Southeast Asia e-commerce: Logistics logjam

Ensogo, a Thailand-based B2C discount platform, was founded by serial entrepreneur Paul Srivorakul in 2010. He expected to manage a few hundred transactions a month, so was astounded when 1,000 consumers put in orders within the first few days. Demand for Ensogo's special offers on dining, beauty treatments and other activities continued apace, with revenue doubling month-on-month.

Berlin-based VC investor Rebate Networks was suitably impressed and committed $2 million. Srivorakul used the capital to introduce new regional platforms - DealKeren in Indonesia and GoNabit in the Middle East. But as the company scaled up, logistics became a problem.

"We were making $5 million in revenue a month from the discount deals business. Once we starting shipping physical goods to customers, we looked for stronger local third-party logistics partners who could do cash-on-delivery," says Srivorakul. "The biggest challenge we faced was finding logistics companies capable of handling B2C e-commerce fulfillment."

In 2011, US lifestyle online marketplace LivingSocial acquired Ensogo. Earlier this year, LivingSocial sold its Southeast Asia assets to Singapore-based iBuy Group. As part of a larger group, Ensogo's has the resources to support growth. But the fundamental problem remains: Logistics providers in Southeast Asia, mainly focused on B2B business where goods are shipped in 5-7 days, are ill-suited to meeting the needs of e-commerce.

UBS estimates that only 32% of Southeast Asia's 620 million population has internet access. As more people come online, online shopping will rise. B2C e-commerce is expected to grow at least five fold by 2020 to reach $35 billion. But who is going to deliver the parcels?

"More entrepreneurs are starting e-commerce service businesses to support small and medium-sized enterprises (SMEs) as they transform from traditional physical retailers into online platforms," says Alex Lin, head of Singapore Infocomm Investments, a VC arm of government-backed Infocomm Development Authority (IDA). "This will place even more stress on the already poor infrastructure."

According to AVCJ Research, venture capital investment in Southeast Asian e-commerce reached $746 million last year, a dramatic increase on the $170 million and $61 million committed in 2012 and 2011. While this could add to the logistics logjam, which in turn restricts e-commerce growth, there are also opportunities for investors looking to address the problem.

Last-mile challenge

The geography of Southeast Asia presents a particular challenge for the logistics sector. The likes of Indonesia and the Philippines - which are among the fastest-growing e-commerce markets - are archipelago nations. Getting from A to B is difficult when it means traveling across water. "Southeast Asia differs from China where logistics is more efficient because it is mainly on land," says Alfred Au Yeung, a freelance logistics consultant in Singapore, who has worked with several retailers on e-commerce initiatives. "Last-mile delivery services require road transportation."

Even on the roads there are problems. Express delivery crews are frequently caught up in serious traffic jams in the cities of Jakarta and Manila, which makes it difficult to schedule shipments within a certain timeframe. And then the fragmented nature of the industry means there are safety concerns. Credit cards are not widely used for online transactions in Southeast Asia and drivers have been known to flee with the money after being paid cash on delivery.

"Last-mile delivery is really difficult in Southeast Asia. Even in Singapore, there are all small van drivers and you never know when and where they will show up," says Vinnie Lauria, founding partner at Golden Gate Ventures. "They call you up and scream at you, saying you have to be there right now. Then they hang up."

Certain segments of e-commerce face further obstacles. Few logistics providers are able to deliver refrigerated products - or at least not without spoiling the goods - and this has promoted start-ups to build up their own warehouses and hire dedicated delivery staff. Golden Gate-backed online grocery player RedMart is one such company. The Singapore-based firm has built a 100,000-square-foot warehouse, bought 27 trucks and hired a staff of 200, ensuring fresh fruit can be delivered to customers on the same day or within 24 hours.

Fashion is another area in which the importance of timely deliver has resulted in significant investments in self-owned logistics infrastructure. German-based Rocket Internet is a leading player in this space. Its two e-commerce sites Zalora and Lazada, the largest Southeast Asia, have raised around $700 million in funding over the last two years. A large portion of this capital was earmarked for warehouses in different countries to handle last-mile delivery.

Building local warehouses is important because it helps avoid additional delays arising from import restrictions. For example, it typically takes a long time to get approval from Indonesian customs to bring in goods, which directly impact the competitiveness of fast fashion e-commerce sites.

However, Stefan Jung, partner at Monk's Hill Ventures - and before that co-founder of Zalora and Lazada as Rocket Internet's managing director for Southeast Asia - sees more players trying to address the logistics shortfalls. This should benefit the entire e-commerce industry.

"I see a lot of start-ups working to solve logistics problems across Southeast Asia, not just the large players such as DHL and SingPost. ACommerce probably is the biggest start-up right now in the logistics space, but I also see 15-20 other start-ups trying to solve delivery problems. That's exciting because they're improving logistics - the situation is much better than three years ago," he says.

Transformation plans

In response to the decline in traditional mail delivery, SingPost is diversifying its operations and targeting three growth areas: warehousing and delivery services, financial services and e-commerce. "We couldn't sit by and wait for more international players like Amazon to enter Southeast Asia and build up significant operations. Instead, we're building by ourselves, bringing more brands into the Asia Pacific region. We are creating the demand for services by ourselves," says Marcelo Wesseler, senior vice president of e-commerce at SingPost.

