E-commerce in Indonesia: what makes it so successful

Indonesia ranks number 4 worldwide in terms of population; right behind China, India and United States, and has more than 250 million people spread across the archipelago. The country is currently deemed as the most attractive market in Southeast Asia and its not only because it’s the most populated nation in the region but because it has the most widespread internet users. According to studies, Indonesian internet users amounted to 102.8 million in 2016. Not surprisingly, those numbers have resulted in the speedy development of e-commerce across the country.

As reported by the Bank Indonesia (Indonesian Central Bank) the value of e-commerce transactions in 2014 was US $ 2.6 billion or equivalent to Rp 34.9 trillion while in 2016, e-commerce transactions are expected to exceed US $ 4.89 billion, a significant increase compared to 2015 in which Indonesian e-commerce exceeded US $ 3.56 billion. According to Indonesian Retailers Association’s (Asosiasi Pengusaha Ritel Indonesia) database, 80 percent of retailers admitted that the percentage of total online sales increased by an average growth rate of 25 percent. The data also revealed the types of goods that are often purchased through e-commerce including, clothing at 69 percent, household appliances at 10 percent, 7 percent book, 7 percent for travel tickets, and 6 percent for computer appliances. Meanwhile, at 54%, the majority of e-commerce consumers are women. Among those shopping online, 50 percent of them are aged 20-29 years old while most of the other shoppers ranged within 30-39 years old (the average age in Indonesia is 29 years old.)

Since the Indonesian e-commerce market is seeing huge growth of customers year over year, it is  certainly tempting for entrepreneurs to move into the space and quickly grab a hundred million potential customers. No doubt, many e-commerce companies are attempting market penetration within Indonesia. Some notable e-commerce companies operating throughout Asia, such as Lazada and Zalora, are major players in Indonesia and have been widely recognized by consumers across the country. Each year, the e-commerce sales turnover increased. As the result of that phenomenon, the e-commerce industry continues to grow with local companies capturing customers, such as Tokopedia, Elevenia, Bukalapak, Berrybenka, Blibli.com. A well-known retail company, which has operated for decades as brick and mortar stores, recently joined the race for market share and launched its own platform, mataharimall.com, online.

In the midst of the competition among e-commerce companies, investors are important stakeholders too in this internet-based sales industry. The record-breaking investments in e-commerce were made by Softbank and Sequoia Capital. Both companies invested usd100 million in Tokopedia, which was deemed as the largest investment ever made in a start-up company in Southeast Asia.

However, the success story of the fast growing e-commerce industry in Indonesia doesn’t come from a single factor. Rather, there are some noticeable factors which contribute and continue to drive e-commerce growth in Indonesia.  

  1.   Increasing Number of Internet Users

In February of 2016, Lazada research showed that the number of internet users exceeded 100 million people.  The research shows the growth in the number of Internet users is driven by a growing usage of smartphones. In 2000, Lazada noted there were 2 million Internet users in the country, which increased to 43 million in 2011 and ballooned to 100 million by 2015.

According to research, there are three main factors driving the growth of Internet users:

  • The growth of stable and fast internet infrastructure
  • The availability of smartphone devices in the market.
  • The growing number of mobile apps which meet the needs of smartphone users

Based on the data obtained, the percentage of adults who own smartphones in Indonesia reached 43 percent, compared to laptop and personal computers ownership which was a mere 15 percent of the population. People in Indonesia also recorded longer time in accessing social media, approximately 2 hours and 51 minutes a day. In a study titled Consumer Barometer 2015 done by Google Indonesia, smartphone penetration has reached 43 per cent of the total population of Indonesia of which around 67 percent of users shop for products from their smartphones. This online shopping behavior is considerably higher than the 10 percent in the US and 7 percent in the UK. Ultimately, with a smartphone in hand, each user becomes a potential e-commerce shopper.

  1.   The Increase of GDP and the Middle-Class Community

The Indonesian economy has expanded by 4.92 percent year-on-year in the first quarter of 2016. The country’s GDP Annual Growth Rate, According to Indonesian Statistic Body, averaged 5.35 percent from 2000 until 2016, reaching the highest peak of 7.16 percent in the fourth quarter of 2004 and lowest of 1.56 percent in the fourth quarter of 2001. The stable GDP increase of the country is a good environment for the e-commerce industry to flourish. Based on the data from World Economic Outlook released by katadata.com[iii], e-commerce shows significant growth within that time. In 2012, the number of e-commerce consumers was only 13 million shoppers. Within 4 years, by 2016, the growth of e-commerce consumers reached 49 million. Among those consumers, according to data from Ministry of Trade, 63.4% of online shoppers are white-collar worker (upper middle class), 15.1% of workers, and 21.5% of entrepreneurs ( employers).

In 2011, the World Bank assessed the growth of the middle class in Indonesia which was considered a quickly rising class. According to their study, every year the middle class grew by 7 million people. Based their data, in 2003 the percent of the middle class in Indonesia was only 37.7 percent of the population, but by 2010, the Indonesian middle class reached 134 million people, or 56.5 percent. The socio-economic classes are divided into four middle – classes. First the middle class with revenue of US$ 2-4 daily (38.5 percent). Second, the middle class with revenue of US$ 4-6 daily (11.7 percent). Third middle class with revenue of US$ 6-10 daily (5 percent) and last middle-class revenue of US$ 10-20 daily (1.3 percent).

