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Wednesday, November 22, 2017 | MANILA, PHILIPPINES
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Date posted: Wednesday, June 28, 2017 | Manila, Philippines

Uneven dev’t marks online retail space

IN A COUNTRY where social media thrives, mobile ownership is widespread and consumer spending robust, you would think that the Philippines has the makings of an online retail mecca.

The potential for online retail is huge, especially in urban areas where household spending is highest, as gridlock offers consumers the prospect of having to shop without the hassle of wading through the traffic, both on the streets and in-store.

The online marketplace also promises unlimited access to consumers at a minimal cost, as it operates 24/7 less the expense of having to pay overtime to an in-store sales force -- something the traditional brick-and-mortar stores can only dream of.

In an industry where success is measured in terms of who provides quality and fast delivery of products, online retailers must carefully manage their supply chain to maximize efficiency and turn a profit.

But with its inadequate infrastructure, the country’s budding online retail business appears like something grafted onto the local scene, shorn of the requisites for fast-cycle transactions seen in mature markets.

The uneven development of online retail in the Philippines is evident in the slow Internet speeds, patchy payment channel and the spotty performance of merchandise delivery, creating opportunities for the enterprising who want to latch onto the online bandwagon.

The local online retail ecosystem (see diagram) therefore mimics the unevenness seen in other developing markets, with the key players burdened by certain aspects of the supply chain that their peers in more mature markets take for granted. In response, industry players try to plug the gaps in the supply chain to make transactions seamless.



DRIVING FORCE
The local online retail scene is dominated by a platform that operates across Asia, which claims to having cornered 91% share of the Philippine market.

“We started our business in March 2012,” Lazada Philippines cofounder and CEO Inanc Balci said. “[When] we entered the Philippines in the early days, there was no other professional regional players in the market and it was mainly because of the challenges in the market.”

Considered as the driving force of the Philippine e-commerce industry, Lazada Philippines has overcome the initial challenges of the local online shopping scene.

Analytics firm Alexa ranks Lazada as the seventh most visited online site in the Philippines as of end-May this year, higher than popular Web sites like Instagram and Wikipedia.

Latest available audited financial statement show that the Alibaba-backed Lazada Philippines earned P2.29 billion in gross revenue for 2015. The figure is a big leap from its initial year’s P83.77 million.

Asset turnover stood at 200.63% in 2015, lower than previous year’s 267.83%, but a big jump from the 42.88% logged in its maiden year.

The platform allows its five to six million customers in the Philippines to choose from over 8.4 million products supplied by big market players to around 8,000 micro, small and medium enterprises (MSMEs) at any time.

“We open the big door for all the companies in the Philippines to reach out to almost anyone because if you try to [do] this offline you have to open a store on 7,000 islands. You can come to Lazada, and you don’t have to do any capital expenditures,” Mr. Balci said.

With a vast reach, Lazada Philippines carries nearly every top consumer item on the market -- from electronics to perfumes. Offering free shipping, customer support, and free returns, Lazada Philippines promises to make shopping anywhere in the Philippines an enjoyable experience that can be achieved with a single click or tap.

More Filipinos are accessing the Internet, including on mobile devices. About 40% of the Philippine’s population of more than 100 million were Internet users in 2012, up from 5.2% in 2004, according to the World Bank. The Philippines had about 118 million mobile phone subscribers at end-2015.

CATEGORY KILLERS
Besides China’s Alibaba, Philippine conglomerate SM Investment Corp., operator of the country’s biggest chain of retail stores, is another key investor, with the partnership bridging online and offline retailing.

Apart from operating brick-and-mortar retail stores across different formats, SM carries an extensive lineup of brands, both local and foreign.

More importantly, the partnership brings together the leading category killers in the online and offline space.

“[The] strategic alliance with Lazada will further enhance our online store,” Teresita Sy-Coson, SM vice-chairperson, said. “It’s a very good match: Lazada has its expertise and we also have our own expertise.”

