Sea, one of Southeast Asia’s most valuable internet companies, has released its full IPO prospectus peppered with claims – among them that it’s the top ecommerce player in the region.
The company cited data from a Frost & Sullivan report it commissioned, saying that Shopee, its consumer-to-consumer marketplace, was number one in market share in “Greater Southeast Asia” during the first half of 2017 – in terms of GMV (gross merchandise volume) or total value of goods sold, and total orders.
It also said that Shopee had about 2.2 times the number of total orders of its closest competitor during the same period, without dropping a name.
Those statements did not sit well with Alibaba-owned business-to-customer marketplace operator Lazada, which has for quite sometime asserted its claim to the throne.
“This is the first time I hear about the ‘Greater’ Southeast Asia, why did they not call themselves Gsea?” Lazada CEO Max Bittner said in a statement emailed to us, referring to their rival’s recent move to change its name from Garena.
“I am very confident that Lazada Group is number one both when it comes to GMV and unique customers in ‘actual’ Southeast Asia – when comparably defined,” he stressed. He didn’t share concrete figures.
In its IPO prospectus, Sea reported US$1.47 billion in GMV and 80.6 million in total orders for Shopee for January-June this year. The figures included its operations in Taiwan, hence the term “Greater Southeast Asia”. Breaking it down, Taiwan accounted for the second-largest share in total orders next to Indonesia.
Sea said Shopee had the largest market share in H1 2017 – 10.6 percent for GMV and 14.7 percent for total orders – still based on Frost & Sullivan data.
By comparison, Lazada is present in all Southeast Asian markets mentioned. But it has no presence in Taiwan.
Responding to our queries, Frost & Sullivan vice president for Asia-Pacific digital transformation Ajay Sunder explained that Lazada actually surpassed Shopee, with 0.5 percent more market share by GMV in the region – even taking into account Taiwan – in 2016. His comment indirectly confirms Lazada as Sea’s closest competitor.
However, come H1 2017, “Shopee registered impressive growth and overtook Lazada,” reaching 10.6 percent market share versus the latter’s 7.5 percent, he says.
Asked about the term “Greater Southeast Asia”, Sunder says “it is what we use when markets at consideration are beyond generally accepted countries for Southeast Asia and is becoming common with ICT vendors as well.”
Lazada last year claimed to have hit US$1.3 billion in annualized GMV (link in PDF). Shopee pegs its annualized GMV this year above US$3 billion.
GMV is a metric commonly used to gauge the performance of ecommerce businesses in their early stages – when it is too soon to judge them on the basis of revenue and profitability. The question is – does it really indicate how healthy a business is?
“As we have recently seen in India, GMV is easily inflatable by subsidy schemes and history shows that GMV falls away as unhealthy subsidies are removed,” stated Bittner.
Sea’s IPO prospectus showed that while its GMV and revenue have been growing since 2014, its net loss also widened due to sales and marketing costs, which included subsidies relating to promotions to acquire more customers and shipping for sellers.
While Lazada also incurs costs from subsidies, there’s no way to know how these have affected its top line as company execs keep mum on its financial performance.
The challenge for both firms then is how to monetize while reducing costs, and to keep users once the subsidies stop.
Sea began monetizing Shopee only this year by offering sellers a cost-per-click advertising service to promote their products in search results in Taiwan and Indonesia, and by charging sellers in Taiwan commission fees for transactions completed in the marketplace.
Lazada, on the other hand, has been generating revenues from transactions through commission fees as well as payment and logistics fees (shipping and fulfillment, among others) to sellers, its president Stein Jakob Oeie told us in a phone interview. In Indonesia, the company is currently not charging commission fees, only payment and logistic fees.
Sea didn’t discuss any plans to rein in on subsidies in its prospectus. Bittner ended his statement saying Lazada will continue to “aggressively build sustainable market share through a combination of advertising and best-in-class shopping and selling experience supported by our own logistics operations.” Oeie declined to reveal whether Lazada has begun cutting down on subsidies.
In the meantime, it’s “no industry secret that marketplaces with no transaction costs and no/low revenues are highly subject to fraud which is further driving unsustainable GMV,” noted Bittner, seemingly taking another jab at Sea. Sea made no mention of payment fees for Shopee itself and so far only charges commission for ecommerce transactions in Taiwan.
Fraud happens when, for instance, people colluding with each other trade the same stuff back-and-forth in a marketplace to gain rewards such as vouchers or credit card points. Imposing some sort of transaction or payment fee helps avoid such incidents.
These transactions bloat the GMV but are not considered unique buys.
Oeie reiterated Lazada’s belief that it’s the top marketplace in Southeast Asia in terms of unique customers, but declined to divulge a concrete figure.
In its annual report, however, parent Alibaba said that Lazada had about 23 million annual active buyers in the year ended March 31, 2017. That’s 3.6 percent of the population of Southeast Asia.
In contrast, Sea said Shopee had 4.2 million “average monthly active buyers” in Q2 2017 but didn’t specify the annual figure.
Apart from shipping subsidies, Shopee’s GMV spike has a lot to do with its business model, according to Lawrence Cheok, senior research manager at IDC Singapore.
Shopee is a C2C marketplace where sellers are comprised of individuals and small professional sellers or “power sellers,” whereas Lazada’s merchants are businesses – mostly branded manufacturers and large retailers. Shopee is “asset-light” in that it does not take on inventory and warehousing, and only taps third parties for logistics capabilities. Lazada, on the other hand, started out as inventory-based direct retailer – thus, the moniker “Amazon of Southeast Asia”.
Over the past years, though, it has shifted to a primarily marketplace model, with warehousing and logistics offerings.
“Shopee reports 1.6 million sellers (in Q2 2017) with 74 million listings, while Lazada had 40,000 sellers when it last reported the US$1 billion milestone. From this perspective, it is possible that Shopee could have scaled much more quickly than Lazada did since onboarding C2C sellers is faster and less complex,” Cheok said.
Yet Shopee’s success – while no easy feat and should not be understated – is also a strategic tradeoff at the expense of long-term sustainability, he stated.
“To sustain its logistics costs, Shopee will have to pivot into a B2C model. Based on their numbers, we estimated their average order value (AOV) is around US$15. This makes it a challenge to start charging C2C sellers shipping fees without a drop in transaction volume. The next best move is to pivot into B2C and drive up AOV through branded products, and to monetize through advertising,” he explained.
However, this may introduce another set of issues for Shopee – cannibalization and price competition between C2C sellers and branded retailers. “To attract branded retailers and expand its B2C model as a viable business, Shopee will have to do what Alibaba did with Taobao and Tmall – setup two separate channels for C2C and B2C,” concluded Cheok.
We’ve reached out to Sea for a response to Lazada’s and IDC’s comments, and for more information in relation to payment and commission fees and annual active buyers, however the company is in a quiet period.
A quiet period is the time in which companies going public are banned by regulators from commenting or disclosing any information so as not to affect the value of the stock artificially.
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