This weekly newsletter chronicles top digital themes and trends playing out in SE Asia, especially Indonesia. We will decode policy and regulatory changes affecting digital economy sectors, crunch earnings data of top players, track developments related to gig economy workers and attempt to piece together ecosystem buildouts in some of the fastest-growing, venture-backed plays. You can access the previous editions of the Vantage Point weekly posts here.
Executive Summary
- GoTo Q1 numbers reiterate focus on profitability vs growth
- BNPL on the march in Indonesia
- Bukalapak – Specialty verticals boost numbers
- Grab bets on tourism recovery
GoTo: Focus on profitability
GoTo’s Q1 2023 results reflect the company’s core focus on achieving positive adjusted EBITDA breakeven by Q4 2023, with all its divisions turning contribution margin positive in the Jan-Mar quarter.
The company also booked an impressive 240-basis-point improvement in adjusted EBITDA as a percentage of GTV to negative 1.1%, with the management highlighting that it is now halfway through achieving positive adjusted EBITDA by Q4 2023 and positive operating cash flow soon after.
The positive Q1 numbers were achieved through reduced variable and fixed costs, coupled with a focus on high-quality profitable users, which make up 70% of its customer base, according to the management.
GoTo optimised both its B2C and C2C businesses in Q1 2023, reducing its commissions, incentives, and product marketing spending by 39% YoY. But despite these moves, merchants remained loyal to the platform, with the number of active merchants remaining stable, according to the management.
These dramatic improvements did not come without a cost, given that the platform saw an overall 8% QoQ decline in GTV in Q1 2023. The management also flagged that there would be a further slowdown in the following quarter.
Part of this slowdown was intentional, given that the company has been shedding low-quality subsidy-driven customers, besides the impact of the closure of some Mitra Tokopedia businesses.
Even taking the above into account, the QoQ GTV decline in both online delivery service (ODS) and e-commerce under Tokopedia are quite striking at 14.9% and 11.3%, respectively.
Tokopedia saw a decline of 4% YoY, which the management suggested would have been flat without the impact of a reduction of Mitra Tokopedia contribution. But even if this was the case, Tokopedia would have seen an 8% QoQ decline.
GTV is increasingly viewed as an ethereal measure, and GoTo, much like its competitors, does not give any guidance on GTV as a metric.
All the same, GTV does provide an indication of growth and market share and as such should be kept on the radar as a performance rather than a valuation metric. GoTo also indicated that there would likely be a further slowdown in GTV in Q2 2023.
The management maintained that the competitive environment remains relatively stable, and it has been preserving its market position despite moderating growth.
The next quarter will provide a further indication of how much more growth is being sacrificed in the pursuit of more sustainable profitability. There may also come a point where market share becomes an issue.
GoTo did see its average transacting users (ATU) decline 10% YoY in Q1 2023 to 59 million from 65 million in Q1 2022, but most of this came over the last quarter given ATUs stood at 64 million in Q4 2022.
Offsetting this decline was the fact that the average GTV per ATU increased by 37% YoY, while the number of orders per ATU also increased by 29% YoY.
These numbers confirm that despite the fall in ATUs, spending by those remaining on the platform increased significantly, which reflects an increase in the portion of high-quality profitable users who require fewer subsidies.
The key will be to retain and grow these higher-quality subscribers by providing higher-quality products and services.
GoTo highlighted two foundational areas of focus, including GoTo Logistics and GoPay’s instalment lending products under GoPay Cicil.
GoTo Logistics will lower the cost-to-serve by bringing logistics and last-mile deliveries in-house, especially in high-density urban areas, with order aggregation through batching reducing the cost of the end-to-end supply chain. It can also improve the speed and reliability of orders.
GoTo will also renegotiate with its 3PL partners for reduced costs on inter-city and inter-island deliveries.
The management suggests that overall cost savings by skirting third parties can be as much as 30%, which will effectively act as a subsidy for customers and an additional service for merchants.
GoTo Logistics’s fulfilment services will focus on enhancing unit economics by improving the assortment mix and inventory turnover rate as well as providing order management services for merchants through its hub-and-spoke model.