Another Philippine conglomerate that threw its hat into the online retail ring is the Ayala Group, which acquired a 49% stake in BF Jade E-Services Philippines, operator of Zalora Philippines. Global Fashion Group, tagged as the world’s leading online fashion destination for emerging markets, owns majority of Zalora Philippines.

Not only does the Ayala Group operate brick-and-mortar shopping malls (through Ayala Land, Inc.), it also owns one of the country’s two largest telecom companies (Globe Telecom, Inc.) and one of the Philippines’ top three banks (Bank of the Philippine Islands).

“This investment demonstrates how we, at Ayala, look at innovation and growth opportunities. We see the potential of e-commerce in the country, and believe that the Ayala group can benefit and add tremendous value to Zalora,” Ayala Corp. Chairman and CEO Jaime Augusto Zobel de Ayala said.

“With resources in banking, real estate and telecommunications, the investment presents new opportunities for Ayala to generate synergies throughout the e-commerce value chain,” he said.

Zalora Philippines expects the partnership with AyalaLand to help it acquire new local and international brands by leveraging on their relationship with the country’s second largest mall operator.

“Let’s just say that we’re very, very, very bullish. We will try to grow at pace with the market which will be challenging given how fast the market is growing,” Zalora Philippines cofounder and CEO Paulo Campos III said in an interview.

“The 49% stake of Ayala is a primary investment... This is fresh capital and all of the proceeds of the investment will go out to Philippine operations,” he said.

“If you look at how the industry develops 10 years from now, in the US or anywhere, everyone has their own Web site and a third party platform... For example, the Bench group, they have their own Web site but they also sell through us. In fact, they sell more through us than in their Web site,” Mr. Campos said.

Zalora wants to become the preferred e-commerce platform of choice for offline retailers, and Mr. Campos believes the partnership with AyalaLand can help convince retailers that they’re “here to stay.”

Zalora raked in P818.78 million in gross revenue last 2015, the company’s latest available financial statement showed, up by 73.9% from the previous year. Asset turnover stood at 232.6%, higher than the previous year’s 152.14%.

THREE CHALLENGES
Despite the growth, Mr. Campos still sees three key challenges -- basic access and slow Internet connection speed, payments and logistics.

“Given that majority of our sales -- two-thirds of our sales -- is cash on delivery (COD) that necessarily shows that there are so many inefficiencies in the market that with the right payment solution this could be addressed,” he said.

Zalora initially created its in-house delivery fleet just to accommodate cash basis payments in the country, as the ecosystem lacked the service at the time the company began operations. Traditional logistics firms suffer from longer delivery times -- a factor that Zalora wanted to improve.

“Delivery fleet… is not something we really wanted to build, if you were to build this business in the US or in China now, or anywhere else with a more developed ecosystem, you wouldn’t build the courier, you would use what the third party logistics [offer],” Mr. Campos said.

Lazada’s Mr. Balci said logistics companies failed to meet the standards the company was looking for. To meet the market’s demand for speed, while assuring quality of service, Lazada also put up its in-house delivery, “Lazada Express.”

Despite outsourcing several logistical operations through LBC, 2GO Express, Air21 and XDE Logistics, Lazada’s in-house delivery still handles the majority of their deliveries.

“Today we deliver 70% of our orders ourselves in majority of the metro areas even in North Luzon, South Luzon that deliver orders faster, more affordable and at the same time with better customer experience, which makes it something that very important for Lazada versus competitors,” Mr. Balci said.

PAIN POINT
The lack of dependable service also spurred Bjorn R. Pardo to put up Xend in 2004. The company CEO got the inspiration for Xend after a successful stint as an eBay seller in the US in the early 2000s. His biggest “pain point” was shipping. At the time, Mr. Pardo had to drive, go to a post office, line up, and fill out forms.

“I fell in love with e-commerce at that time. It was just so much fun, I was making a lot of money... Then I thought, there have to be people just like me back in the Philippines. I decided to go back and see if I can do it here and help entrepreneurs here, to make their lives easier,” Mr. Pardo said.

