Written by Gary Khoeng
Few could dispute the level of attention Indonesia has been getting on eCommerce, especially in 2014. With a robust domestic household consumption of almost 60% of total GDP and consistently growing middle & affluent class across the archipelago, Indonesia is poised to maintain a strong eCommerce ecosystem.
A long time coming
Indonesia’s startup scene has come a long way since its nascent environment in 2007 to 2012. Since then, we have observed strong double-digit online retailing value growth supported by two important key enablers.
Rise of wealth: due to a relatively insulated consumption economy, Indonesia managed to weather the last global financial meltdown. A survey done by the Boston Consulting Group in 2012 found that 91% of Indonesians feel financially secure; while having 30% of the population is categorized as Middle-Affluent Class as spending more than IDR 2mil of monthly household expenses. It is expected that around 8-9 million people will enter this segment each year.
Increased Internet penetration: according to an eCommerce report by SingPost, Indonesia commanded between 70 to 80 million Internet users this year, growing at 20% yoy until 2016. This is more than 30% Internet penetration, double the rate several years ago. Additionally, growing usage of smartphones also provide the basis for increasing the accessibility of online retailing.
All is good and well
We believe that eCommerce in Indonesia will continue to be a promising area in the next few years. According to eMarketer, an independent market research company, there are 5.9 million online shoppers in Indonesia in 2014. This number is expected to grow to 7.4 million and 8.7 million in 2015 and 2016 respectively.
Singpost also reported that in 2012, a single transaction basket size online was about US$55 with an average annual customer spending of US$256. To put into perspective, Sukamart says that its average basket size is about $30-50 (this is not bad compared to the average basket size of a UK fashion retailer at $94).
On a sidenote, Euromonitor indicated that consumer electronics remain the largest eCommerce category, but apparel and footwear remain the strongest growing sector thanks to an increasing number of fashion e-tailers and their intensive promotional efforts.
Hot developments in the online retailing space include Tokopedia, one of the largest C2C platform claiming 10 million visitors monthly. The company has successfully leveraged their ever-increasing consumer base to receive an injection of about US$100m from Seqouia and Softbank in 2014.
Place your bets in
The outlook for Indonesian eCommerce is bullish, as several key indicators remain favorable:
- Internet penetration and smartphone sales continue to drive more people from across the nation to access online retailers, especially with the expected establishment of Indonesia Broadband project. Rakuten and Zalora already claimed that in 2014, 70% of their orders come from rural areas.
- Continued evolution of essential supporting infrastructure for eCommerce such as logistics and payments. The establishment of aCommerce and UITOX on top of existing established players such as JNE is good indication.
- High investor confidence translating to healthy valuation trajectory for existing funding rounds. If the market continues to believe in technology startups and can justify valuation multiples, there is a good supply of capital to continue growth.
However, despite the rosy picture we are seeing on Indonesia’s eCommerce, online retailing will continue to face several challenges:
- The deteriorating rupiah and the government’s recent initiative to curb consumer lending from overheating may result in weaker consumer confidence in 2015
- Relatively high inflation in Q4 and reduction in fuel subsidy might directly impact disposable income, thus further cooling down consumption rate
- Continued education for consumers to be more comfortable in purchasing online, as current surveys still indicate that customers still prefer bank transfer as mode of payment and the ability to touch and feel products before purchasing online. This indicates a lack of trust on online retailing.
Nonetheless, we have high hopes for the eCommerce scene in Indonesia. It may not even be too farfetched to expect an IPO in the next two years. The question is, will it be in electronics, apparel, or media products?