People talk a lot about Indonesia’s burgeoning ecommerce market, and how Jakarta may very well be on the cusp of an online retail revolution. Over the past 12 months, we’ve seen more activity in the sector than ever before, with new firms emerging and big-league investment coming in simultaneously.
Naturally, these are all positive signs that point toward a maturing market in the region; hopefully one that can push Indonesian ecommerce into the mainstream conversation in Asia. It would be great to see online shopping reach five percent or more of the nation’s overall retail sector, but for now we can only speculate on the future.
Like any market, Indonesia has its own set of challenges, caveats, and peccadillos that all ecommerce founders are forced to cope with. In the past, we’ve cited the archipelago’s hellish logistics landscape, weak payments infrastructure, and a fragmented market as some of those limitations. However, there is a second layer of challenges that all estores will face in the gauntlet that is Indonesia.
This is a set of generally accepted idiosyncrasies that newbie e-tailers — and especially foreigner founders — will run into on a daily basis in Jakarta, so take notes. In no particular order, here are five cultural challenges all ecommerce firms, new or seasoned, will face in Indonesia.
Price-sensitive shoppers
It’s true, Indonesia has one of the most attractive emerging middle-classes in the world. By 2030, an estimated 90 million people will have joined the consuming class. That said, Indonesians are, to put it mildly, true suckers for sales and discounts. Locals have a strong proclivity toward finding the best prices at all costs.
This is no secret to anyone who lives in Jakarta, as it’s extremely common to see hundreds (sometimes thousands) of locals waiting in line at the mall just for a 50 percent off sale to happen at Bershka or the Samsung store. Nevermind the time, energy, and fuel spent to get to the store across town or the fact that folks may not have felt compelled to buy anything in the first place, had there not been a sale.
Boston Consulting Group says Indonesian shoppers actively seek out promotions and hunt for deals. At the lower half of the income pyramid, this is a function of family dynamics. Men typically give their wives a monthly budget for the family. The more money these women can save on groceries, the more they have to splurge on small indulgences for themselves. However, the bargain-hunting drive spans the wealth spectrum — more than 60 percent of the overall population says they enjoy searching for discounts and promotions, and more than 70 percent of the country’s affluent population says they enjoy doing so.
This might seem like more of a blessing than a curse at first glance, as demand can be easily created so long as merchants temporarily lower their prices. But in the end, competition often becomes a race to the bottom and profit margins suffer if you don’t plan your discounts as if you were going into brain surgery. Anyone thinking about opening an estore in Indonesia needs to firmly understand the lowest price they can offer while still being able to turn a profit. If it’s not in the same ballpark as the nation’s big competitors, both online and offline, new web firms will need to rethink their strategies.
Risk aversion
New ecommerce names in Indonesia, even ones as big as JD for example, are going to have to work twice as hard as their more established counterparts when it comes to acquiring and retaining users. According to a recent McKinsey study, Indonesian consumers have some specific shopping behaviors. They are risk-averse and brand-loyal. 63 percent of Indonesian consumers only buy products from brands they already know. This positions them as late adopters because they need to be encouraged by friends and family before they choose to adopt new products.
Bank Mandiri cites this challenge as a short-term hurdle in the grand scheme of things, however, as purchasing behavior will likely change when Indonesia’s internet infrastructure improves, and more people come online for the first time. However, for smaller ecommerce sites without a bankroll and several years of runway, they’ll need to find new and creative ways to get local shoppers to trust their brand, and do so fast.
Deep-pocketed competitors
Rocket Internet’s Lazada Indonesia, Lippo Group’s MatahariMall, SoftBank and Sequoia-backed marketplace Tokopedia, and now JD.id — the Indonesian arm of the Chinese ecommerce giant — are all firms with copious spending power. All are up and running in Indonesia, and those who are intimate with Indonesia’s ecommerce landscape understand how unwise it is to challenge these guys head-on.
Lazada Indonesia is perhaps the biggest force to be reckoned with, as overall spending on Lazada Group’s Southeast Asia portals jumped from US$89 million in 2013 to US$350 million in 2014. Indonesia’s shoppers made up over 30 percent of that, says CEO Max Bittner. To date, the firm has pulled in US$686 million in funding on public record. Tokopedia grabbed US$100 million last year, and MatahariMall also claims to be earning hundreds of millions. JD is a publicly traded company that’s raised around US$2.6 billion to date.
If you want your fledgling ecommerce venture to work out, you’re going to need to find multiple ways to differentiate yourself from these firms or face certain death. Homework and competitive analysis is a must.
An increasingly frothy market
There are many figures that paint a positive picture of Indonesia’s ecommerce scene. The most referenced one is a 250 million population with a recent annual GDP increase between 5 and 6 percent, primarily driven by people buying things. In reality, Indonesia’s ecommerce market is still in its infancy, yet an increased level of attention and hype is drawing entrepreneurs who think the market and investment scene are already primed.
Zalora Indonesia was able to succeed in its early days because of Rocket Internet’s vast resources and a long period of trial and error. Today, seemingly strong competitors like Paraplou Group are closing their doors in Jakarta, citing reasons of market immaturity, uncertain financial conditions, and a hard time getting funded as the primary reasons for closure.
With firms like MatahariMall making bombastic funding claims and many early-stage VCs adopting the spray-and-pray investment method (without disclosing round sizes), all the news coming from Indonesia makes the archipelago seem like a perfect lilly pad for incoming ecommerce companies.
Lyall Taylor, associate director at global financial services firm Macquarie Group in Jakarta believes there is a lot of hype about future ecommerce growth in Indonesia. He recently broke down typical causes of market hype for Tech in Asia.
“Usually what happens is that rapid growth in an industry […] results in profits to early investors,” said Taylor. “These profits get increased media attention and eventually attract more and more people to enter the fray, driving prices higher still […] investors are extrapolating growth well into the future and assuming a high likelihood of success for many tech ventures, even when high levels of future growth and profitability may not be assured.”
A preference toward brick-and-mortar
Shopping is undisputedly a religion in the archipelago. When friends get together on a Friday night, the question is not “Should we go to the mall?” Instead, it’s “Which mall should we go to?” Local business portal Indonesia-Investments says it’s astonishing how many new malls have opened during the last decade or are currently being developed in Jakarta. Most new malls are part of large real estate projects that also include apartment complexes, office towers, hotels, and sometimes even hospitals.
The mall is usually the epicenter of everything on a Jakarta superblock, connecting all other buildings. For Indonesians, from the middle-class up to the elite, these malls are places to hang out, relax, and eat because the environment is enjoyable: pleasant temperatures, no pollution, and clean spaces. Most Jakarta malls contain one or more floors with several restaurants, which are inevitably popular among young adults. Malls are also common places to have business meetings. Live music is a regular occurrence.
Jakarta alone has nearly 200 shopping malls and counting, despite the government trying to curb mall growth in recent years.
The reason this is important for incoming foreign ecommerce founders, or anyone considering starting an estore in Indonesia for that matter, is that ecommerce is not going to replace brick-and-mortar shopping in the archipelago anytime soon. In fact, startups will need to work much harder to provide incentives for shoppers to transact online rather than simply taking the elevator downstairs and buying offline.
