Supersized pandemic revenue growth is waning and losses are mounting, but Shopee is now the clear Southeast Asia market leader. Shopee opened for business as a consumer-to-consumer (C2C) marketplace in the first quarter of 2015 and evolved into a hybrid B2C/C2C business model that by late 2019 was growing fast. Still, it was trailing Lazada in its home country of Singapore, as well as in the Philippines, Malaysia and Thailand – four of the key Southeast Asian markets in which it was operating.
ng. In Vietnam, where it was ahead, it was only by a nose, and in Indonesia it was a long second to Tokopedia.
When the pandemic came, Shopee made its big move. The company invested heavily in its systems and pushed the limits with governments, marketplace partners, and logistics to ensure that it could continue to operate smoothly in the lockdown economy. Its revenue growth hit 160 per cent in 2020 and 136 per cent in 2021, which translated into an increase in dollar terms from US$835 million to US$5.1 billion ($1.2 billion to $5.1 billion). In doing so, it has eclipsed Lazada in Singapore, the Philippines, Malaysia and Thailand, strengthened its lead in Vietnam, and has Tokopedia looking anxiously over its shoulder in Indonesia.
But although the business has boomed and it is the dominant e-commerce player with the biggest market share in six countries (the sixth is Taiwan), profitability remains elusive. How much longer will investors have to wait?
Some have lost patience and deserted the ship. The stock price of its parent company, Sea Ltd, has been wilting since it peaked at US$366.99 on 19 October 19 2021, nose-diving to a close of US$80.47 on 24 June. Its fall from grace with investors occurred well ahead of the general decline in tech stocks that started a month later and tipped the NASDAQ over a cliff in March 2022.
Certainly, there are a few red flags waving around Shopee, but it is still on course for profitability. Unfortunately, in the e-commerce business, that pathway is always, in the words of the Beatles song, a long and winding road.
Still scaling up – at a price
In Southeast Asia, more than half of Sea Ltd’s revenues are derived from Shopee’s e-commerce business, but another large chunk comes from digital entertainment and it has a growing fintech business consisting of digital payments, credit lending (to both consumers and its marketplace partners) and insurance. The fintech segment particularly has a strong synergy with the Shopee e-commerce business.
It took Amazon 37 quarters to achieve profitability for the first time. Shopee has been in business for ‘only’ about 29. By now, investors in technology companies know that it can take years for them to reach black ink.
Shopee has done what e-commerce players do: it has scaled up partly by acquiring market share with deep discounting and free shipping deals, going particularly hard on the promotions during monthly sales events that yield mouthwatering top lines. It also lures new sellers onto its marketplace and keeps a grip on existing ones with attractively low commissions. Its ‘take-rate’ – roughly speaking, the percentage of gross merchandise value (GMV) that it siphons off in revenue – is very low, possibly on the order of 8 per cent.
Shopee has also spent heaps on marketing, including the employment of celebrities and influencers like K-pop group Blackpink, footballer Cristiano Ronaldo, actor and stuntman Jackie Chan, and Thai rapper BamBam.
As a result of the discounting, low commissions and heavy spending on advertising, while revenues have been growing rapidly during the past couple of years, so too have losses. Earnings before interest, taxes and depreciation (EBITDA) went from -US$1.0 billion in 2019 to -US$2.6 billion in 2021. In 2021 alone, EBITDA losses about doubled.
Moreover, the end of the lockdown economy has also brought with it an end to the party that e-commerce operators worldwide had been enjoying in 2020-21. Sales growth, while still strong, is slowing, returning to its pre-pandemic trajectory.
Competitive edges
Despite the double whammy of rising costs and slower revenue growth, however\, Shopee looks to have some clear advantages over its main rivals in Southeast Asia, which, with continued wise stewardship, can be sustainable.
Shopee understands that Southeast Asia’s cultural and economic diversity require a tailored approach to serving each market. It has a different app in each country and a differentiated product mix. To accomplish its granulated level of understanding of each market, Shopee installed large local teams to work on product customisation and marketing. It reportedly has twice the number of employees in Indonesia as Tokopedia.
Shopee also has a category mix differentiated from its major competitors. Most notably, the contribution of fashion, health, and beauty to its total GMV is twice that of Lazada, which derives more than half its sales from electronics. The fashion, health, and beauty category consists of relatively low-priced and diverse products that are shopped frequently and offered by a large number of small sellers. This serves three purposes for Shopee: first, it attracts a lot of diverse suppliers to the marketplace; second, margins are generally higher on soft goods than they are on bigger ticket items like electronics; and third, it means consumers can buy with more confidence because they don’t have to commit as much money to each purchase. Then later, as they become more accustomed to and trusting of buying online, they often migrate up to Shopee’s higher-priced products anyway.
So where’s the room for growth?
As noted, Shopee’s take-rate is artificially low and there is plenty of scope for increasing it. Advertising revenues have a lot of upside, and so have commissions on marketplace sales. Commissions vary according to the market and also according to the nature of the sale (lower on C2C transactions) but at this point tend not to exceed about 5 per cent. Contrast this with Amazon’s commission of approximately 15 per cent and it is clear that the scope for Shopee to push up commissions is material.
The company also has an excellent opportunity to push sales through its growing fintech operations.
There are two other fundamental drivers of sales growth. The first is that the region is still relatively under-penetrated in e-commerce and so large populations in Southeast Asia are still available to be won over.
The second is that Shopee is not restricted to Southeast Asia – most notably, it has already entered Brazil, Mexico, Chile and Colombia and about 20 per cent of its revenue already comes from Latin America.
Shopee, then, has a number of pathways for dampening its losses, growing sales, and achieving profitability within the next few years. But it will be a few years. And in the meantime investor patience will be thoroughly tested.