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These startups could unlock ecommerce’s true potential in Indonesia

Many ecommerce platforms have hit a wall in Indonesia. Despite billions in US dollars in investments, traditional ecommerce players like Tokopedia and Shopee have a long way to go to win over the rural population. While people in Greater Jakarta are spending a third of their household expenditure online, those who live far from the country’s capital are still reluctant to do that, according to data from the Indonesian government and Google’s eConomy report.

Greater JakartaOther cities
Total yearly consumption per capitaUS$1,618US$773
Online yearly consumption per capitaUS$555US$103
Offline yearly consumption per capitaUS$1063US$670
Online – offline consumption ratio1 : 1.91 : 6.5
Total yearly consumptionUS$56.6BUS$181.7B
(3x Greater Jakarta)

Why do people in the countryside still prefer offline transactions? Rusli Abdullah, a researcher at the Institute for Development of Economics and Finance cites two reasons: lack of internet access and limited payment options. Only 22% of rural residents in Indonesia have internet access, including Facebook, Twitter, and WhatsApp, he says. And of those with access, only 42% of them have a bank account.

“Meanwhile, ecommerce transactions usually require people to deposit money in a bank account or mobile payment first,” adds Abdullah.

Social Commerce Agents

Social commerce agents in a local community / Photo credit: Super

Even if rural people have bank accounts or can do mobile payments, their funds might be low because most of them sell agriculture products and have irregular daily or weekly income.

“That’s why they still prefer offline transactions and payment in cash – they only have to pay when the goods are there. It’s really different [from] private or public employees who have a monthly income and are less reluctant to deposit money,” Abdullah explains.

Despite these challenges and logistics-related issues, a prominent venture capitalist in Indonesia thinks that it’s only a matter of time before traditional ecommerce reaches the countryside and people’s behavior “will shift.”

See: Indonesia’s stunning growth doesn’t tell the full story

A new wave of startups in Indonesia, however, believe that they can overcome these barriers faster by marketing, distributing, and selling products through a network of human agents. Called social commerce, this model still uses online tools but it’s distinct from traditional ecommerce in several ways:

Traditional ecommerceSocial commerce
ProductsDigital and physical productsPhysical products
Preferred paymentBank transfer and mobile paymentCash
LogisticsDirect delivered to end customersDelivered to agents, who will personally
send orders to end customers
Mobile app usageFor end customersFor agents, who will share product information
to end customers via WhatsApp, Instagram,
or Facebook
Customer serviceOnlineOffline via agents

Super, which focuses on selling fast-moving consumer goods (FMCG), is one such company. Right now, it has zero transactions in the Greater Jakarta area.

Steven Wongsoredjo, Super’s chief executive, believes that in rural areas, social commerce has an advantage over traditional ecommerce. For example, most rural folk are not used to dealing with online customer service to solve transaction problems. Instead, they prefer to meet representatives like social commerce’s agents in person, he says.

But as the world grapples with Covid-19, when mass gatherings are forbidden and social distancing is the new norm, social commerce agents are turning to SMS or messaging apps to reach their customers.

Since the government has not implemented a total lockdown, people can still meet in person to do cash payment and collect goods. But Super isn’t taking any chances amid the pandemic. “We provide tools like masks, face shields, gloves, and plastic bags. We also encourage them to wash their hands and use hand sanitizer after every transaction,” shares Wongsoredjo.

Steven Wongsoredjo, Super’s CEO / Photo credit: Super

The CEO observes that by focusing on middle-class consumers outside Greater Jakarta, social commerce in the country can have a total addressable market of US$200 billion – a third of Indonesian household yearly expenditure. But the business model is still in its “early phase,” and he expects that it will take around 10 to 12 years to hit that number.

“It will reach an inflection point in the next five years, when people have realized what social commerce and its function,” Wongsoredjo says.

Unlike Super, other social commerce startups like Chilibeli and Woobiz are still targeting Greater Jakarta’s urban population. However, they offer products that city dwellers can still buy offline, like groceries.

“There are still many housewives who go shopping for groceries at traditional markets. But many of these markets are in poor condition – they’re wet and dirty. That’s why we offer a community-based grocery shopping experience,” a Chilibeli representative says.

Selling through agents is similar to community selling and multilevel marketing, according to a senior executive from a regional logistics firm. Instead of being based on marketing expenditure and brand trust, social commerce banks on agent commission and community trust, he says.

