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‘Mitras won’t just be the commercial centre within a town, but its economic centre’ – Mitra Bukalapak’s Howard Gani

An overwhelming 96% of warung (mom-and-pop retail store) owners reported an increase in weekly net income after adopting online-to-offline or O2O apps. This was just one of the data points from the Indonesia Warung Tech Review 2022 which was formally launched at the recently concluded Indonesia PE-VC Summit organised by DealStreetAsia.

O2O apps are a critical element in ‘warung tech’ a catchall term for a range of services which aim to modernise and digitalise Indonesia’s vast traditional retail sector. The first Indonesia Warung Tech Review was created based on research by DealStreetAsia, and sponsored by Bukalapak.

The Review aims to establish the impact that warung tech has made on the lives of mitras (the store owners) as well as other principals in the space. These include firms that pioneered the warung-focused online-to-offline (O2O) model such as Mitra Bukalapak, as well as businesses that have piggybacked on the model across categories like financial services, FMCG, and gaming.

According to data from the Review, among the biggest challenges to warungs is the mushrooming of modern retail – particularly convenience stores. There is also evidence that the use of warung tech blossomed through the pandemic. Close to two-thirds of users claim to have adopted these apps in the past 12 months and 80% over the last two years. Savings on time and money, and ease of transactions were cited as the biggest benefits. Nearly all adopters claimed the apps gave them savings on procurement costs.

To mark the launch of the report, DealStreetAsia conducted a lively discussion on the impact of warung tech on the Indonesian retail landscape featuring Howard Gani, CEO of Buka Mitra and Khailee Ng, managing partner, 500 Global. The discussion was moderated by DealStreetAsia’s head of ASEAN research Andi Haswidi.

Please download the full report which contains multiple data points on the impact made by warung tech as well as the challenges yet to be addressed.

Read on for a transcript of the session featuring Howard and Khailee which has been edited for clarity and brevity. You can see a video of the session here

For an audience who may not be familiar with Mitra Bukalapak, can you explain how it began and the major pain points that you are trying to solve?

Howard Gani (HG): It started in 2018 when we talked to a mom-and-pop shop next to our office. The feedback was that they felt left out by digitalisation and e-commerce. Most of the marketplace functionalities that we built were for end consumers. But warungs had a different level of technology literacy.

We started to think about applications that could be built keeping these stores in mind. We wanted to bridge this big divide, build a fair economy for all, and give an opportunity to the warungs to improve their livelihood.

Ever since, we have grown to 10 million registered mitras, serving about 50 million offline customers a month. We don’t sell just groceries but give them access to more products: airtime and electricity top ups, credit payments, cable TV, land tax payments, vehicle registration, and e-wallets. Game vouchers are gaining ground, as are toll passes. So is buying gold bullion or becoming money transfer and logistic agents.

We envision that as the education level rises and the economy grows, the mitra will become central to that development. They won’t just be the commerce centre within town, but its economic centre.

In the survey, we found that more than 80% of adopters came on board in the past 24 months. What was that experience like?

HG: During COVID, we found that people didn’t want to travel as much to shop, and were exploring nearby locations instead. With mitras being closer to where people live and work, they became the go-to point. People realised that the warung provides a range of products right next door, and there is no real need for them to go to supermarkets or malls.

We have been in the market for a couple of years and there used to be cycles, but when COVID hit, it accelerated the digitalisation of mitras. Lots of new mitras came in and Mitra Bukalapak really surpassed our expectations in deals, and transaction volumes.

Khailee, can you tell us about your involvement in Mitra Bukalapak as an investor?

Khailee Ng (KN): One of the biggest draws for us to invest back in 2014 was the DNA of the company. Bukalapak really understood the power of community and that Indonesia is much more than Tier 1 cities. A lot of early traction was built by the fact that even Tier 2 and 3 cities had their own community popups. These were not organised by Bukalapak but by people in these cities, creating their own stores that educated others.