The key focus for lending will be on building the GoPay Cicil instalment lending business, which was launched only in October 2022.
The early offerings were on a very selective basis, with most of the early efforts focused on whitelisting potential customers, mainly from Tokopedia, based on their transaction history.
GoTo Financial started to ramp up its GoPay Cicil lending business in Q1 2023 and revealed that Tokopedia customers using GoPay Cicil spend 25% more than those not using it. Therefore, ramping up the pay-later business will have a positive impact on e-commerce spending as well as help retain customers.
The lending business will not just be restricted to the GoTo ecosystem but also offline or open-loop lending.
Given the high level of acceptance off-platform for GoPay, there are also opportunities for growth in lending off-platform, with a virtual credit card approach. Other than instalment lending, GoTo Financial is also experimenting with GoPay Pinjam cash loans but this is at an early stage.
GoTo also highlighted the success of its GoTo Hemat service, which provides more affordable services in less affluent areas from ODS and helps bring new customers onto the platform.
Although there was not much mention of it during the recent results, the company also continues to push its non-cash rewards scheme under GoPay Coins, which also has an increasing number of off-platform use cases.
Other than watching the headline numbers and monitoring the progress towards profitability, it will become increasingly crucial to monitor the progress of GoTo’s foundational product efforts, which aim to reduce the cost to serve and replace cash subsidies as a means to drive future growth in a more sustainable fashion.
GoTo’s focus on profitable users also makes sense but it will potentially come as a cost of growth in the near term. Tracking the success of its lending products will be crucial, given its loan book is relatively small currently. The traction of its foundational products with customers will be key to its future growth prospects.
BNPL on the march in Indonesia
Buy Now Pay Later as a product is a different animal from what is being offered in mature markets such as Australia and the US, where the service is struggling with credit quality and has attracted the attention of regulators.
One key difference is the charging structure. In developed markets, the service offers zero interest rates for consumers and charges the retailer for the service. Given it is a highly competitive market, the rates that pay-later companies can charge the retailer are not sufficient to price in risk sufficiently.
In Indonesia, BNPL firms will charge both the retailer and the consumer on a monthly basis, making the annualised returns extremely attractive for the lender. There may also be upfront fees, together with late-payment fees, which further boost returns. The key difference in terms of the environment is the very low rate of credit card penetration in Indonesia, which currently stands at only around 6%. It is also quite hard to get a credit card in Indonesia, with large deposit balances often required by banks in order to get approval.
Other than credit cards, banking penetration is also relatively low and those customers actively taking out loans are even lower still. What also makes Indonesia an attractive market for BNPL is the high level of internet penetration, with a large portion of the population transacting online.
BNPL is increasingly used as a means to tip consumers into buying something they could not otherwise afford by spreading the payments. In order to grant loans, BNPL forms will often rely on data generated from customers’ transactions and activities online to judge whether they are credit-worthy. This increasingly takes the form of whitelisting customers as potential customers first before offering a loan.
Post the pandemic, there has also been a resurgence of offline retail activity, which has also attracted BNPL firms to be present at the physical checkout to take advantage of this business. BNPL players such as Atome, Akulaku, and Kedivoi are often present in physical stores offering BNPL services at the till.
One of the more recent initiatives is to pre-approve a credit limit so that the BNPL loan can be effectively used as a virtual credit card to make purchases both online and offline. BNPL forms are also extending their reach beyond their traditional categories into new growth areas.
Singapore-based Atome, which initially focused on fashion and beauty through its collaboration with Mitra Adiperkasa, Indonesia’s leading retail group, is now expanding to groceries, sports, automotive, and home appliances. These areas have higher frequency in terms of transactions, and can potentially generate higher margins. Atome plans to work with a total of 800 merchants in 2023.
Tech platforms including GoTo, Traveloka, Grab, and Shopee have launched their own BNPL initiatives for their online businesses. GoTo launched GoPay Cicil last October and saw QoQ growth of 40% in its Q1 2023 loan book but this is expected to accelerate significantly over the coming quarters.