“Outreach is higher, easier, and more engaging because you can leverage digital media,” the executive explains.

Marketing through agents

Another key difference between social commerce and traditional ecommerce is on how they do marketing.

Traditional ecommerce players usually use “one-way” marketing through digital media. They also sometimes pay influencers to create a viral effect.

On the other hand, social commerce startups generally try to create traffic through either group buying or reselling. They depend on face-to-face meetings and WhatsApp’s groups feature, which is widely used in Indonesia’s local communities.

Here are the other differences between group buying and reselling:

Group BuyingReselling
Growth engineEnd customersAgents
Incentive to promote productsCustomers can get cheaper prices
if there are more people who buy
the same product
Agents can get commission
from every transaction

Most social commerce startups in Indonesia build and rely on a network of resellers by combining digital marketing and offline events. These agents get a mobile app that comes with a detailed product list, which they can share to end customers.

Some players like Chilibeli also provide a mobile app for end customers. But consumers still have to pick a specific agent via the app because their orders will be delivered to the resellers, who will then send the groceries to the end customers.

Majority of social commerce agents are housewives aged between 25 to 40 years old who want additional income for their families. They can get commissions of up to 10% from every transaction.

“It is a more powerful yet personalized [marketing] method because of its significant potential reach. An average agent might have 150 to 200 WhatsApp contacts,” says Woobiz CEO Putri Noor Shaqina. WhatsApp’s “forward message” feature can expand that contact list even further, she adds.

Social commerce agents / Photo credit: Woobiz

Super’s Wongsoredjo admits that it’s possible for traditional ecommerce players with big funding to allocate money and develop their own network of agents. However, identifying the right people who can bring orders is the real challenge.

“Every community has a different culture, so we need different approaches to win their hearts to join us. We also need to do a thorough survey before deciding which products can work well in the area so we can retain the agents,” Wongsoredjo says.

Some agents also lack the drive to aggressively promote the products while others live in areas that sometimes inaccessible to delivery trucks.

See: After social ecommerce’s success in China, Webuy tests the waters in Southeast Asia

The background of Super’s founding team informs its approach to handling agents. They may have studied overseas, but they also come from Tier 2 Indonesian cities. “It’s easier to execute on the ground and choose the best business model to evolve the venture going forward,” Wongsoredjo says.

To boost retention, Indonesian social commerce startups usually ensure that existing agents first get a monthly commission worth around US$100 to US$200 before scaling their networks in massive numbers. Another way to keep agents is by giving them loyalty points that can be exchanged for merchandise or to sponsor their umrah or a minor pilgrimage to Mecca.

Offering cheaper prices

Startups like Super combine reselling with group buying by aggregating orders first before collectively shipping out the products.

“If the orders are above US$200, we will deliver to the agents’ houses. However, if the orders are below US$200, agents need to pick them up from the nearest Super Center (distribution hub) in the village. We have a policy of US$70 minimum order for the smaller-basket agents,” Wongsoredjo explains.

By pooling the orders, social commerce startups can buy products in bulk directly from manufacturers at cheaper prices. This in turn allows agents to sell the goods at competitive prices. Wongsoredjo claims that some of Super’s top stock keeping units or SKUs can be 10% cheaper compared to market prices.

Super Warehouse

A Super warehouse / Photo credit: Super

What Super actually does is to bypass the traditional FMCG supply chain, which consists of intermediaries like wholesalers and distributors. As such, Wongsoredjo is aware that the startup could come into conflict with more established players.

“I have friends in Big Manufacturing, and they say that their relationship with those middlemen is like a family,” he shares.

To avoid friction, Super doesn’t take in wholesalers and big retailers as its agents. Instead, it only accepts owners of warungs – mom and pop shops that are found across neighborhoods in Indonesia – and individuals, who are typically at the end of traditional supply chains. This way, both Super and incumbent players can continue to operate without killing each other’s business.

“We also don’t burn money to give significant discounts, so the price range for end customers is still normal,” Wongsoredjo says.

Social Commerce graph

Traditional ecommerce vs. social commerce supply chain flow

Other Indonesian startups like Kudo and Payfazz have also recruited warungs as agents for their payment business. Kudo was acquired by Grab in 2017 while Payfazz has a valuation of over US$100 million.