Xend is designed specifically for e-commerce; it is fully online, includes free delivery insurance, and costs up to 60% less than other courier services. Mr. Pardo said the company is a hybrid of B2B, B2C, and C2C, but more on the latter, as the company focuses more on the entrepreneurs, micro businesses, and individuals.

“What our vision is, we’re trying to empower entrepreneurs in any way we can. It just so happens that we focus on logistics first because it was the biggest pain point for me, for myself when I was first starting out,” he said.

“But there are so many opportunities -- payments, sourcing, I mean this is what my other company does -- Jinio, is where we sign up hundreds of people every day but only a small fraction of these people start shipping within the first month,” Mr. Pardo said.

“So we reach out to these people and we ask them why they aren’t shipping. I mean, you signed up in our Web site... and our sign-up process is tedious, it’s not like signing up with Facebook and you have an account,” he said.

According to its Web site, Xend has around 120,000 clients trusting their logistics service worldwide.

Mr. Pardo said the company is not trying to compete with existing e-commerce players but trying to educate people and encourage them to grow their business: “This is how you could do it, we’re trying to help.”

LOW-TRUST SOCIETY
Mr. Pardo agreed that payments also is an area that need improvement, blaming this partly on the Philippines being a “low-trust society.”

“When Lazada and Zalora popularized COD, e-commerce started to grow like crazy because people saw like ‘I don’t have to take that risk and deposit in a bank account first. I can actually pay for it once it arrives in our doorstep.’ So we’re trying to also help with that,” Mr. Pardo said.

If a courier company has to do that, we’re the ones handling the parcel. We’re the ones that collect the money at the point of delivery,” he said.

But e-commerce’s definition is doing transaction online, in which payments plays an important role. As more Filipinos engage in e-commerce, the Philippine-based payment solutions provider Dragonpay Corp. offered additional services to address increasing demand.

Dragonpay founder and Chief Operating Officer Robertson Chiang said the payment solution provider facilitates around 20,000 transactions a day or “about a million transactions” on a monthly basis passing through its system with an average transaction amount of “more or less P1,000.”

It was not this robust in the beginning, as consumers were reluctant to entrust their money, especially to small players like Dragonpay.

“If you came out of nowhere and then you start offering your business, the natural [reaction] would be: sino ka ba? Bakit namin ipagkakatiwala pera namin sayo?” Mr. Chiang said.

Latest financial statements showed that Dragonpay generated gross revenue of P35.7 million in 2015, a large increase from the P4.79 million it made in the previous year. However, the company still incurred losses, amounting to P1.97 million that year, albeit lower than the P4.51 million in 2014.

CYBER SECURITY
Cyber security is also a concern for some consumers, but for MasterCard’s Senior vice-president of Communications for the Asia Pacific Region, Georgette Tan, the company is committed to enhance security and convenience for consumers shopping online.

“We are continuously focused on developing solutions to address and eliminate underlying fears about the safety and security of payments made online. Our research tells us that consumers want fast, easy, seamless and safe e-commerce experiences, and we work with merchants and key industry players to design and implement payment solutions such as digital wallets and biometric payments,” Ms. Tan said.

In an effort to migrate all COD transactions to online payment, MasterCard added security features such as the “MasterCard SecureCode,” which keeps the transactions private.

“We are constantly innovating to ensure cardholders have safe and secure online shopping experiences,” Ms. Tan said.

These technologies provide a bright future for the payments segment of the value chain. Despite the industry’s continuous growth, majority of the consumers still prefer COD over online payment, mitigating the need for an online payment system.

COD enables a larger base of customers to buy online, Zalora’s Mr. Campos said, adding that “in general we’re still a cash economy.”

In a survey conducted by We Are Social, Filipinos were spending an average of 6.3 hours every day using the Internet. Mobile subscriptions also exceeded the country’s population of 101.1 million by 13.5 million.

