Digital 2019: The Future of Ecommerce in Southeast Asia
Hundreds of millions of people across Southeast Asia already shop online, and the value of ecommerce spend in the region passed US$50 billion in 2018, an annual increase of more than 20 percent.
The internet economy already accounts for almost 3 percent of the region’s gross domestic product (GDP), and Google and Temasek project that this will rise to 8 percent by 2025.
With figures like these, the future of ecommerce in the region looks promising.
However, there are a number of local nuances and challenges that will influence the evolution of online shopping across Southeast Asia, and many of these influences are unique to the region.
In this article, we’ll explore some of the key barriers keeping growth in check, and offer our analysis of the biggest opportunities for the future of ecommerce in Southeast Asia.
Let’s start with the challenges.
Geography
With more than 270 million inhabitants, Indonesia is home to Southeast Asia’s largest population, but its people are also spread across more than 6,000 separate inhabited islands.
Similarly, the 107 million people living in the Philippines are distributed across roughly 2,000 inhabited islands.
Scaling delivery across these archipelago nations poses enormous logistical challenges for ecommerce companies, especially when it comes to the delivery of perishable grocery products, or to managing product returns.
Furthermore, the associated challenges aren’t restricted to whether companies have access to a sufficiently large and distributed network of delivery boats, vehicles, or aircraft.
Even once packages arrive on a particular island, delivery to individual customers may be complicated by issues such as a lack of internal roads, different approaches to addressing, and a variety of other infrastructural challenges.
It’s not just archipelagoes that cause problems for ecommerce companies, either.
The topography of countries like Vietnam and Thailand also poses challenges, with mountainous regions and dense jungle creating a different set of problems for ecommerce companies and logistics partners alike.
Population dispersion
The United Nations reports that less than half of Southeast Asia’s population currently lives in urban areas, with significant numbers of the region’s inhabitants still dispersed across smaller villages.
While mobile technologies make it increasingly easy for rural communities to access the internet, the challenges associated with providing regular delivery to these more remote areas mean that ecommerce will likely take much longer to achieve critical mass.
Furthermore, a lack of consistent and comprehensive addressing in many rural areas adds another layer of complexity for players at all stages of the ecommerce value chain.
Meanwhile, ecommerce brands face the opposite problem in Singapore, where the majority of the population lives within a short distance of the city state’s various retail hubs.
As a result, it’s often quicker for shoppers to visit bricks-and-mortar stores than it is to wait for online delivery, even when ecommerce platforms offer two-hour delivery.
Simple differences like this mean that brands often need to rethink the marketing messages that form the core of their approaches in more geographically dispersed nations such as the United States.
Physical infrastructure
Although the situation has improved rapidly in recent years, some parts of Southeast Asia are still not served by fully paved roads.
This can restrict the kinds of vehicles that can be used for deliveries, especially during the Monsoon season.
This in turn impacts the kinds of products that ecommerce companies are able to deliver (e.g. frozen produce), and also makes it more risky to guarantee delivery within specific timeframes.
Conversely, some parts of the region are experiencing such rapid development that mapping may not have caught up with recent improvements to the road network, making it difficult for logistics companies to know exactly what’s possible.
Even something as simple as knowing where to deliver a package can become complicated in places without consistent, complete, or exact addressing.
Meanwhile, regional megacities like Jakarta and Bangkok frequently struggle with chronic congestion, with traffic jams lasting many hours not uncommon during the rush ‘hour’.
These jams can wreak havoc on carefully sequenced delivery schedules, and while motorcycles are a good solution for delivering smaller goods, they’re often impractical for delivering items that don’t fit into a backpack.
It’s also worth noting that ecommerce deliveries could become a major contributor to traffic congestion in their own right.
Google and Temasek report that the number of deliveries across the region rose from 800,000 per day in 2015 to 3 million per day in 2018, with peak periods around shopping ‘festivals’ such as Singles’ Day seeing deliveries approach 10 million per day.
Telecoms
The latest data from GSMA Intelligence’s Mobile Connectivity Index shows that more than 97 percent of Southeast Asia’s population is now covered by a mobile network, with 84 percent of the population living within range of a 4G connection.
However, not all of those people living within range of a mobile connection will have a mobile phone.
