What's Driving Indonesian E-commerce Growth?

Katrina B. & Benedict L

Indonesia is a burgeoning e-commerce market with great potential in SEA. But what’s driving this growth and are there any potential roadblocks to its growth? What can we do to tackle these roadblocks?

(Edited to include updated digital wallets information)

With Indonesia’s e-commerce market standing at US$ 12.2 billion in gross market value (GMV) in 2018, Indonesia is currently an e-commerce hotbed in Southeast Asia. This industry is seeing lots of investment and just as importantly, has great potential to continue being one of the biggest e-commerce economies in Southeast Asia. According to McKinsey, Indonesia’s e-commerce industry is expected to hit US$ 40 billion by 2022, a nearly four-fold increase.

More Indonesians than ever are shopping online. In 2017, 35 million people in the country made online purchases; this figure may reach 119 million by 2025, according to a report by Google and Temasek. But what’s driving this growth?

Drivers of e-commerce growth in Indonesia

Four major factors have driven the e-commerce surge in Southeast Asia’s most populous country:

  • A growing middle class

  • High internet and mobile penetration rates

  • Growing numbers of fintech and alternative finance options

  • E-commerce Tech Investment in Indonesia

1. A growing middle class

The World Bank notes that at least 52 million of the country’s 265 million-strong population are now part of the middle class. The Boston Consulting Group puts this number higher, at 88 million in 2014—counting middle-class and affluent consumers (MACs)—and predicts that this group will exceed 140 million by 2020.

They’re spread out, too, with at least 52 cities and regencies (typically rural areas that encompass multiple towns) having more than 500,000 MACs.

This has lead to the growth of many of Indonesia’s product categories. Some of the bigger winners are:

2. High internet and mobile penetration rates

It’s not only upper and middle classes shopping online, though. Rising rates of smartphone and internet penetration have given people across different socioeconomic classes access to online shops, marketplaces, social media sellers, and apps.

Half of Indonesia’s population are active internet and social media users, according to data compiled by Hootsuite. Almost all of them—around 120 million people—are active mobile social users, too.

3. Growing numbers of fintech and alternative finance options

For their part, e-commerce platforms, fintech companies, and banks have worked together to address one of the biggest hurdles to online consumption: payment methods.

Only 36 percent of Indonesians have a bank account, and a meagre two per cent have a credit card. To fill this gap, e-wallets and other fintech services have sprung up.

Alternative finance is flourishing in Indonesia. One example is Kredivo, founded in 2016, which offers an online credit card that requires only the person’s mobile phone number. It allows buyers to pay in installments either online or offline. Kredivo reportedly has partnerships with around 200 online merchants, including major players Lazada, Bhinneka, Blibli, and Bukalapak.

The agent-to-consumer method is also popular, in which shoppers would pay for purchases via sales agents’ e-wallets, and pay the agents in cash. In 2017, there were around 400,000 of these digital finance agents in the country, serving over 10 million accounts. One of the earliest players in this space was Kudo, which Grab acquired in 2017.

Indonesia is seeing a surge in new e-wallet options, which include brands like Go-Jek’s Gopay, Mandiri e-wallet, Tcash and OVO (which has partnered with Grab), among many others.

For instance, Go-Jek 8—a super app that lets users book an array of services from rides to massages, as well as request riders to purchase and deliver food and other products—launched its own mobile wallet, GoPay, in 2016. For now, this is used to pay for services within Go-jek’s ecosystem, paying for bills (like electricity bills) as well as for some offline merchants.

Currently, e-wallets are still in a nascent stage in Indonesia and are slowly getting picked up by online retailers. For now, some e-wallets like Mandiri e-pay, is accepted on marketplaces like Tokopedia.

4. E-commerce Tech Investments in Indonesia

E-commerce players in Southeast Asia can’t have missed the spate of major foreign investments into Indonesian platforms in the past years. After Indonesia’s government loosened investment rules in 2016, investors haven’t been shy in making headways into Indonesia.

Traveloka received US$ 350 million in investment from Expedia to achieve this status. For Tokopedia, Alibaba made a $1.1 billion investment which made the former a unicorn in August 2017.