       Euromonitor International recorded Indonesia as the world’s fourth largest middle class with 17.3 million households as of 2014, behind the USA at 25.3 million, India at 74 million, and China at 112 million. It is predicted that Indonesia’s median disposable income will reach US$11,300 (in constant 2014 prices) per household, up from US$6,300 per household in 2014. Meanwhile, the country’s middle class will expand to around 20 million households by 2030. This research shows that the country’s population has strong purchasing power which is a strong contributing factor to the growth and success of e-commerce.

  1.   Infrastructure and Government Support in E-Commerce Industry

Infrastructure development is an important aspect, and sometimes a severe challenge in the growing tech industry in Indonesia. This is especially true for the e-commerce industry which relies on adequate infrastructure to move goods and enable efficient delivery across the country. In recent years, the Indonesian government has committed to improving infrastructure in Indonesia including building main roads, harbours and airports. In the era of President Joko Widodo, infrastructure development became priorities (in addition to his policies aimed at attracting foreign investment.) The government, through the Committee for the Acceleration of Infrastructure Provision Priority (KPPIP), set 30 infrastructure projects, worth Rp 851 trillion, as priority projects for 2016-2019. The 30 projects involved a political guarantee facility, licensing, and financial as stipulated in Presidential Decree (Decree) No. 3 of 2016 on Accelerating the Implementation of the National Strategic Projects.

Meanwhile, the government has shown serious interest in the concerns of the growing e-commerce industry. In a visit to the United States in late October 2015, President Jokowi met five major venture capital firms. Those investment companies stated a readiness to invest in information technology companies within Indonesia. Furthermore, in February 2016, the Ministry of Information and Technology, alongside the Ministry of Commerce, have released e-commerce roadmaps which contain seven main issues include funding, tax, communications infrastructure, consumer protection, education and resources, logistics and cyber security. To encourage the growth of e-commerce, the government has also made it easier for foreign investment in the market.

 

  1.   Supporting Various of Payment Methods

Payment methods are another key point for the growth of e-commerce. In Indonesia, credit card penetration is considered low in comparison to other Asian countries. Only 3- percent of the country uses a credit card. Thus, some e-commerce companies have introduced payment method called  Cash On Delivery (COD) which eventually became the primary choice for consumers. Another popular choice is Rekber (Rekening Bersama) or joint account, which was popularized by the website Kaskus. Those payment options were popular with internet users because in the infancy stage of e-commerce, people didn’t trust the online shopping and payment systems. Later, bank transfers became the most popular choice, and remain that way today. Two major banks which cooperate with e-commerce companies are BCA and Bank Mandiri.

In 2015, DailySocial conducted research regarding the payment methods of e-commerce shoppers.  The result of their research confirmed that bank transfer payment method is the most trusted payment option by Indonesian e-commerce shoppers. Nearly 75% of respondents choose bank transfer as their mode of online payment. Only 13% are chose Cash On Delivery, while a mere 7% are opt for credit card. Moreover, the use of E-Money telecommunications services (T-Cash, wallet, or XL Cash) and payments through minimarket is considerably small. Only 6 respondents stated (0.79%) trying to pay through minimarket and 12 (1.57%) used e-money telecom services.

  1. Hari Belanja Online Nasional/Harbolnas (National day of Online Shopping) Boosts the E-commerce Sales

Indonesia has an annual event called Harbolnas (National Online Shopping Day), held every December 12th, which has become a big day for online shoppers to get discounted rates for goods sold online. Harbolnas was first held in 2012, as a gimmick by some e-commerce companies. Initially, it only involved 7 participants, though it increased to 22 participants by 2013, and 78 e-commerce sites by 2014 with a whopping 140 sites in 2015. Usually, e-commerce companies held consecutive three discount-days and successfully increased the online sales.

As reported in Tempo in 2015, the Harbolnas event earned e-commerce companies Rp 2.1 trillion. Their research also recorded that as many as 76 percent of Internet users knew about the shopping holiday. The information is spread through television and e-commerce sites. It was estimated that around 50% of online shoppers made purchases on Harbolnas.

Harbolnas organizer said that traffic purchases from participants of Harbolnas increased 5-10 times with the total order of goods raised of 7 to 10 times higher than normal days. In addition to e-commerce sites, the delivery support for online shopoing also experienced a surge in shipments and increased revenue on Harbolnas. One of the big scale freight and forwarding company in Indonesia, JNE, recorded an increase of 100 percent of shipments during Harbolnas in 2015. On a normal day, deliveries total about 46 thousand, but during Harbolnas they peaked at 92 thousand per day.

In summary, the factors outlined above directly impact the development and growth of the e-commerce industry in Indonesia. Based on data released by eMarketer, Indonesia is a country with the best sales growth of e-commerce in the Asia-Pacific region until 2017. It estimated the sales growth in 2015 accounted for 37.2% in 2015, 26.05% in 2016 and 22.0% in 2017. These ratings even beat China and India which have higher populations than Indonesia.
Ultimately, Indonesia is a very tempting and lucrative market for e-commerce companies. The ecommerce industry is growing day by day, supported by the growth of internet penetration, several methods to approach consumers nationwide (such as introducing online to offline concept, trusting payment methods), friendly policies from the government, and a quickly rising middle class. The future is bright for e-commerce and there are boundless opportunities for growth when it comes to Indonesian online shoppers.

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