Early evidence suggests that customers using GoPay Cicil on Tokopedia spend 25% more than those who do not. GoPay Cicil relies on whitelisted Tokopedia customers as its target customer base to provide visibility in terms of the risk profile of its borrowers. The space is becoming increasingly competitive, with some of the major banks in Indonesia starting to enter the fray.
The difference with banks is that they have an exceptionally low cost of funds, with the top 4 banks having a cost of funds at less than 2%, allowing them to offer relatively attractive rates of interest. Bank Negara Indonesia was one of the first banks to offer BNPL in collaboration with Traveloka, which enabled consumers to take out a pay-later loan to pay for a flight or hotel but the facility can also be used to buy products on other platforms using a virtual card number. Leading consumer bank Bank Central Asia also plans to enter the pay-later space but in a measured and risk-averse fashion and likely targeting more affluent consumers.
One key risk with BNPL is allowing consumers to borrow more than they can afford creating a debt trap. This may attract the attention of regulators looking to protect consumers, although to date the level of NPLs in this business is manageable. The Indonesian regulator OJK is in the midst of drafting new regulations but it is not yet clear what shape and form these new rules may take.
In terms of credit risk, a rising rate environment may raise the risk of higher NPLs but the population in Indonesia is much more accustomed to higher interest rates, with mortgage rates already above 10%. BNPL loans tend to be short-term in nature with tenures of 3-6 months, making it less of a headache than longer-term mortgage loans, given better visibility.
Consumers essentially know their monthly payments at the start and this tends to be fixed, taking away any potential shock factor. The winners in this space will be those players with a good track record of risk management and those able to access lower funding costs.
This includes existing players including Akulaku, Kedivo, Atome, and major e-commerce players such as GoPay, Shopee Pay and Grab. The major competitive threat will probably come from the local banks as they launch their own PayLater products, although there is still significant room for a number of players with access to customer data, to better judge the credit risk of customers.
Bukalapak – Specialty verticals boost numbers
Bukalapak booked a strong TPV growth of 19% in Q1 2023 at 40.5 trillion rupiah ($2.76 billion) driven by rapid growth in its marketplace segment and specialty verticals.
The company continues to be the clear leader outside Tier 1 cities in Indonesia that account for 72% of its TPV. The growth in these areas comes from digitizing trends among offline micro-retail stores or warungs, where Bukalapak works closely with its Mitra partners to provide them with a broad range of physical and virtual goods to help grow their businesses.
The company’s Mitra Bukalapak segment saw its Q1 TPV grow by 9% YoY with growth coming from the expansion in its product range. It saw a 10% YoY TPV growth in the sale of physical products and an 8% YoY TPV growth in virtual products & financial services.
The number of registered Mitra partners increased to 16.8 million at the end of Q1 2023 against 16.1 million at the end of December 2022.
Bukalapak Q1 revenue grew by 28% YoY while the Mitra Bukalapak revenue rose 9% YoY. It is the marketplace revenue that booked a significantly stronger growth of 77%, driven by an increased portion of higher take-rate specialty verticals, such as gaming vouchers (Itemku) and groceries (AlloFresh).
This rapid uptick in marketplace revenues is a sign of things to come, given that Bukalapak’s ecosystem operates within a virtuous cycle where its Mitra Partners provide traffic for the marketplace as the source of goods to sell offline.
Some of the company’s specialty businesses are at an early stage of development but have the potential to grow to a meaningful size, using the network of Mitra partners as a captive source of demand.
This improvement was also reflected in the improvement in the company’s overall contribution margin – calculated as gross profit after sales & marketing costs – from -0.2% of TPV in Q1 2022 to a positive 0.3% of TPV in Q1 2023.
Bukalapak’s marketplace contribution margin improved from 0.2% of marketplace TPV in Q1 2022 to positive 0.7% of marketplace TPV in Q1 2023, whilst Mitra Bukalapak’s contribution margin improved from -0.4% of Mitra TPV in Q1 2022 to -0.1% of Mitra TPV in Q1 2023.