Furthermore, not everyone who uses a phone will have internet access via their mobile device, either because of handset limitations, or because they don’t yet subscribe to a data-enabled plan.
A variety of other factors influence mobile connectivity too, and many of these are relatively nuanced at a local level. As a result, the Mobile Connectivity Index offers a simple and representative way to compare levels of connectivity across countries.
Mobile internet use is growing quickly across the region though, and the latest data from GSMA Intelligence suggest that more than 325 million people across Southeast Asia already subscribe to a data-enabled mobile plan.
The speed of average mobile connections is also improving across the region, although there’s still considerable disparity between individual countries.
At more than 50Mbps, average mobile internet connections in Singapore are fast enough to rank the country in the global top ten. However, Indonesia, Cambodia, and the Philippines all fail to rank in the global top 100.
The adoption of smartphones is also growing rapidly in Southeast Asia, with the latest reports from Ericsson suggesting that roughly two-thirds of the region’s mobile subscriptions are now associated with a smartphone device.
This has particular significance for the growth of ecommerce in Southeast Asia. Data from GlobalWebIndex shows that the region’s shoppers are more than twice as likely to make purchases via a mobile phone than they are to buy via a computer.
Furthermore, our analysis suggests that a significant volume of the region’s mobile purchases originate from dedicated mobile shopping apps, which may help to facilitate a certain level of ‘loyalty’ to a smaller number of platforms.
Electricity
Although the region has seen rapid improvements over recent years, a meaningful number of people across Southeast Asia still don’t have access to ‘grid’ electricity, particularly in rural areas.
The latest data from the World Bank suggests that the situation varies significantly by country, from universal access in Singapore, to just 70 percent of the total population in Myanmar.
However, the World Bank’s latest dataset is from 2017, and the organisation reports that access in Myanmar jumped from 56 percent in 2016 to 70 percent in 2017, so it’s safe to assume that the figure is now considerably higher.
Payments
The penetration rate of credit cards remains extremely low across most of Southeast Asia, with many countries experiencing ownership rates amongst adults aged 15 and above of below 5 percent.
The latest data from the World Bank suggest that just 4 percent of the region’s population owns a credit card today, which is more than four times lower than the global average of 18 percent.
Meanwhile, rates of adoption for any kind of ‘structured’ financial services also remain low across the region, with data from the World Bank suggesting that less than half of the region’s population (47 percent) had a bank account in 2017 – significantly below the global average of 69 percent.
However, these low levels of adoption do not seem to pose the barriers to ecommerce that many people outside the region might expect.
Indeed, most ecommerce companies in Southeast Asia have found simple and effective ways around the potential challenges, and solutions such as payment-on-delivery are commonplace throughout the region.
Distinct cultures
Many of the most interesting challenges to scaling ecommerce in Southeast Asia relate to the region’s cultural diversity.
Tastes and fashions vary markedly from one country to another, and while global influences are evident throughout the region, there’s plenty of evidence to suggest that local cultures still dominate.
Furthermore, it’s worth highlighting that when it comes to outside influences, Southeast Asian consumers are more likely to be influenced by trends in other Asian countries like China and Korea than they are to emulate Western behaviours from countries like the United States.
Diversity of language is another critical issue. As we saw in our analysis of Southeast Asia’s top ecommerce players in a previous post in this series, most of the region’s top platforms adapt their offerings by language, and evidence would suggest that this is a critical consideration for success.
This becomes increasingly important with the rising use of voice commands and voice search. As we saw in our recent Digital 2019 Q3 Global Digital Statshot report, data from GlobalWebIndex show that more than half of all internet users in Indonesia already use these interfaces today, and voice adoption rates in the country are amongst the highest in the world.
It’s worth highlighting that linguistic diversity within the same country is also common throughout the region.
Even in Singapore – which is arguably the most ‘globalised’ country in Southeast Asia – there are four major languages in everyday use, with announcements on the country’s subway system made in English, Mandarin, Bahasa, and Tamil.
Religious diversity across the region is also an important consideration, particularly when it comes to serving the needs of Muslim consumers. Considerations range from the need to offer halal food and personal care products, to the influence of religious norms on fashion and beauty trends.
Religion can also play a more subtle role, such as influencing popular travel destinations, and the times of year people choose to take vacations and visit family.