Among SingPost's initiatives is a program that helps over 600 retail brands - most of them fashion and electronics players like Adidas and Toshiba - launch websites in different Southeast Asian regions. It also integrates online technology, including online ordering and payment systems, and uses existing distribution centers to support warehousing and delivery. In the interests of efficiency, both Hong Kong and Singapore are now SingPost e-commerce hubs. For example, packages supplied by Chinese merchants are consolidated in Hong Kong and then shipped to different markets.

"We chose to provide services for different brands because we can get a lot more in scale," Wesseler explains. "Whether a customer buys a pair of Adidas shoes online in Malaysia, Indonesia or Thailand, everything is local experience, with local-language websites and local after-sale services. Consumers won't know the shoes are shipped from Singapore or Hong Kong."

Four months ago, Chinese e-commerce giant Alibaba Group paid S$312.5 million ($249 million) for a 10.35% stake in SingPost, becoming the company's second-largest shareholder. The investment will significantly improve cash flow available to improve current infrastructure, with significant amounts earmarked for automated warehouse management technology. The tie-up also will allow merchants on Alibaba's platform to sell products in Southeast Asia.

What SingPost is trying to do is position itself as the intermediary of choice for international players entering Southeast Asia by facilitating smooth cross-border transactions. All retailers participating in SingPost e-commerce platform can share resources, although last-mile delivery will be handled by outsourced local third-party providers. For example, when large containers are shipped to Malaysia, GD Express will break down the shipments into small items and make deliveries to consumers.

There are also a number of emerging logistic start-ups devoted to serving the needs of e-commerce platforms. After selling Ensogo to LivingSocial, Srivorakul co-founded e-commerce focused investor Ardent Capital. Last year, Ardent's Labs division launched aCommerce with a view helping e-commerce companies scale up with greater ease than Ensogo.

ACommerce provides end-to-end solutions in Indonesia,Thailand and Singapore. After one year in operation, it handles local fulfillment and delivery for clients such as L'Oreal, Lazada and Japan's Rakuten. The company is now seeking partnership with large players like SingPost and DHL to do cross-border delivery for its clients.

"A lot of companies want to become a platform or marketplace, such as Alibaba's TMall, Lazada and Rakuten. These players want to invest more in platforms, technology, marketing, and gain more online transaction fees from clients. They don't want to invest in heavy assets like warehouse and fulfillment back-end services," says Srivorakul. 

However, aCommerce has ambitions that stretch beyond being a fulfillment and delivery services, which account for about 60% of its entire business. The company wants to provide technology platforms for e-commerce operators, building warehouse and transportation management systems that support local infrastructure.

Venture capital investors appear to have bought into this proposition. In June, aCommerce received a $10.7 million - the largest Series A round ever seen in Southeast Asia - led by Inspire Ventures. Other participants comprised a mixture of VC and strategic investors, including NTT DOCOMO Ventures, Sumitomo Corporation Equity Asia, Sinarmas Indonesia, Asia Pacific Digital, Cyberagent Ventures and JL Capital, as well as angel investors and key executive staff.

"We haven't invested in any online retail websites. Rather, we have backed aCommerce, which can provide services to the whole playing field of online retailers," says Tom Kim, managing partner at Insprie. "Thailand has over 20 websites and hundreds of independent online retailers in the fashion and beauty space who are competing aggressively with each other. Zalora may be on top but there are many others underneath. I don't know who is going to win that war."

Another Singapore-based e-commerce logistics player, Anchanto, has secured a few million dollars in VC funding. Vaibhav Dabhade, the firm's co-founder and CEO, notes that technology is the main differentiator from other industry players. With a 25-strong team, Anchanto integrates its ordering system with the platforms of e-commerce clients. When consumers order goods online, the logistics provider receives the orders directly and handles delivery immediately.

Early movers

Although a few logistics start-ups are emerging, the amount of capital going into the sector is still small. It is just a tiny fraction of the $4.9 billion that private markets investors - including a number of large private equity firms and leading institutional players - have deployed in warehousing and trucking and courier services in China in the last 18 months.

The size of the funding gap reflects the fact that China is a far larger online shopping market than Southeast Asia. E-commerce accounts for 0.2% of Southeast Asia's $436 billion in total retail sales, according to UBS. This compares to 8% out of China's $3.8 trillion retail market.

ACommerce's Srivorakul says the main challenge for logistics businesses in the region is there aren't enough e-commerce sites to fully realize potential of different verticals. It makes it difficult to optimize operations.

"It's the chicken-or-egg story," adds Golden Gate's Lauria. "E-commerce operators here don't have many choices in terms of delivery services. However, there won't be many without stronger demand from the e-commerce side. You can't have one without the other." He sees Rocket Internet as a potentially valuable addition to the region. The company aggressively encourages consumers to buy online and this is the kind of demand driver required to stimulate the logistics side.

Lauria expects Southeast Asia to ultimately follow China's lead, with 20% growth for both the e-commerce and logistics markets over the next few years. Inspire's Kim raises the bar even higher, predicting that the e-commerce share of the region's retail market will rise from 0.2% to 20% over the next 10 years.

He also emphasizes the importance of getting into the logistics game early. "We selected the most challenging part of that e-commerce value chain - the end-to-end component. Then we identified the smartest people to solve that problem, and that's how we found aCommerce," Kim says. "The great thing is there isn't much competition in the end-to-end space right now."

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• Topics
• Southeast Asia
• Consumer
• Technology
• Venture
• Early-stage
• Golden Gate Ventures
• Consumer
• TMT
• Venture
• Ardent Capital
• Rocket Internet
• Alibaba Group
• Logistics
• Transportation