Around 2015-16, when we got Willix Halim (who is the current CEO) involved, we could see a real growth dynamic that leaned into his strengths and started to build momentum. The extension to serving the audience in Tier 2 and 3 was very natural.

The biggest appeal is they continue to remain among the largest opportunities in Indonesia: the 95% of commerce that isn’t accounted for by e-commerce. They continue to be a market leader, and the only company with an obsessive focus on this space. They have the results to prove it. The confidence of 500 Global and many other investors is that Bukalapak continues to build on that compounding value.

Do you see the Mitra Bukalapak model surpassing e-commerce?

KN: We cannot just put businesses into these boxes. The growth in the Mitra and e-commerce models feed off each other. People all over Indonesia want to enjoy the same conveniences as city-dwellers while shopping: whether it gets delivered to them or can be picked up right next door. Today’s world is about ‘all-commerce’: online to offline; offline to online – that’s what Bukalapak has been able to do. Urbanisation is not about location but access. It doesn’t matter where you live in Indonesia. If you have the same access as Jakarta, you might even have a higher quality of life.

HG: Imagine turning every rural part of the country into a small micro hub with the mitra at the centre.  We envision that the mitras will provide access to the people around them. It could be to more digital and entertainment products, online shopping payments, and a greater range of physical goods. We can make this happen by giving mitra access to different product ranges and by educating them on what they can achieve through providing better services to customers.

Our internal surveys say that on average, a mitra can grow 3X. I have heard of cases where they have grown 7X or 8X. The impact we are making is massive.

How much do digital products contribute to your business and what’s the growth trajectory like?

HG: Digital products are one of our big pillars of growth. For mitras, selling virtual products is really easy. I’ve heard from my teams that mitras always ask questions about these products. All so that they can improve their product knowledge to sell better.

By simply firing up the app, they can boost their offline sales, offering more products than ever before to the very next customer. They don’t need working capital. The immediate success is incredibly inspirational for us to keep going and improving.

Is there a market that you can use as a benchmark for the future trajectory of the O2O landscape?

KN: We have invested in 2,700 startups in about 80 countries, of which around 48 unicorns have emerged. Of course, Bukalapak is a shining star. The model is present even in markets like Egypt or Tier 2 and 3 in Saudi Arabia. But compare these models with India and it still feels like Day 1.

There are four and a half billion people on the internet, which means there’s about an equal number not online. The story of them coming online is the story of rural commerce in Tiers 2 and 3.

We have an eye on companies in the portfolio that are obsessed with the space, have taken a lead position, are innovating quickly, and rolling out multiple services. We hope to be able to find a Mitra Bukalapak story all over the world.

That being said, because we have been early backers of Bukalapak and engaged with the Mitra journey, many founders see it growing and wonder ‘how do they offer fintech to rural areas all of a sudden?’ They see news every month in terms of the spread of offering. Even young startups are trying to keep pace.

In Indonesia, there’s a lot of support for Bukalapak from the public markets, regulators, and the government. When Bukalapak wins, all of Indonesia wins. We can demonstrate a model on advancing the entire economy, and other nations will be able to learn from that.

Can you explain how you are utilising funds from your $1.5 billion market debut for expansion – particularly when it comes to Mitra Bukalapak?

HG: We are looking to get better access to physical, digital, and financial goods. We have started the group buying concept for mitras, introducing them to fresh products which need to be treated differently.

We have also seen opportunities in other verticals which share similar traits to how Mitra Bukalapak started. On top of that, we have acquisitions and partnerships that will help us grow aggressively.

We have invested in a digital bank and understand that coupled with the mitra business, we will be able to provide far better financial products and access.

We also announced a partnership with Trans Retail which is a major player in offline supermarkets. They have thousands of square feet and have been in the business for years. They have a lot of experience and access. By leveraging this, we can grow the mitra business by leaps and bounds.

We raised $1.5 billion and have a full vision of what we want to do. But we are investing very strategically. We have probably spent only 10%.

Consider Allo Bank — we got a very good valuation — at about 1.7x price/book, and we believe there will be synergistic opportunities with Mitra Bukalapak.

