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E-commerce an expensive endeavor

Released at: 07:44, 11/08/2018

E-commerce an expensive endeavor

Photo: Viet Tuan

E-commerce in Vietnam is growing each year but major players keep burning money to grab more market share.

by Khanh Chi

The Vietnam-based business-to-customer (B2C) e-commerce platform the Tiki Corporation is planning to secure $50-100 million in Series-D fundraising from strategic or financial investors. The funding process is likely to close within the second half of 2018 and the proceeds will be used for operations during the next 12 to 18 months, according to Tiki. This comes after an undisclosed Series-C financing round co-led by Chinese e-commerce firm JD.com along with Vietnam’s entertainment and social media company the VNG Corporation last January.

VNG’s latest financial report shows that it incurred losses of around $12.4 million from its investment in Tiki.vn in 2017; seven times higher than the loss reported in 2016. VNG’s total losses in Tiki.vn amount to more than $14.1 million since it bought 38 per cent of the platform in 2016 for $16.8 million. Vietnam is proving to be difficult terrain for e-commerce players, as they keep spending to grab a slice of the lucrative market but incur losses and, for some, eventually collapse.

Big spenders

JD.com became one of Tiki’s largest shareholders alongside VNG upon completion of the Series-C round, China’s second biggest e-commerce firm, behind Alibaba, said in a statement. Local media reported last November that the round was worth roughly $44 million. Despite VNG’s losses, Tiki is still focusing on becoming the leading B2C e-commerce site in Vietnam. “We achieved good business growth in 2017 and maintained it in the first half of this year, with the website receiving more than 30 million visits each month,” said Mr. Tran Ngoc Thai Son, Founder and CEO of the Tiki Corporation. “We expect three-fold growth this year against last year.”

Shopee Vietnam’s parent company Sea Ltd, meanwhile, has seen quarterly losses triple on the back of rising e-commerce costs in Southeast Asian. Sales and marketing expenses increased by 177.1 per cent to $127.2 million in the first quarter of this year. An increase in marketing efforts was part of its strategy to fully capture growth opportunities and were primarily connected to shipping offers and other promotions to attract new users. But Shopee has now limited one of its core strategies - faster shipping - which greatly contributed to its strong performance. Customers can now access free shipping with Shopee ten times a month rather than on every purchase, as previously. Despite joining the local market just three years ago, Shopee is ranked among the most popular shopping apps, alongside Tiki, Sendo, and Lazada. 

Alibaba recently injected another $2 billion into Lazada, raising its total investment to $4 billion, in order to boost development. Meanwhile, Sea Ltd raised about $884 million in its US initial public offering (IPO) last October. The Singapore-based Lazada Group and the Vietnam-based Vingroup’s e-commerce site Adayroi are seen as competitors of Tiki in B2C, while Shopee and the local FPT Group’s e-commerce site Sendo are considered rivals in customer-to-customer (C2C). 

According to the Vietnam E-commerce Association (VECOM), Vietnam’s e-commerce market saw growth of over 25 per cent in 2017, which is expected to be sustained throughout the 2018-2020 period. Meanwhile, a Statista report revealed that the local e-commerce market last year reached more than $2.1 billion, an increase of 16.7 per cent year-on-year, with total e-commerce revenue expected to reach $3.4 billion by 2020.

Vietnam has all the ingredients for a thriving e-commerce sector thanks to its young population, rising incomes, and growing internet and smartphone adoption. This raises the question of why global tech giants are still sinking more capital into e-commerce platforms while e-commerce companies with good brand images and strong investment flows are still incurring losses.

Top 5 e-commerce platforms, by visits

Source: iPrice, Q4/2017

E-commerce Annual value growth

Source: Kantar Worldpanel - 52 weeks ending March 2017

Tough nut to crack

Online retail makes up only 1 per cent of total retail in Vietnam, compared with 14 per cent in the US and China, according to Mr. Thomas Harris, CEO of DHL eCommerce Vietnam. There is still a long way to go for Vietnam’s e-commerce market to reach its peak, so foreign companies like Alibaba, JD.com, and Sea have invested in the country, intensifying the competition. Mr. Nguyen Ngoc Dung, Deputy Chairman of VECOM, said that e-commerce companies are also incurring losses to capture a larger market share. They are in the investment stage, so it is difficult to say how high the losses will end up being and when they will begin to turn a profit.

