In 2019, Lazada is the most visited e-commerce website in Southeast Asia. According to Similar Web, it attracts up to 150 million monthly views across Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
In this blog post, we will explore how Lazada got so big. From its European origin to its expansion in Southeast Asia. We’re going to look at the region’s consumer environment. And Lazada’s business model to see if it is sustainable in the long run.
Table of Contents
A brief background
Lazada is now the largest online marketplace based on monthly visits in Southeast Asia. It hosts 155,000 sellers, 7,000 local and international brands, and carries over 300 million products. In 2016, Lazada recorded a total of $1.36 billion in annual gross merchandise volume.
How did it reach this point? There are two main factors. First is entering the market at the right time. And second is Lazada’s diversified business and revenue model. Let’s explore the first one!
1. Right entry at the right time
Online shopping in its infancy was full of barriers for Southeast Asian consumers—at least in the Philippines, where I’m from.
Remember how difficult it was to buy things online? Because shipping fees were way too costly, even more than the item you wanted to buy? The delivery time took forever? Or worst, e-commerce websites didn’t even ship to your location?
Freight-forwarding companies were the initial solution. Especially for those of you who didn’t have relatives based in the US or EU. But it wasn’t enough. Southeast Asian consumers were ready for an easier and much faster online shopping experience.
Then in 2012, Maximillian Bittner, founded Lazada with the backing of Rocket Internet. The company famous for copying business models of US tech firms in emerging markets.
Here’s a quote from an article on Inc., “Rocket Internet, the Berlin-based incubator whose 39-year-old co-founder, Oliver Samwer, is renowned for his effectiveness, his ruthlessness, and his penchant for shamelessly knocking off the brilliant creations of Silicon Valley’s best and brightest.”
Lazada is a clone of Amazon. And, at the time when it soft launched in 2012, there were three main consumer and market characteristics that reinforced its “right entry at the right time.” These factors are also instrumental in its continued growth in the following years.
a. Growing internet penetration and mobile use
In 2010, internet penetration in Southeast Asia was at 25% with a total of 166M users. Then it grew to 260M in 2015. Finally, in 2019, there are now 360M internet users in the region, according to Think with Google. For comparison, Statista revealed that the United States has 293M internet users.
Internet penetration rate in Southeast Asia is 63%. Of the 360 million, about 90% access the internet via their mobile phones.
b. Presence of young, digital-savvy consumers
Southeast Asia has a relatively young, mobile, and digitally savvy consumers. Nielsen reported that 60% of the population is below 35 years old (except Singapore and Thailand). And that growth in internet users from 2015 to 2019? Most were aged 15 to 19 – the digital natives.
“All eyes are on Southeast Asia as the world’s next consumer powerhouse, with its young population and increasing purchasing power,” said Nick Waters, chief executive officer of Dentsu Aegis Network Asia Pacific. Over 50% are spending more than $30 a month on online shopping.
c. An option for convenience and affordable products
The last driver for Lazada’s growth is a no-brainer. Convenience and deals. Online shopping became a hit because a lot of people wanted the ease of buying things at the comfort of their home. Couple convenience with a wide variety of products sold at cheaper price and great deals and you get a winner.
So, with increasing disposable income, young demographics prone to spontaneous purchases, and connectivity, Lazada entered into the Southeast Asian market at the right time.
But these same factors made other online marketplaces successful. Shoppe, probably Lazada’s next biggest competitor across the region. Tokopedia in Indonesia. Sendo and Tiki in Vietnam. Qoo10 in Singapore. And more. How does Lazada fight to stay on top? Let’s look at its business model.
2. Diversified business and revenue model
Lazada has a lot of revenue streams built within its business model that contributed to its rapid growth.
a. Marketplace
Launched in late 2013, Marketplace is Lazada’s platform for third party sellers. In 2014, it accounted for 65% of Lazada’s overall sales. Simply put, the Marketplace offers retailers, big or small, access to millions of customers.
An upgraded version of the Marketplace is LazMall which was launched in 2018. As the official online store of international and well-known brands, LazMall guarantees 100% authentic products, 15-day free return policy, and next day delivery.