Bukalapak’s adjusted EBITDA stood at negative 209 billion rupiah in Q1 2023, an increase of 44% YoY. This represented an improvement in the adjusted EBITDA to TPV ratio from -1.1% of TPV in Q1 2022 to -0.5% of TPV in Q1 2023.
The company also recorded an operating loss of 1,177 billion rupiah in Q1 2023, which was a decline YoY primarily because the first quarter benefited from a substantial gain in the value of the equity stake Bukalapak held in Allo Bank Indonesia. As a result, the company recorded a net loss of 1,008 billion rupiah in Q1 2023 from a net profit of 14,549 billion rupiah in Q1 2022.
Alongside its efficiency improvements and rapid growth, Bukalapak maintained a solid capital position in Q1 2023, with 20.3 trillion rupiah of cash & cash equivalents and liquid investments, including government bonds and mutual funds.
Bukalapak faces no concerns regarding cash burn, given that it has more than 15 years of runway. The key standout here is that the company has managed to marry higher take rates and profitability improvements along with stronger growth for its marketplace revenues.
Grab bets on tourism recovery
SE Asian super app Grab is leveraging the sharp bounceback in travel and tourism activity in the region by launching new features to serve visiting tourists.
Through the app features, overseas tourists can easily plan routes, and explore restaurants, and places of interest. Another key feature will make the Grab app available in Chinese, Korean, and Japanese. In popular tourist locations in Indonesia, Vietnam, and Thailand, Grab has also translated food menus to English to make local restaurants more accessible, with Chinese translations to come soon.
Grab has also seen tourists increasingly using multiple services through its app, with Bali given as an example, where traveller contribution to food delivery sales has grown from 10% of sales to 15% between December 2022 and March 2023, as travellers order food in their hotels.
In SE Asia, Thailand and destinations such as Bali in Indonesia are seeing a rapid resurgence of growth, although still some way off the pre-pandemic levels. Despite the recovery last year, tourism numbers are still 63% of pre-pandemic levels, according to the World Travel Organisation.
The last peg to fall into place is the recovery in Chinese tourism, given the country’s later post-COVID reopening. In Thailand for example, 150,000 Chinese tourists visited the country, which is a three-year high but still 85% below 2019 monthly levels, according to the Thai Ministry of Tourism.
The obvious beneficiaries of the resurgence in tourism are hotels and restaurants but there is also a more widespread impact in countries like Thailand, where tourism was estimated to be as much as 20% of GDP.
Given the importance of Chinese tourists, Grab has formed a partnership with WeChat, which has 1.3 billion users in China, to integrate Grab services directly into the Chinese super app. This allows users to access ride-hailing services in more than 500 cities in SE Asia, with users able to pay for fares in Chinese RMB.
Grab has also partnered with South Korea’s Kakao app, which has more than 47 million users, to allow users access to its services in eight SE Asian countries. To capture outgoing tourists from SE Asia, Grab has also enabled bookings in Japan and the Middle East through a partnership with Spiyt Technologies.
Grab is not the only digital player looking to capture the resurgence of tourism in SE Asia, with food delivery firm Foodpanda recently announcing a partnership with Tada, a ride-hailing service in Cambodia and Singapore.
The partnership will initially target the upcoming South-East Asia games and ASEAN paragames in Cambodia, with around 500,000 visitors expected to visit Phnom Penn during the games but the partnership will be for the long-term.
Given its regional footprint, Grab is probably the best-positioned player to benefit from the resurgence of tourism in the region, with the contribution potentially having a material impact at the margin, especially in Thailand and Bali in Indonesia.
Once snared for an airport pick-up, travellers are quite likely to continue to use Grab throughout their trip for transport, especially with the local alternative being both expensive and often unreliable. GoTo is a key competitor in Indonesia but is much less visible than Grab at the airport, and the latter’s regional presence probably gives it an advantage in terms of brand recognition for tourists.
Angus Mackintosh, a consulting editor with DealStreetAsia, is responsible for the publication’s Southeast Asia digital economy weekly newsletter and its monthly research reports. Angus is also the founder of CrossASEAN Research and publishes on Smartkarma.