A lot of warung owners don’t see O2O apps as a gateway to financing. What’s your plan on that front?

HG: We hear the same feedback. They wish to expand their business but a major hurdle is cash flow. Organically, it will probably take them years to build it meaningfully. They are not after big ticket loans but micro loans that help them cycle the money through and expand.

We have introduced and are in the process of introducing more micro loans via some major partnerships. We are looking to give the mitras access to financial instruments that have been very easily available to modern retailers, but with limited interest. The challenge here is execution. How do we introduce and help improve the mitras financial literacy, as well as set up a credit scoring system to help all our partners have a balanced and healthy portfolio?

The demand for loans was $190 billion last year and the banking sector could only provide $40 billion. The fintech lending side could provide a mere $2 billion. What are the issues when it comes to tech companies disrupting financial inclusion?

KN: We want to close the lending gap. The issue is not just Indonesian, but global. But before loans can be issued, we need data.

The folks who can actually get the data first will be able to credit score, build the loan book, and create credit models, so that they can lend safely and reliably. How do we close that lending gap? Who has the most data on MSME transactions? This is one of the pillars of why Mitra Bukalapak has been collecting data from 10 million mitras. It can understand at a granular level what each of them are buying and selling,  and build predictive models on similar types of mitra. Think of it like Facebook lookalike audiences. The data model comes first, then you have the credit model, and can get on to the lending.

Bukalapak has already started lending to mitra through micro loans, with other lending partners. But loans do not necessarily have to be cash – it can be trade credit sometimes.

HG: The mitras that we have met are not normally the ones who can access bank loans. These are small to micro businesses – a big chunk of them are unbankable. It’s a mix of low financial literacy and limited availability of reliable credit scoring in that segment. Hence, financial institutions are probably trying to tell us the risks. At Mitra Bukalapak, we have built enough historical data around buying and selling patterns. We will be more confident in building the model and helping financial institutions balance the risk.

KN: In Africa and some other parts of the world, there’s an entire industry that wants to lend to the mitras. They’re called impact nodes. They come from organisations such as FMO or DEG – a lot of developmental finance institutions. They are looking for someone who can offer the credit model and access to manage these loans. Though it’s currently a work in progress, the future will come more quickly than we think.

A question from the audience: How do you deal with cross border taxes?

HG: We don’t have any cross-border businesses in Mitra Bukalapak. All products sold through the platform are compliant with government regulations, be it access channel licence or tax. We help make the mitra aware of GST, VAT and income tax. We work with the taxation office to let them know what they can and cannot do.

Another question from the audience. Everyone is rushing to buy a traditional bank in Indonesia. How do you see this playing out?

HG: We are excited about financial products and they are in line with how we think about improving livelihoods and businesses. One of the biggest pillars is financial literacy. I don’t really have a view on the traditional bank landscape. But for us, digitalisation of banks and the use of financial products through them, will be very positive. That’s why we invested in Allo Bank. Having access to those financial products, putting them through Mitra Bukalapak and passing them on through our community and from there to offline customers, gives a seamless channel to introduce these programmes.

KN: Let’s assume we all own banks – who do we serve? For the longest time, all conferences around the world talked about Indonesia’s 280 million strong population. Bukalapak will use its bank to serve all these people. This is the true story of Indonesia and Bukalapak is proving that with its momentum. Every single mitra across Indonesia having the same conveniences as us in the cities is the eventual trajectory. The bank falls into that context because people in cities are looking at banking services too.

When investors consider Bukalapak today, those examining it closely can see the compounding value of where this asset is headed. I think it’s important for global investors to recognise the true potential of Indonesia as a nation. To unlock its financial opportunity, you are going to need companies like Bukalapak who actually understand mitra and the rest of Indonesia, and how to serve them.

To get a complete picture on the transformative impact of O2O apps on traditional retail in Indonesia, please download the Indonesia Warung Tech Review 2022 created with research from DealStreetAsia and sponsored by Bukalapak