This means the potential market is bigger than the existing online stores. However, not every Internet user in the country transact online, according to a study conducted by VISA, which noted that nine out of 10 Filipino consumers went online to shop at least once a month.

According to Lazada’s Mr. Balci, the e-commerce landscape is still in the very early stage, “I imagine that there are 57 million Facebook users, but the number of e-commerce users is significantly less than it, so there is a lot of room to grow.”

Lazada Philippines’ Facebook page has 17.5 million followers and likes, way below the number of users of social media in the country.

DISCOUNTS
Unlike the limited space in a physical store, cyberspace is boundless for everyone who wishes to place their products. Cheaper prices of merchandise are always favorable for the consumers. The savings of merchants’ expenses on physical store’s rent can translate to savings for end-customers.

With the brick-and-mortar stores, floor space could cost between P1,500 and P2,000 per square meter, depending on the location and type of retail space. Space rental for stores also depends on the land value, which in turn relies on location.

The primary reason of consumers in switching to online shopping are the discounts, which can range from 10% off to more than half the price of an item as compared to its in-store price. The consumer can also save money from eating-out and transportation when going to the mall.

The availability of the product is also important for the consumers. For instance, Zalora has its own merchandise which they sell on their Web site. The online platform also offers exclusive brands to keep their customers’ loyalty.

The consumers also consider the available options for payment, as majority prefers COD. From the entrepreneur’s point of view, transacting in cash brings more risk than doing it online, but as the majority of online buyers prefer COD, the consumers have a big leverage on this.

The cost in switching stores for consumers is very low as online stores abound, with each offering best deals than what traditional malls can offer. In contrast, the holding power of an online store for the consumer is the exclusivity of a product or wide range of brand offerings, and ultimately, the ability to sell COD.

Other than paying less for getting the same product online, customers’ satisfaction in terms of service is another important factor in retaining customers.

The better and faster the service, the more loyalty gained from the consumers. Although, loyalty in online shopping is fragile given the low-trust levels among consumers when it comes to matters online. One or two bad online shopping experiences is enough to lose a customer. This includes poor delivery of the products, damaged/inauthentic goods, and overall poor customer service.

THREAT FROM P2P
These can lead to an alternative way of online shopping: Peer-to-Peer (P2P), which involves two persons transacting via online classified platforms, or social media Web sites. Afterwards, buyers and sellers decide on how to deliver the product, whether through meet-ups or shipping. Modes of payment also vary from meet-ups or bank deposits.

“In OLX, there’s a wide range of items for sale on the platform,” said Raffy Montemayor, general manager of the online classified platform formerly known as Sulit.

“We get thousands of different kinds of items listed every day. This varies from cars to furniture to fashion. This is a guarantee that buyers will definitely find what they’re looking for, plus they can even negotiate for the price they prefer,” he said.

“As for the sellers, the platform is teaching simple business practices to all users regardless of age. Both parties become connected to different passion communities. Meet-ups create friendships and eventually end up as a network that can be used for future business pursuits,” he added.

P2P transactions however are not immune to scams or lemons, which is another factor behind the staying power of in-store shopping. In-store, customers can examine the quality of the things they purchase and can take possession of the goods immediately.

Plus, most of the consumers still find shopping in a physical store more socially interacting and fun, a satisfaction that sitting in front of a computer or a smartphone cannot provide.

“Security against online scams and fraud is still a major concern among consumers. It’s natural for people to be naturally protective of the hard-earned money they make,” Mr. Montemayor said.

“On OLX, we encourage meet-ups and real-time exchange between buyers and sellers at secured public places. Some people see this extra step as a hurdle but it ensures you see the item you’re buying prior to purchase or you get to assure your buyer of an item’s authenticity if you’re the one selling,” he added.

For Lazada, whose platform has 8.3 million products, flagging inauthentic products is difficult, according to Mr. Balci.