All these investments are being channeled to help out Indonesia’s e-commerce scene. Flushed with cash, Go-Jek, Tokopedia, and Traveloka were able to team up to invest in PasarPolis, an insurtech company. This paves the way for partnerships, such as selling insurance plans on e-commerce platforms and providing insurance to SME online sellers.

Since attaining unicorn status (a valuation of at least $1 billion), both Bukalapak and Tokopedia have announced the creation of research and development centres (or ‘innovation centres) for e-commerce. Both aim to support local SMEs and develop capabilities in machine learning and drone delivery, which will shake up the local Indonesian business scene.

Go-Jek has also been busy, launching a marketplace for deal vouchers, and creating an interest-free virtual credit card. Producing more alternative payment methods for Indonesians can also help encourage more of them to try out online purchases, which can further fuel Indonesia’s e-commerce growth.

While all this is spurs growth of e-commerce in Indonesia, we’ll also need to be conscious of factors that could be hindering its potential as well.

Thinking about expanding your online store to Indonesia? Get the latest tips and tricks in our latest Indonesian e-book, now updated with Ramadan-related info!

2019 Guide to Entering Indonesia’s E-commerce Market

Roadblocks to e-commerce uptake

Of course, it’s not all sunshine and rainbows for this industry. The average annual online purchase value is IDR1 million (US$70) and is expected to stay low with the entry of more consumers across different socioeconomic classes. People worry about delivery times, especially for items purchased abroad. But even locally bought products may take a longer time to reach certain parts of the country. Potential shipping delays also need to be handled well.

For instance, to deliver a product from Jakarta to Tanjung Selor in North Kalimantan on the island of Borneo, one needs to first use an aeroplane, then a speedboat. And in an archipelago with around 18,000 islands, Tanjung Selor is hardly an exception. There are still many Indonesian online shoppers are also wary of fraud and scams from online purchases. As they can’t test the product’s quality before a purchase, many Indonesians rely on online reviews or reviews from friends or family. They bemoan the inability to return a product it if it falls short of expectations.

Buyers are also concerned about the security of online payments, as well as delivery reliability. It’s definitely a legitimate concern—a survey by Kaspersky Lab in 2016 found that Indonesia had the highest rates of online financial fraud globally. For other consumers, especially those in Medan and Surabaya, the reason for hesitating to shop online is simply that they don’t know how.

This problem is most prevalent both among households earning less than IDR1 million (US$68) a month and those earning more than IDR10 million (US$684) a month, according to Deloitte. (Indonesia’s middle-class households are typically described as having monthly incomes of IDR3 million to IDR10 million.)

These problems aren’t without solutions however, there are e-commerce companies that are doing tackling bigger issues and also some steps you can take to handle these as well.

What can merchants do about these roadblocks to e-commerce?

To address these problems, some of the local e-commerce players are either developing their own payments platforms or partnering with or acquiring fintech companies. For instance, Ralali developed its own e-wallet, various digital platforms offer integration with e-commerce sites, and Go-Jek bought at least three fintech firms.

If you’re aiming to enter the Indonesian market, you should also seek out a shipping partner with a wide network across the archipelago. When working with your shipping partner, you’ll also need to be transparent about delivery times and product return policies and invest in educating consumers on online shopping.

You can also implement various strategies to prove product quality, such as encouraging customer reviews, producing product videos and demos, and using an online-to-offline approach to allow buyers to see and try out the items in real life.

With Indonesia’s rising middle class, internet penetration, and developments in its tech scene, it’s going to be a hotbed for e-commerce action the next few years. To capitalise on this, making sure you have the right plans and the right shipping partners will go a long way in helping you leave your e-commerce mark in the country.

Also, stay tuned as next week we’ll be diving into how and why Indonesian consumers buy online, from their motivations all the way to how their various payment methods.

We update our blog with the latest news on logistics and e-commerce in Southeast Asia every week. If you’d like to stay updated, consider signing up for our Janio newsletter. If you’d like to find out more about how we can solve your SEA e-commerce cross-border delivery needs, come and have a conversation with us.

Interested in e-commerce in Indonesia? Find out more about Indonesian e-commerce here:

2019 Guide to Entering Indonesia’s E-commerce Market

How to Ship to Indonesia

Who are Indonesia’s Online Shoppers?

Top 4 E-commerce Product Categories in Indonesia

Indonesia’s Biggest E-commerce Sales

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