Indonesia is quickly becoming the hottest place for online retail in Southeast Asia. Here is what you need to know about this emerging e-commerce giant.
Indonesia, the fourth most populous country, is presenting itself as a promising hotbed for e-commerce. E-commerce transactions are expected to triple, from US$8 billion in 2014 to US$25 billion by 2016, as estimated by the Indonesia E-commerce Association. As Indonesians become more affluent, online shopping is also predicted to double by 2016, from 4.6 million shoppers in 2013.
Opportunities for Growth
Indonesia already has a solid retail market, and local consumers just need to adjust to buying products online rather than in brick-and-mortar stores. The country ranks 12th out of 30 emerging economies for retail investment opportunities in the Global Retail Development Index 2015 by A.T. Kearney. Furthermore, total retail sales have already grown 14.5 percent in 2015 compared to the previous year.
Although there has been a lot of buzz about e-commerce in Indonesia, it represents only a small fraction of the country’s retail market. Online sales account for only 7 percent of all retail sales. E-commerce has a huge space to grow in Indonesia, as Internet penetration is only at 29 percent as of March 2015.
Furthermore, according to a SingPost report released in 2014, of the roughly 74.6 million Internet users in 2013, only 4.6 million had shopped online. As Internet penetration steadily increases and smartphone use grows, online shopping is expected to surge in the Indonesian archipelago.
Indonesia’s massive population size, and widely spread towns and cities across thousands of islands, has actually created a suitable climate for online shopping and home delivery. E-commerce platforms Rakuten and Zalora both reported that about 70 percent for their orders in Indonesia came from rural areas in 2014. This is due to the lack of convenient stores and shopping malls that are easily accessible to rural dwellers, so they turn to online shopping and delivery services for the convenience and variety of goods.
However, e-commerce is still in its infancy in Indonesia, and the country’s infrastructure and government regulations will determine how well e-commerce thrives there.
Government regulations are being refined for the ecommerce industry, which currently follows a 2014 trade law, which states that stores must source for at least 80 percent of their goods locally, thus restricting what retailers can sell online. Other factors being consider include how e-commerce businesses are taxed and how well consumers are protected in online transactions. Depending on the new regulations imposed, e-commerce growth in Indonesia can be hampered or accelerated.
There have also been barriers to making online transactions in Indonesia, and e-commerce businesses have been spreading themselves thin in providing a variety of payment methods that locals can trust. Only 20 percent of Indonesians have bank accounts and less than 5 percent have credit cards, making alternative payment methods, such as cash on delivery and prepaid debit cards, popular in Indonesia.
There is a need for other services that facilitate e-commerce as well. For instance, not all e-commerce businesses are large enough to have their own dedicated delivery fleet or localised warehouses, leading to high chances of delays and late deliveries. This is where 3PL companies can step in to increase the efficiency of last mile fulfilment.
Although Indonesia is not known for good infrastructure or congestion-free roads, there is hope that will drastically improve, given the record US$22 billion set aside for infrastructure projects around the country.
Understanding the Indonesian Shopper
According to McKinsey and Co., Indonesian shoppers tend to be risk-averse and late to adopt new products and technology. This mainly stems from a lack of trust. Thus, they prefer to use forums and social media platforms where they can interact with the sellers and other buyers directly before making their purchase, as opposed to visiting an online store.
As such, social media will be a good way of engaging with potential customers. As of end-2014, Indonesia had 60 million active Facebook users and 30 million LINE users, while Jakarta as a city had the highest Twitter usage in the world. In 2014, 27 percent of the country’s e-commerce transactions were done through social media platforms.
It appears the most lucrative e-market to target in Indonesia lies in women’s fashion, as most online shoppers are women, who spend larger amounts more frequently. 61.7 percent of all online shoppers purchased clothing in 2013, making the e-commerce space in Indonesia suitable for female fashion brands.
What does this mean for retailers?
Indonesia has a huge potential for growth, making it an attractive place for investment and business opportunities. Although some e-commerce companies such as Berniaga, Tokopedia and Bukalapak have already made it big, it is not too late to take advantage of the booming demand for online retail that is expected in the years to come. Furthermore, these existing Indonesian e-commerce companies can form good partners for companies that are looking into expanding into Indonesia.