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Mitra Bukalapak’s roadblock: Indonesia’s FMCG giants

Bukalapak is at a crossroads. It sits in fourth place among Indonesia’s mobile ecommerce apps, behind Shopee, Tokopedia, and Lazada, according to estimates seen by Tech in Asia and price comparison site iPrice.

Ecommerce growth in the country is hampered by underdeveloped infrastructure in second- and third-tier cities, various reports note.

Launched in late 2017, Mitra Bukalapak could herald a new growth spurt for the company. The initiative marked Bukalapak move into offline retail, and its goal is to supply goods to Indonesia’s roadside stores or warungs, which in turn sell those items to consumers. Since then, many competitors have sprung up, each attempting a different approach to tackle a common problem: Indonesia’s fragmented retail supply chain.

But these players’ experiences highlight an obstacle for anyone looking to disrupt the status quo: well-entrenched incumbents. For Mitra Bukalapak, it finds itself grappling with skeptical manufacturers, which have strong economies of scale and strict policies on how their goods are priced and distributed. The company, for instance, had to deal with pushback from major cigarette distributor Sampoerna, sources tell Tech in Asia.

Bukalapak also has to convince warung owners to stock up through an app when they’re used to pen-and-paper methods.

These factors raise questions about whether Mitra Bukalapak, which claims to have onboarded 5 million partner warungs, can be financially sustainable, since most of the profits are captured by incumbents occupying the top of the supply chain.

Howard Gani, senior vice president of online-to-offline at Bukalapak, says the company has since established “far more improved and structured partnerships” with all major principals. A Sampoerna representative didn’t respond to Tech in Asia’s request for comment.

Protecting their turf

When Mitra Bukalapak was starting up, the company had limited relationships with fast-moving consumer goods (FMCG) companies. That’s a crucial gap, considering the program aims to supply warungs with FMCG products.

The ecommerce unicorn then relied on unofficial distributors while establishing partnerships with the manufacturers at the same time. But this approach caused Sampoerna, one of Indonesia’s largest tobacco companies, to bristle at how Bukalapak violated its pricing policies, three sources tell Tech in Asia.

They add that this chain of events happened sometime in 2019, and Bukalapak had trouble offloading its fast-expiring cigarette stock to warungs as a result.

While Mitra Bukalapak has pressed on despite the incident, it underscores how ecommerce marketplaces need to strike a balance between their own activities and the interests of FMCG incumbents – not the easiest task.

There’s a limit to how far an innovative company can disrupt a traditional business.

When viewing the entire retail supply chain, the most powerful players are not the ecommerce marketplaces. From global giants like Procter & Gamble and Unilever to local heavyweights like Mayora Indah or Sampoerna, manufacturers claim the bulk of margins and power – after all, they make the products. These companies are deeply entrenched, with well-established ways of doing business, including having specific processes as well as official distributors.

Sampoerna, for example, exerts influence on the retail industry through its Sampoerna Retail Community, a warung partnership program that the company has links to over 100,000 stores.

Ecommerce marketplaces are reportedly careful to avoid disrupting or cannibalizing FMCGs and their official distributors. There’s a limit to how far an innovative company can go in disrupting a traditional business.

Bukalapak CEO Rachmat Kaimuddin / Photo credit: Bukalapak

“If it ends up with backlash, then it’s not good. You might lose [your] business, reputation, and network,” says the founder of a startup that has dealt with FMCG firms. “It’s a dinosaur industry. It’s been around for a long time, and there are many established rules that nobody questions. It’s just how it is.”

For many of these FMCG companies, pricing appears to be a particularly sensitive issue. Discounts, cashbacks, and free deliveries are typical tech or ecommerce practices, but that’s not the case for FMCG companies, which may view these strategies in a negative light.

“I think it’s an honest mistake that startups may often commit,” says the founder. “Many startup employees don’t necessarily come from an FMCG background.”

An analyst who requested anonymity says that based on a conversation with an FMCG company, 40% to 50% of what Mitra Bukalapak offers doesn’t really overlap with that company’s distribution coverage. Given that, the company would have no problems with programs like Mitra Bukalapak.

Brands like Sampoerna can enforce strict pricing and distribution policies.

