On the face of it, Indonesia’s online fashion startups are down on their luck.
Of the 24 e-commerce ventures that closed down or merged in the country since 2013, seventeen were young fashion-focused ventures, according to data compiled by DealStreetAsia.
Most recent among them are Blanja.com — a joint venture between the Indonesian telecommunication giant Telkom and e-Bay, which shut shop on September 1 — and OpenSpace Ventures-backed Sorabel, which ceased operations in end-July.
While six-year-old Blanja faced eroding retail sales, Sorabel’s operational runway was slashed as potential investors pulled out of its Series C funding round in the eleventh hour.
“COVID-19 crashed squarely through the company’s fundraising window, choking off the flow of funds when we were most vulnerable,” Sorabel’s CFO Kevin Widlansky told DealStreetAsia in an email interview.
The firm had bagged an undisclosed pre-Series C round from South Korean venture capitalists Ncore Ventures and Shift in August 2019. “This [Series C] meant that the window for closing the next round of financing would be March-April 2020, when COVID-19 hit the hardest,” Widlansky added.
But the startups’ troubles were not entirely as a result of the pandemic. In fact, the crisis in the sector started around 2015-17 when as many as 12 fashion startups folded.
Booms and busts
Eddy Widjaja, partner at management consulting firm Bain & Co. attributes the high failure rate to the large number of startups that sprouted around 2010. “The failing is a typical risk associated with startups in any sector. There is a period of mushrooming of startups since the cost-to-start is relatively low in the seed stage,” he said.
It was during this mushrooming stage that now-prominent e-commerce firms such as Singapore’s Zalora (founded in 2012), and Lazada (2012) as well as homegrown startups Tokopedia (2009), Bukalapak (2011), and Berrybenka (2012) were born.
Then came the shakeup period beginning 2015 when a host of startups — Ardent Capital-backed lingerie maker Lolalola, Pinkemma, Beautytreats, Etclo, and Cipika, to name a few — shut shop.
Indonesian startups that stopped operations
|Name||Sector||Years of operation||Merged/Stopped operations||Investors/Backers/Owners|
|Tokobagus||Agnostic||2005-14||Merged with OLX||Bootstrapped|
|Berniaga||Agnostic||2009-14||Merged with OLX||701 Search, a joint venture of Singapore Press Holdings (SPH), Telenor and Schibsted Classified Media (SCM)|
|Paraplou||Fashion||2012-15||Stopped||Singapore-based VC firm Majuven|
|Lamido||Fashion/Electronic||2013-15||Stopped||Rocket Internet, Lazada Group|
|Alikolo||Fashion/Electronic||2014-15||Stopped||Undisclosed angel investors|
|Valadoo||Travel||2010-15||Merged with Wego||Wego|
|Rakuten||Fashion/Electronic||2011-16||Stopped||Japan-based Rakuten Group Inc.|
|Scallope||Fashion||2012-16||Merged with Hijup.com||Bukalapak|
|Lolalola||Fashion||2015-17||Stopped||Thai-based Ardent Capital (merged to Wavemaker Partners)|
|Etclo||Fashion||2015-17||Stopped||Undisclosed angel investors|
|Cipika||Electronic/Food||2014-17||Stopped||Indonesia's second largest telco operator Indosat|
|Kleora||Fashion||2014-17||Stopped||Tokyo-based VC firm Rebright Partner, angel investors|
|Mataharimall.com||Fashion||2015-18||Merged with Matahari.com||Mitsui, Lippo Group, Matahari Department store|
|LYKE||Fashion||2016-18||Merged with Jollychic||German-based HV Holtzbrinck Ventures|
|VIP Plaza||Fashion||2013-19||Stopped||Toyoshima, YJ Capital|
|Qlapa||Handicraft||2015-19||Stopped||Global Founders Capital, Prasetia Dwidharma, Aavishkar VC, Kapanlagi Networks|
|Sorabel||Fashion||2014-20||Stopped||Golden Equator Capital and Gobi Partners, SMDV, Alpha JWC, Convergence Ventures, Korea Investment Partners, Openspace Ventures, and MNC Media.|
|Blanja||Fashion/Electronic||2014-20||Stopped||JV between Indonesia's Telkom and US eBay|
“Startups that didn’t serve their customers well, those who couldn’t pivot to meet customers’ evolving needs, or stay competitive, or the ones with weak business models, couldn’t raise the required capital to sustain and expand operations,” explained Widjaja. Many firms were sustaining huge losses during the early stage, he added.
Moreover, during this shakeup period the important foundations of e-commerce — logistics, smartphone usage, and digital payments — were still weak, and many customers were only learning to shop online.
“It is clear that the e-commerce market was in experimentation mode, the product-market fit was still being developed. It seems natural that many e-commerce companies shut down in this period,” said Mrigank Gutgutia, director of the Indian management consulting firm Redseer.