Through the Marketplace, Lazada earns a commission from third party sellers.
b. eTail
Lazada buys and sells its own products. And through funding, they are able to make subsidies in certain products. This allows Lazada to lower the prices up to 90%. Which then attracts more customers to the platform.
c. Ads or sponsorship
What to do with millions of website traffic? Most, if not all, with purchase-ready intent? Sell ad space not only on the homepage but also on individual product pages to third party sellers.
d. Customer acquisition and marketing
Lazada pumps a lot of money in customer acquisition and marketing. Seven years since its launch, it definitely became a household name for online shopping in Southeast Asia.
- Marketing localization. Even if it’s a regional brand, Lazada is localized in each of the six Southeast Asian countries. This facilitates fast and seamless connection to its specific target consumers. And also easier brand awareness and recognition.
- Online ads. With 87% of shoppers beginning their product searches online, Lazada invested heavily in ads to show up at the top of the search results. Specifically, it uses the strategy called Target Outranking Share Bid.
“Thanks to the target outranking share bid strategy, we positioned Lazada’s brand and quickly increased our market share within new product categories. We were able to increase ad impression share by 50% within a new competitive market, which resulted in an overall increase in traffic of more than 30%.” – Stein Jakob Oeie, CMO, Lazada Group
- Affiliates. If you want to earn an extra income by monetizing your website, app, or any online asset, Lazada Affiliate Program is the way. This also works out for social media influencers. You earn money by referring products on Lazada to your audience. Lazada profits and you get a commission per customer you sent who end up purchasing.
- Time-sensitive pricing. From 9.9 and 11.11, Lazada conducts huge sales events multiple times a year but only at a very limited time. It’s like Thanksgiving Weekend but more! Combining “a sense of urgency” with “low prices” obviously results in massive sales.
e. Better delivery through Lazada eLogistics
Finally, with convenience at its foundation, Lazada has to make sure that products are delivered within a reasonable time. Most of Southeast Asia have inefficient and fragmented logistics infrastructure. To address this issue, Lazada created its own logistics service called Lazada eLogistics.
Relying on a network of partners, robust infrastructure and modern technology, Lazada’s delivery time becomes more predictable. Ideally, within 72 hours for Southeast Asian main cities.
Losing money
With this impressive growth numbers, why is Lazada losing money? In 2014, Lazada’s revenue was $154 million at an operating loss of $153 million.
It’s because of the strategy, “Invest Now, Profit Later.” Like Amazon. Where are they investing slash burning money? Gaining market share and acquiring customers through massive discounts, sales, and promotions.
In fact, in 2016, it was close to running out of cash. Until Alibaba injected 1 billion US dollars and acquired control of Lazada, as Techcrunch reported. Eventually, the Chinese-owned company invested a total of 4 billion US dollars to date. Using it as a springboard into the Southeast Asian market.
What’s the future like for Lazada?
- Minimizing loss. To narrow Lazada’s losses, Alibaba, through its March Quarter and Full Fiscal Year 2019 press release, is strengthening its third-party marketplace. It is also reducing its exposure to direct product sales of low-margin categories such as electronics. This means less reliance on capital-intensive products that require higher logistics and fulfillment expenses.
- Growing market. The Southeast Asia internet economy is expected to grow from $100 billion in gross merchandise value in 2019 to $300 billion in 2025. E-commerce is predicted to account for $153 billion of this growing market in 2025.
But even with a massive market, Pierre Poignant, chief executive of Lazada Group said: “We need to address the challenges of Southeast Asia. We have an inefficient logistics industry, a very low penetration for online payments and a fragmented retail landscape.”
Seeing the opportunities in these challenges, Lazada and other online marketplaces can grow via three main segments:
- Extending reach and internet use beyond the metros
- Optimizing a fragmented retail landscape, and
- Leveraging the still low penetration for online payments.
- Is it sustainable? However, with its current strategy and financial health, there is the question of Lazada’s sustainability. Competitors are popping up here and there. Plus, retail trends from around the world are suggesting consumer preference for experiential retail.
According to KPMG, 78% of young consumers, specifically the millennials, prefer to spend money on an experience or event and share these experience-related purchases on social media. There is an emotional driver to this with 69% believing that attending experiences helps them connect better with friends, community, and people around the world.
This contradicts Lazada’s strategy of driving more offline purchases online. What do you think of Lazada and its future?