But cigarettes may be a different story. A report from investment firm CLSA states that cigarettes make up the largest single item sold by warungs and, along with coffee and instant noodles, account for around 80% of daily sales. Cigarettes also have thin margins and expire more quickly compared to personal or home care products like soap or detergent.

As such, Mitra Bukalapak may be pressured to offer discounts because it needs to move the goods before they expire. On the other hand, brands like Sampoerna can enforce strict pricing and distribution policies.

The startup founder says there’s also the matter of unauthorized traders, who often attempt to make money by playing with the margins via methods like buying cheaper stock from Mitra Bukalapak but then reselling them at retail prices. That’s why these rules around pricing are particularly important to the brands, the founder adds.

Cigarette companies in Indonesia are also unique because the industry is heavily regulated by the government due to health hazards associated with smoking. This strong regulatory oversight would make manufacturers more conservative. For instance, marketing a new cigarette brand or product is more difficult compared to other consumer goods. Ads for cigarettes – be they billboards, print, or television – have long been forbidden from featuring the actual products.

A way forward

That said, Bukalapak’s Gani believes that there are “multiple opportunities” for FMCG and ecommerce industries to work together.

“With Mitra Bukalapak specifically, we’re able to offer a clear and direct communication path and a transparent and efficient channel to reach [partner warungs],” he explains. While supermarkets or convenience stores in the modern trade channel have grown, Gani thinks that “the general trade channel still commands a major proportion of FMCG product sales.”

High distribution costs are another hurdle for FMCG companies in Indonesia, says a Sampoerna employee who asked not to be named. Such companies have also invested in giving out promotions and discounts to reach sales targets, and technically, working with a marketplace like Bukalapak can cut down distribution costs.

Gani agrees with this point, highlighting the inefficiencies in the general trade supply chain that hinders or limits FMCG firms from effectively reaching end retailers.

“Mitra Bukalapak is trying to streamline these complex processes by providing an end-to-end digital sales channel that allows FMCG players to directly tailor their interaction with the end retailers,” he adds.

Bukalapak currently sources products from both third-party distributors as well as manufacturers. It operates both its own warehouses and shared ones (in the case of distributors) as well as its own logistics fleet.

It makes margins from the sale of these products to the warungs, though there’s also the question of subsidies and cashbacks. The CLSA report says that these incentives are instrumental in convincing warungs to sign up for Mitra Bukalapak and similar programs, with 93% of the 48 respondents saying that they initially joined because of these perks.

“I think it’s nothing to lose for warung owners. They just need to install the Bukalapak app in the smartphone [to get the subsidies],” says an analyst who has looked into this space. Without it, the warung owners can easily go back to their traditional way of sourcing products from wet markets or supermarkets.

Gani, however, says that Mitra Bukalapak is not focusing on heavy subsidies.

“Our goal is to build better engagement, provide better services, and continuously enlarge our physical and digital products offerings,” he points out.

Going up the supply chain

What is Mitra Bukalapak’s path to profitability? Instead of simply increasing transaction volumes, it could boost margins by going up the supply chain and merging with or becoming a distributor itself.

While manufacturers capture most of the profits, distribution businesses can also make money, albeit with slim margins. This means players like Mitra Bukalapak would be left with an even thinner slice.

A look at PT Tigaraksa Satria could provide a better understanding of this. The company is an FMCG distributor that brings various consumer goods brands – including Nutricia, Quaker Oats, Ovaltine, and Colgate – to retail locations across the country.

Its 2019 revenues totaled 13.4 trillion rupiah (US$925.7 million), with gross profits at 1.68 trillion rupiah (US$115.1 million or about 12.5% of revenue) and net profits at 428 billion rupiah (US$29.6 million or nearly 3.2% of revenue). Almost all its cost of goods is attributed to inventory purchases.

Since February 2018, Mitra Bukalapak has been sourcing items from PT Tigaraksa Satria as well. In 2019, the FMCG distributor said in its annual report that it supplied a total of 150,000 Mitra Bukalapak warungs.

“PT Tigaraksa Satria is one of Mitra Bukalapak’s partners,” Gani says. “We are also working with other national distributors and various local MSME-sized distributors to fulfill the increasing demand from our [warungs] across the nation.”

