Indonesian operations has “exceeded forecasts”.

RPX, the Indonesian subsidiary of FedEx, has now integrated digitised logistics services for e-commerce into its business model. It has forecast an average 100,000 deliveries a month in 2015, working with Lazada and convenience store Indomaret.

Electronic payment adoption remains limited

Another limitation on growth in Indonesia is the low adoption rate of electronic payment – as in much of Asean. Cash-on-delivery payment still accounts for more than 95 per cent of e-commerce transactions in the country, according to industry estimates, while more than 90 per cent of visits to e-commerce sites do not translate into sales.

The cultural aversion many Indonesian consumers have towards credit cards has hampered the growth of electronic payment. Moreover, while the price of wireless data is coming down, 99 per cent of all mobile subscriptions are prepaid, offering a limited amount of data, which somewhat hinders the ability of consumers to browse websites freely on their phones.

Elsewhere, the lack of collaboration between banks and overlapping jurisdictions for oversight of the industry within government ministries has meant there is no unified approach to payments.

Furthermore, innovation has been in short supply in Indonesia. “Many of the big firms in industries like banking and telecoms tend to follow trends rather than have a desire to innovate”, Joseph Lumban Gaol, CEO of m-Stars, a digital services and mobile content provider, told FTCR.

Progress is now being made. Many of the country’s largest banks now facilitate online payments through services such as Bank Central Asia’s KlikBCA. However, this has been slow coming, due to a level of complacency. As Mr Gaol notes, “Banks have taken 15 years to adopt mobile banking despite the availability of the technology, due to their high profit margins.”

Independent e-payment providers springing up

In the absence of a universal payment system, new independent e-payments companies have grown rapidly, and competition is intensifying.

The market leader is Doku, which processed $520m in transactions in 2014 and partners with thousands of merchants. It operates a so-called e-wallet service – in effect a prepaid account – called Doku Wallet, which has 100,000 users and competes with similar businesses from local telecom companies:

  • TCash, offered by Telkomsel 
  • XL Tunai, offered by XL Axiata
  • Dompetku, offered by Indosat

Other competitors include Veritrans, which launched in 2012 as a JV between Veritrans Japan and local conglomerate MidPlaza. Other smaller firms with operations in Indonesia include Singapore-based 2C2P and Coda Payments, both of which are seeking funding to expand Asean-wide payment businesses.

Market remains fragmented

Indonesia’s e-commerce market leaders continue to attract considerable internet traffic, ranking among the top 20 most visited websites in Indonesia (see chart). However, smaller rivals are catching up: Bukalapak, for example was ranked 31st in May (see chart), up from 74 in mid-2014.

FTCR data suggests that while Lazada is the most popular e-commerce site, its lead is far from unassailable. The percentage of survey respondents that listed Lazada as one of the two sites they prefer to shop through fell from 34.0 per cent in 4Q14 to 28.5 per cent in 2Q15 (see chart). The market appears to remain fairly open.

But it is hard to say whether a truly successful business model has yet emerged in Indonesian e-commerce. Many start-ups are, in effect, betting on sheer volume of customer base. Recent history shows that as soon as a platform has acquired several hundred thousand customers, it becomes a target for private equity investment, at a hefty premium.

Yet despite this interest, some of Indonesia’s biggest homegrown players remain unprofitable. Lazada and Zalora lost $235.3m last year, despite huge sales growth. Tokopedia and OLX, meanwhile, are heavily dependent on advertising. The same is true for GO-JEK, which subsidises motorbike drivers to lower prices, as it looks to grab market share.

Consolidation on the cards

We expect industry consolidation in the next three years, given the recent spike in start-up activity fuelled by foreign capital, which is intensifying competition.

Competition will be further heightened by two elements of Indonesia’s increasing global integration.

First, we expect global e-commerce players, such as Amazon – which does not have a direct presence in Indonesia at present – to enter the market soon and rapidly expand.

Second, growing integration within Asean will further accelerate the entry of regional players, predominantly from Singapore. In this environment, price differentials and the ability to move goods within Asean would become a crucial competitive element.

Survival not guaranteed for local players

The ability of existing players such as Tokopedia to retain merchants will be crucial, as foreign players leverage technological advantages and local conglomerates such as Matahari are able to offer incentives like cinema tickets and coupons.

Tokopedia is trying to enhance its platform, generating new revenue streams by charging merchants that sell products on its site. It has also diversified into a wide range of products and services.

The optimism surrounding Indonesian e-commerce is justified. Online sales accounted for just 0.5 per cent of retail sales in Indonesia in 1Q15, vs 11 per cent in China where, just five years ago, they accounted for 3 per cent. The conditions seem ripe for rapid expansion, and the scope for growth is huge, though given the continued constraints on that growth, online sales are likely to still only account for 3-4 per cent of total retail sales by 2020. 

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.

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