Looking to the future: turning challenges into opportunities
Despite the seemingly extensive list of challenges facing ecommerce companies in Southeast Asia, a number of companies have been quick to turn these challenges into commercial opportunities.
The region’s startups have been particularly successful in delivering innovative solutions, and some of the most celebrated ‘local’ solutions have come from Southeast Asia’s two ‘super apps’: Grab and Gojek.
Both of these apps started out as Uber-like ride-hailing services – albeit with local twists – but have since broadened their offerings to include services such as food delivery.
It’s also interesting to note that Grab beat Uber at its own game in Southeast Asia, and Uber eventually sold its Southeast-Asian operations to Grab in March 2018.
However, it’s the entry of Grab and Gojek into payments that has the most significant potential to advance Southeast Asia’s growing e-commerce industry, with industry observers often drawing parallels to the success of WeChat’s integrated payments solution in China.
From a customer satisfaction angle, the existing success of smaller, niche players across a number of Southeast-Asian markets points to the potential for brands who are able to address local tastes and cultural contexts, especially in the food category.
While managing large inventories of a wide variety of fresh produce could be risky for large-scale players, we see clear potential for a ‘marketplace’ approach to online grocery retailing.
This would bring the enduring popularity of Southeast Asia’s physical markets to the online world, enabling customers to find a wide variety of ‘long-tail’ products through specialist vendors.
Logistics would likely be the most complex issue for smaller players hoping to leverage these fresh goods marketplaces, but the growth of meal delivery services like Grab Food, Deliveroo, and Foodpanda throughout the region suggests that there are already plenty of companies willing to experiment with fresh delivery solutions, even when it comes to smaller order values.
Adapting to local cultures is also important when it comes to fashion and beauty products, which represent Southeast Asia’s largest ecommerce category.
A good example of this is Hijup.com, which offers the latest fashions for the region’s Muslim shoppers – a particularly important opportunity when we consider that Indonesia is home to the world’s largest Muslim population.
Meanwhile, social commerce is also taking off across the region, with local platforms like Singapore’s Carousell and Thailand’s Sellsuki both attracting significant interest from customers and investors alike.
Individual brands are getting in on the act too, with ecommerceIQ reporting that L’Oréal has been experimenting with sales directly via its Facebook page in Thailand.
There’s plenty of innovation in ecommerce ‘support’ industries, too.
Location services such as what3words can help logistics partners to get deliveries to customers even in situations where no formal addressing systems are in place.
What’s more, by using dynamic solutions like what3words, logistics companies can deliver to the most strategic location – one that is potentially even updated in real-time – rather to a fixed street address.
We also anticipate a variety of innovations in the payments sector to cater to the specific needs and contexts of Southeast Asia’s consumers.
Whether it’s app-to-app payments to offer more reliable solutions for payment-on-delivery, to a Southeast-Asian take on distributed payment solutions like Afterpay, this will likely be one of the hottest areas for growth in ecommerce in the coming months.
Similarly, we expect to see a range of innovations designed to solve the region’s logistics challenges, especially in light of recent reports that Amazon may be exploring a partnership with Gojek in Indonesia.
While we’re perhaps still a long way off from widespread drone deliveries, it’s likely that the region’s complex geography and topography will require some quite different solutions to those being developed for deliveries in Western markets.
Southeast Asia’s ‘real appeal’: sustained and diverse growth
Despite all of the impressive numbers we’ve covered so far in this series, it’s clear that there’s still plenty of room left for ecommerce growth in Southeast Asia, even in more ‘established’ economies like Singapore.
What’s more, for the foreseeable future, we believe it’s unlikely that ecommerce in the region will devolve to the ‘winner takes all’ scenario that seems to dominate in many Western markets.
That means that Southeast Asia’s online economy should continue to grow well into the next decade, offering a variety of opportunities for sustained and diverse growth.
However, as we’ve seen throughout this series, ecommerce opportunities vary considerably by country, so it’s important to take a market-by-market view.
To that end, the remainder of this series will explore the local ecommerce opportunity in each of the region’s six key economies:
You can also find all of the previous articles in this series by clicking here.
Alternatively, if you’d like to look beyond Southeast Asia, you’ll find insights into ecommerce usage and trends across the rest of the world in our complete library of free country reports.