Wongsoredjo, however, says that his company is targeting a different market. While Payfazz, Kudo, and Mitra Bukalapak usually enlist warung pulsa or phone credit stalls, Super focuses on warung kopi – small eateries or restaurants – and micro convenience stores.

Super is even working with Payfazz to offer its own reseller network the ability to process bill payment and phone credit purchases, giving them more livelihood opportunities.

Efficient logistics

Traditional ecommerce players in Indonesia have partnered with logistics companies or built their own systems to deliver orders as soon as possible at affordable rates.

But traditional ecommerce logistics goes from door to door, so the delivery fees can become expensive. For example, when a customer who lives in the Greater Jakarta area buys Indomie noodles from its official store on Tokopedia, the delivery charge is almost half of the product’s price.

Tokopedia’s checkout page indicates that the cheapest delivery fee (40,000 rupiah) is almost half of the product’s price (93,120 rupiah).

In comparison, social commerce startups say that by pooling orders and sending them in bulk to their agents, who then distribute the goods to end customers, they can increase logistics efficiency. This model can also cut costs, adds the senior executive from a regional logistics firm.

But if the startups deliver the products directly from a warehouse to the end customer, “there will be no difference in logistics cost compared to traditional ecommerce,” he says.

Another reason why social commerce startups can have this efficiency is because they usually only offer limited SKUs or SKUs with similar proportions. In contrast, traditional ecommerce companies sell all sorts of products, so they sometimes need to send a refrigerator – big size – and a bag of frozen food – a small item that needs special preparation – to the same area.

Traditional ecommerceSocial commerce
General schemeOrders directly shipped to end customersOrders sent to agents, who then
deliver to end customers for free
Delivery processOne by one, but can be sent in bulk
if the destination and product type
are similar
In bulk for every delivery
WarehouseOwn warehouses or done via
a third-party logistics provider (3PL)
Own or done via 3PL warehouses
and agents’ warehouses (free or at
low cost)
Delivery feeNot free, sometimes can be too highFree (cost factored into the goods’ prices)
Delivery timeInstantTakes longer, but instant option
is available for a fee

Logistics is another area where social commerce diverges from traditional ecommerce.

Wongsoredjo decided to take the order-pooling approach after realizing social commerce startups in India find it challenging to hit average order value (AOV) because they facilitate every single order to the end users.

“Indonesia has a smaller economy compared to India, and the gross domestic product per capita of our Tier 2 and 3 cities and rural areas is relatively small. If we do the same, we will have a hard time making our business profitable,” Super’s CEO explains.

Some social commerce startups have also set up their own logistics hubs in locations near their agents – a strategy that they say can push logistics costs below 1% for every product.

Chilibeli, for example, has a warehouse in the Greater Jakarta area and says that it will add more when the business and communities grow. Super, on the other hand, often teams up with stall owners who have small warehouses to boost its logistics capabilities.

However, there is a caveat: Pooling orders means longer lead times before products can be sent out.

Wongsoredjo says that this may be a problem for customers in big cities, but not for those in rural areas. “For them, the most important aspect is the product’s price, not the delivery time,” he points out.

Choosing the right products

For social commerce startups, choosing the right product is essential because they need to have access to the manufacturers to get cheaper prices. On the other hand, the products they select must generate a high volume of transactions so they can keep ordering in bulk. It’s also important to have hyperlocal product availability, according to Wongsoredjo.

In general, this is the general cost structure of a social commerce product:

Cost of goods sold for manufacturers80% to 85%
Commission for agents5% to 10%
For social commerce firms10%

Social commerce startups allocate the profits from each transaction to logistics, operational, and marketing expenses.

To increase profits, Super plans to release white-label products or goods that it repackages with its own brand and logo. The startup can gain a gross margin of 25% to 30% from every transaction involving such merchandise, Wongsoredjo says.

In the last decade, traditional ecommerce players have succeeded in pushing online transactions, especially for tech-savvy consumers. But the low digital literacy of most people in rural areas means they have been excluded from the online ecosystem.

“That’s why social commerce can’t work in the United States, where people’s digital literacy is high. It’s a similar situation in China, where you can aggregate orders online without offline agents’ presence. But not in Indonesia, where most of the people who live outside Jakarta are not savvy about doing online transactions,” Wongsoredjo says.