Competition for Southeast Asia’s fast growing e-commerce market is intensifying, as industry titans Alibaba and Amazon launch new ventures and acquisitions in a region projected to be the next high-growth frontier for online retailers.
US-based Amazon and Chinese-run Alibaba, both formidable in their home markets with an estimated 60% and 80% share of online shopping respectively, are now vying for market supremacy in a region of over 600 million consumers.
Amazon’s entry into Southeast Asia in July saw the launch of its ‘Prime Now’ service in Singapore, an app available in the country’s iTunes and Google Play stores that promises free two-hour delivery for customers across the city-state who place orders above S$40 (US$29).
Previously, Singaporeans were only able to order select items on Amazon’s website, with most products subject to high international shipping fees. Many saw Amazon’s venture into Singapore as a bold initiative: unlike other countries where it previously launched express delivery services, the e-commerce giant lacked a retail and logistics presence in the island nation.
Though small with a population of just 5.7 million, Singapore is seen by global e-commerce firms as a testing ground for the viability of their operations in wider Southeast Asia, a springboard where services can be established and honed in preparation for entry into larger neighboring markets.
Products available on Prime Now include Amazon-branded private-label products, grocery items, electronics, toys and games, stationery and beauty products. Amazon serves the city-state out of a single 100,000 square foot warehouse, its largest Prime Now order fulfillment urban center that is several times larger than an average US facility.
Amazon’s debut in July saw an avalanche of opening day orders, three times the volume it received when launching Prime Now in its home city of Seattle in 2015. Customer enthusiasm overwhelmed delivery capacity, causing delays just hours after its official launch.
Despite keen interest from consumers, there are now indications that Amazon may be finding Singapore a tougher nut to crack than it first assumed. The online retailer faces stiff challenges from the traditional retail sector and rival Alibaba, which has already consolidated a majority market share of e-commerce in Singapore.
A mere 4.6 % of Singapore’s retail sales took place online in 2016, compared with 15% in the United Kingdom and 10% in the US, according to Euromonitor International, a market intelligence publisher.
The figure is somewhat surprising considering the wealthy city-state boasts the world’s highest smartphone penetration rate, high consumer spending power and a population of which 82% identify as active internet users.
Brick-and-mortar retailers selling mass market items and clothing have recently seen slumping sales and fading footfall in Singapore, reports say, though air-conditioned shopping malls continue to serve as community hubs for hanging out, dining and family gatherings.
Still, Singapore’s cultural affinity for shopping and attachment to the in-store experience may explain why e-commerce hasn’t gained faster traction, though analysts believe on-line sales will grow significantly in the region over the next decade.
A study conducted in 2016 by Google and the Singapore government’s investment arm, Temasek Holdings, predicted Southeast Asia’s e-commerce market would grow from US$5.5 billion in 2015 to US$87.8 billion by 2025, fueled by a rapidly expanding middle class and surging internet use. Mobile devices help to plug in an average 124,000 new internet users a day, the fastest pace in the world, the report said.
Amazon’s foray into Southeast Asia comes as the company boosts spending on warehouses to satisfy e-commerce demand and data centers for its Web Services division. The company is also expanding into India and Australia, launching new smart-home market products, and producing original movies and shows for its Prime streaming video service.
The high cost of Amazon’s business model and its focus on gaining market share instead of delivering consistent quarterly profits begs comparison with Alibaba. Founded by Chinese billionaire Jack Ma, Alibaba is now the most visible player in Southeast Asia’s e-commerce space after pouring billions of dollars into the region’s nascent markets.
Amazon keeps vast product inventories stored in its network of warehouses, selling directly to consumers with a markup. Alibaba, by contrast, doesn’t own inventory and instead provides a platform for sellers and buyers to trade goods, enabling its operations to scale with greater ease. Its largest site, Taobao, doesn’t take a commission from sales, but rather charges sellers for higher ranking on site searches.
Acquisitions have been key to Alibaba’s Southeast Asia expansion strategy since entering the region last year. It preempted Amazon’s arrival in Singapore by purchasing an 83% stake in e-commerce firm Lazada and subsequently acquired e-grocery company Redmart. Moreover, it has already introduced a Prime-like membership service in partnership with Uber and Netflix.
Lazada, a German e-commerce company originally founded in 2011, operates in six Southeast Asian countries and has more than 6.6 million unique visitors a month. Since being acquired by Alibaba in 2016, the firm has seen its order volume triple, according to reports. Lazada’s web store offers more than 30 million products, compared with tens of thousands currently on offer through Amazon’s Prime Now.
Alibaba earned a record US$389 million from marketplaces outside China from April to June, a 136% increase year on year, generated primarily from Lazada and AliExpress, a service that enables global consumers to buy directly from Chinese merchants. Ma’s company has also embarked on a series of fintech and insurance investments in Southeast Asia.
In Malaysia, Alibaba has made big investments in logistics and warehousing in an effort to build the world’s first ever Digital Free-Trade Zone. Malaysia’s Prime Minister Najib Razak appointed Ma as his country’s ‘digital economy adviser’ earlier this year in a drive to promote the growth of small and medium-sized enterprises and double the country’s e-commerce by 2020.
As part of a US$15 billion global research and development push, Alibaba will establish its first tech research lab outside of China in Singapore by early 2018.
As the global e-commerce giants gain a regional foothold, local startups without major financial backing stand to lose. Smaller competing services will likely be absorbed through acquisitions or cloned, analysts say. Brick-and-mortar retailers will also have to reevaluate their operations to compete and survive.
Despite perceptions that Amazon is late to the region’s e-commerce party, a survey by market research consultancy firm Blackbox suggests that 86% of online shoppers in Singapore will likely purchase from Amazon’s Prime Now app, suggesting shoppers are willing to switch over from other e-commerce apps to embrace the US web retailer.
“E-commerce has always traditionally been a last-man-standing kind of game,” says Ajay Sunder of research consultancy Frost & Sullivan. “Given the competition in the market, we are expecting a wave of consolidation in the next year which will see smaller players acquired by the regional or bigger players.”