There was also limited funding. “It is only post-2017 that the market saw massive funding rounds and the entry of well-funded players like Tencent-backed Shopee,” Gutgutia added.
By then, Indonesia’s e-commerce ecosystem had matured with rapid strides in internet penetration (93 million users in 2015 vs 36 million in 2010 according to a study by CSIS and ISEAS-Yushof Institute), stronger phone subscriptions and more payment options.
E-commerce firms that lack a deep-pocketed investor will eventually fold, Bastian Purrer, co-founder and former CEO of fashion e-tailer LYKE, told DealStreetAsia. LYKE went belly up in 2018 after two years of operations as it “had little margins due to high operational costs and low income from users’ transactions,” according to Purrer. He also acknowledged that he created the startup without a proper understanding of the Indonesian market.
And while e-commerce overall was evolving, fashion startups had their own unique set of additional challenges to deal with.
What ails fashion?
Fashion e-commerce globally commands high margins and a decent repeat rate, but in Southeast Asia the market remained unorganised until recently.
E-commerce was a new concept, and fashion startups were too focused on product fit – the size and colours for example, according to East Ventures partner Melisa Irene. “Fashion e-commerce had to adopt services such as cash-on-delivery, and manage returns which increased their cost,” she added.
Besides, Indonesian consumers took a while to warm up to the idea of buying clothes without first trying them on, which was unlike the case with other categories.
“You have seen companies like online mall Blibli and online marketplace JD.com trying to build their fashion segments without much success because fashion is different from electronics, or groceries, for instance. Fashion has an ‘identity’ that has to be built over time, and you need to get those avid followers,” said a sector expert on the condition of anonymity.
Fashion e-commerce requires many levers in order to succeed. “Fashion startups must possess the ability to provide the widest and latest selections, which requires partnerships with many sellers and brands. The firms also need high-quality supply chain networks to execute fast deliveries and returns. They must be able to run big-season campaigns, and maintain high-quality user interfaces on their website to make impulsive purchases viable,” said Redseer’s Gutgutia.
While plans to make it big in Indonesian fashion may have faded for many startups, the sector has enormous potential.
Globally, the online fashion industry’s annual revenue for 2020 is estimated at $9.8 billion, according to recent data by the German research firm Statista. By 2024, this is projected to reach $17.71 billion, clocking a compounded annual growth rate of around 16 per cent.
To successfully tap into this growth, fashion e-commerce firms in Indonesia have two feasible routes—replicate Zalora or follow Berrybenka’s model, according to the industry expert quoted earlier.
Zalora focuses on fashion, shoes, accessories and beauty products, from local and international brands, including luxury and premium collections. “Zalora’s business model requires an e-commerce firm to become an online department store, showcasing multiple brands with the most up-to-date female and men’s clothing. It requires having the guts to compete with more general marketplaces like Shopee,” the person added.
Rival Berrybenka, on the other hand, has a click-and-retail strategy. It is solely focused on local brands, targeting middle class to type-B consumers (those who are price-conscious but still look for quality service, and style). It also operates offline with pop-up stores in several shopping malls across Indonesia.
Bain’s Widjaja says there are some common formulae for e-commerce success. “Indonesian e-commerce firms will have to address negative unit economics, or their relatively high burn rate, to achieve profitability,” he said.
Bain research indicates three critical steps to sustained growth: monetising digital financial services, especially lending to both consumers and SMEs; penetrating Indonesian tier 2, 3, and 4 cities; and unlocking the potential of offline distribution of both physical and digital goods, and also improving merchant monetisation.
“Moving zero commission merchants to 1 per cent commission merchants is an important imperative for the e-commerce platforms of Indonesia, and must be complemented by raising the gross merchandise value (GMV) contribution from B2B2C/official store merchants who pay a higher commission than C2C merchants,” Widjaja added. B2B2C merchants are the core revenue earners for successful firms like Tokopedia, and Shopee.
After the COVID-19 pandemic, e-commerce is poised to become a necessity and sellers, consumers and brands will be willing to pay a premium, according to Redseer. It will then create new monetisation opportunities as discounts can be reduced and margins increased.
“Per our data, we see that most players are still running their e-commerce operations at a loss. However, the level of losses is lower than some other markets we track, indicating a stronger path to profitability in future,” Gutgutia said.
The path to profitability, though, will likely not come without further consolidation.
“The top four players [Tokopedia, Shopee, Bukalapak, Lazada] in Indonesian e-commerce have a combined share of around 80 per cent. If we look at other markets, top 1-2 players could account for 50-55 per cent market share. The question is whether Indonesia will be a one-player market like Alibaba in China or Amazon in US, or a two-player market like India and Brazil,” Widjaja said.