“What we do is we practically approach by vetting the merchants and then there is reactive approach, if a merchant attempts to sell an inauthentic product to someone if the customer tells us, we keep the merchant off the platform,” he said.

In addition to that, Lazada requires merchants to submit government permits to validate legitimacy.

“If you are selling a health and beauty products, you need to show us your FDA [Food and Drug Administration] permit, if you are selling branded products, you need to show proof that you actually bought that product from proper sources,” Mr. Balci said.

ENTRY BARRIERS
To build an online store, entrepreneurs don’t need to pay rent, enabling them to reach millions of customers in the comfort of their computers or mobile gadgets. But to be successful, there are a number of key ingredients, starting with a user-friendly Web site.

Entrepreneurs must first create a domain name and have a web hosting service. The cost depends on the scale of the bandwidth. In the Philippines, the cost for small and medium businesses can start from P30,000, which includes the cost of domain name and web hosting.

Hiring manpower like web developers is necessary. A marketing strategist is also necessary to focus on what products to offer.

The most important of all is the uniqueness of the products that the online store will offer. This can be provided by exclusive merchants who are willing to sell their products in the online store with best deals.

An entrepreneur must also provide a solid payment system as this is the most sensitive part of the e-commerce process. Consumers can look over the products in the Web site, but without reliable payment options, those buyers could easily lose interest and stop from buying.

The most popular payment method today is COD. Partnering with banks is also an option for entrepreneurs for a more seamless payment, which easily caters bank clients.

But for the payment business, the volume of the transactions they make per day is important, as it’s in the nature of the business to have high volumes, but low margins.

“One of the biggest barriers to entry is how do you scale papunta sa volume na ’yon? Kasi you make very little per transaction, so kung ’yung volume mo maliit, you cannot sustain the business,” Dragonpay’s Mr. Chiang said.

“Today, we see about a million transactions on a monthly basis passing through our system. It’s already that big. Previously it would have been 100,000 to 200,000 a month. If you are only doing a few hundred transactions a day, hindi ka kikita enough to cover your payroll,” he said.

“So getting into the market, getting the merchants, getting the volume, that itself is a barrier to entry, but of course if you have deep pockets, or a foreign player, you’re Alibaba, Alipay, [have] money to burn, that’s a totally different story.”

Last but not least are logistics. Besides ensuring the quality of the products ordered, an online store must provide a reliable delivery service. There are numbers of logistics companies right now that offers around P100 per delivery.

INDUSTRY RIVALRY
The top company in the online shopping industry right now is Lazada Philippines, which according to its CEO Mr. Balci now enjoys a whopping 91% market share. The company has around 8.7 million monthly visitors. The closest to Lazada in terms of popularity is Zalora, with around 6 million visitors per month.

In terms of return on equity, Lazada came in at 55.29% in 2015, up from 49.88% in the previous year, but lower than its initial year’s 113.23%. While Zalora made 48.14% for 2015, lower than the previous years’ 80.82 and its initial year’s 565.45%.

In terms of product differentiation, Lazada offers various merchandise ranging from hardware tools to clothes, unlike Zalora which focuses on Fashion and lifestyle. Most social media vendors also sells fashion and lifestyle items. Therefore, choice among consumers is determined by who gets the fastest and most affordable services.

To keep its competitive edge, Lazada gives out discounts and deals to combat the growing number of informal online businesses. According to Mr. Balci, around 20,000 vendors are ready for the platform in the Philippines, majority of which are MSMEs.

DTI assistant secretary Arturo P. Boncato, Jr., agreed, “There’s a lot more,” citing probably 60,000 that have no proper licenses or business permits.

“To make the long story short, they’re part of the informal economy,” he said.

Mr. Balci encourages more competition as he said that the most important thing to sustain the growth of the industry is to have a “nice competitive landscape.”

“So far, Lazada has been almost the only e-commerce player growing the market… and it’s much healthier for us to have more competition, so that more companies would spend money and grow the market significantly faster,” he added. -- R. O. R. Reusora

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