Focusing on both B2C and C2C, FPT’s e-commerce platform Sendo.vn has maintained treble growth annually in terms of orders. Mr. Nguyen Dac Viet Dung, Chairman of Sendo, said the greatest challenge for the C2C model is building a technology platform and policies to enable vendors and buyers to complete sales smoothly. “For B2C, I think there will be some difficulties in terms of transport and operational costs as well as limited categories,” he said. “There is now a gradual shift from B2C to C2C.” 

Vietnam’s leading groups, including FPT, Vingroup, and Mobile World, have also jumped on the bandwagon with e-commerce marketplaces such as Sendo.vn, Adayroi, and Vuivui.com. Furthermore, the shift from bricks-and-mortar to omni-channel retailing has also prompted foreign retailers such as Japan’s AEON, South Korea’s Lotte, and Thailand’s Central Group to develop online marketplaces. Lotte E-commerce Vietnam opened in 2016 in order to meet the rising trend of online shopping and 2017 saw it settle successfully in the local market. The Central Group, meanwhile, is also giving priority to e-commerce, with three online platforms in Vietnam: Nguyenkim.vn, Robins.vn, and B2S.com.vn.

Nonetheless, the biggest challenges for Vietnam’s e-commerce market are logistics, delivery, storage, and payments, according to Mr. Ralf Matthaes, Managing Director of Infocus Mekong. “This holds true for all companies in Vietnam,” he said. “E-commerce platforms are showing losses largely due to the fragmented logistics chain. Considering that roughly 80 per cent of consumers pay cash-on-delivery, you can appreciate the huge financial logistics required to just collect payments, hence the losses.” 

Unlike many Southeast Asian countries, Vietnam is still new to credit and credit cards. The country also suffers from a lack of a nationally-united logistics network. This creates a level of mistrust and inconsistent delivery, which slows down e-commerce growth. “Until consumers start to use credit payments and until the logistics of delivery can be rectified, I see e-commerce staying at ‘business as usual’, with numbers in the red, not black,” Mr. Matthaes added. “Even if there is a huge spike in sales, these issues will only magnify and potentially get worse.”

Moreover, e-commerce companies have spent heavily on sales and marketing to promote their platforms, which can quickly eat up profits. Many platforms suffered losses from special discount offers and promotional campaigns aimed to snag new customers. As a result, several local shopping sites went broke and had to close after just a few years. E-commerce expert Mr. Le Thiet Bao also said that there is a cash-burning battle among e-commerce companies. Those who have strong financial capacity and the ability to hold on for longer will ultimately be the winners. 

Moving forward

Mr. Son revealed that Tiki has now been focusing its financial resources on building strong fulfilment and logistics systems, boosting the express delivery service TikiNOW, developing core technologies, and expanding cross-border trading services. During the next three to five years it has two options: conduct an IPO or be acquired by another company. Regarding the first, it is unlikely to conduct an IPO before at least 2021 as it wants to grow further and raise more capital to enhance its valuation.

Tiki has had 250 million page visits during the last 12 months and a traffic share of around 10 per cent among e-commerce platforms in Vietnam. The company, which offers delivery within two hours for a dollar extra, is planning to pilot 30-minute delivery for cold beer. Meanwhile, celebrating six years in Vietnam, Lazada has reported growth doubling year-on-year, with about 30 million visits a month, four large warehouses, and 43 distribution centers nationwide.

Ms. Nguyen Thanh Thuy, Director of Brand Marketing Solutions at Lazada Vietnam, told its anniversary ceremony in May that it will intensify investments in logistics but did not reveal a sum. Lazada eLogistics (LEL Express) has brought an additional 50 electric motorbikes since June for deliveries in Ho Chi Minh City and Hanoi, which are expected to complete 30 per cent of its total daily orders by the end of this year, saving time and cutting transport costs.

At its 2018 annual general meeting in May, Mr. Le Hong Minh, Chairman of VNG, spoke of the vision for Vietnam’s e-commerce market. The first priority for e-commerce platforms is to build the business. “Even leading e-commerce firms like Amazon and JD.com took years to cut losses, while global startups must constantly call for additional investment,” he said. “The huge potential of the local e-commerce market will see the ‘battle’ continue and only those with strong financial resources, good administrative strategies, and well-managed logistics systems will succeed.”

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