In 2019, PT Tigaraksa Satria earned 2.4 trillion rupiah (US$166 million) from its Bukalapak connection – roughly 18% of total revenue. That resulted in gross profits of 214.9 billion rupiah (US$14.9 million or about 9% of revenue) and net profits of 46 billion rupiah (US$3.2 million or 0.13% of revenue).

Made with Flourish

Based on their relationship with merchants/warungs, programs like Mitra Bukalapak seem to occupy a space somewhere between third-party distributors and players such as Warung Pintar, a startup backed by East Ventures.

Mitra Bukalapak has a relationship with warungs, but technically, these warungs can still source their goods from other places. Warung Pintar, meanwhile, has an end-to-end relationship with each of its warungs, from the prefabricated kiosk all the way to distribution of goods. The startup makes margins directly from its own distribution business, says co-founder and CEO Agung Bezharie Hadinegoro.

“Of course, Warung Pintar doesn’t have capital like Tokopedia or Bukalapak, which is why we don’t try to compete with their aggressive expansion,” he explains. “But we aim to build a model with more responsible unit economics from the start.”

The flipside is that Warung Pintar grows at a slower pace compared to Mitra Bukalapak. By mid-2019, Warung Pintar had 2,000 warungs and was targeting to hit 5,000 by the end of that year. Meanwhile, Mitra Bukalapak has close to 5 million warungs and agents.

That said, becoming a full-fledged distributor might require Bukalapak to expand beyond its core tech competency. Gani says the company currently has no plans to embark on such a path.

“We are still focusing on creating accessible technology adoption for MSMEs from all segments and scale up the kiosk competitiveness,” he explains.

A Warung Pintar kiosk / Photo credit: Warung Pintar

However, concerns remain for FMCG players, says the Sampoerna employee. An FMCG company’s head office has a lot of power in determining sales channels and other strategies, and at this point, they don’t necessarily see the value in going through marketplaces yet because the returns on investment aren’t proven.

“Once an FMCG opens the ‘floodgates’ to ecommerce marketplaces, there’s no way back, which is why they’re conservative about this,” the person says. “There might be future unexpected costs and other things to consider.”

According to the analyst that Tech in Asia spoke to, some FMCG players may be more open to working with ecommerce platforms than others, but they also need to be mindful of their long relationships with their authorized distributors.

Still, the analyst thinks that programs like Mitra Bukalapak have been an eye opener for manufacturers. It shows how ecommerce could be a viable distribution channel and eventually cooperate with manufacturers as a full-fledged distributor.

“Distribution and logistics costs are some of the less efficient ones [for FMCG], and they actually can make it more efficient if they try to consolidate the distribution [by partnering with ecommerce firms],” the analyst notes. “Right now, they have to go through so many parties to distribute to warungs.”

Less than 10% of retail

Ultimately, ecommerce still represents just a tiny chunk of Indonesian retail, accounting for 3% of the country’s total retail sales in 2017, estimates Statista. In 2018, that number went up to 8% and is expected it to reach 18% by 2023, according to a Morgan Stanley study.

By bringing warungs online, ecommerce platforms are also increasing their share of the pie. If Indonesia were to realize its full ecommerce potential, this would – or should – happen sooner or later.

“Stabilizing the economy at the micro level [which Mitra Bukalapak does] also means contributing to the country’s economic resilience,” says Gani.

The startup founder considers Mitra Bukalapak and similar programs to be attempts at tidying up the “messy” supply chain.

“A lot of things are still semi-manual. A lot of infrastructure building needs to be done, so we think it’s all healthy competition,” the founder observes.

Photo credit: Bukalapak

The Sampoerna employee says that for now, there is no official agreement between Bukalapak and the tobacco company.

In the meantime, Gani says Mitra Bukalapak has been growing steadily in the past year and in the first quarter of 2020. Though he didn’t not specify figures, he notes that the program’s number of transactions, retention rate, and gross merchandise volume continue to increase.

The company is also teaming up with Bank Mandiri – Indonesia’s largest bank by assets – to turn warungs into banking agents.

Gani says that despite the Covid-19 pandemic and Jakarta’s erstwhile large-scale social restrictions, Mitra Bukalapak is not seeing a significant impact.

“Most of our mitras sells daily staples, so our mitras are still operational and an essential part of the economy,” he says.