TECHINASIA:After GoTo IPO, Tokopedia eyes Indonesia’s lower-tier cities
May 12, 2022

Armed with a fresh cash infusion after GoTo Group’s IPO, Tokopedia appears to be doubling down on a familiar playbook for its next phase of growth: expanding its presence in lower-tier cities.

Among GoTo’s four growth strategies post-IPO is to strengthen a “hyperlocal” shopping and transacting experience. A Tokopedia spokesperson notes that this would help the ecommerce marketplace – still dominant in major urban areas – reach MSMEs across Indonesia and “maximize” the country’s large domestic potential.

But going outside major cities may also signal a deeper commitment by the Indonesian ecommerce firm to its Mitra Tokopedia service, a platform that helps small mom and pop shops called warungs digitalize their offerings. Rivals Bukalapak and Shopee also offer similar services with their Mitra Bukalapak and Mitra Shopee platforms.

Mitra Bukalapak, which pioneered the model, has been a linchpin for its parent company’s IPO strategy. According to third-party estimates viewed by Tech in Asia, the Mitra Bukalapak app has also benefited from a post-IPO boost in monthly active users.

But while Mitra Tokopedia and Mitra Shopee have comparatively flown under the radar, both services appear to be competitive with Mitra Bukalapak – at least based on active users of their respective Mitra apps. In fact, before Bukalapak’s IPO, Mitra Tokopedia attracted higher monthly active users in the first half of 2021.

Tokopedia did not comment specifically on these third-party figures. Bukalapak and Shopee did not respond to requests for comment by the time of publication.

Hyperlocal strategy

Tokopedia’s strategy to reach lower-tier areas is not new. It launched the hyperlocal program, which uses geotagging technology to help customers find sellers in close proximity in 2020. Mitra Tokopedia as well as the firm’s e-fulfillment service Dilayani (previously known as TokoCabang) were also launched in 2018 and 2019, respectively.

But the strategy perhaps takes on a new modicum of importance after GoTo’s IPO. Tokopedia’s take rate at 1.3% is still substantially lower than similar players.

Shopee, for instance, is said to have a take rate of around 7.5%, but unlike Tokopedia’s Indonesia-only strategy, it also has the benefit of having a regional presence. Not only does this give Shopee a larger user base, but it also lets the company penetrate more affluent markets like Singapore or Taiwan.

While GoTo’s growth strategies include strengthening its presence outside Indonesia, it’s likely to apply only to Gojek, not Tokopedia.

“A multiregion strategy would require significantly more resources,” says Dondi Hananto, Jakarta-based partner at early-stage firm Patamar Capital. “There are already established local players, so the cost will be too much for Tokopedia to expand.”

This leaves it with Indonesia’s own domestic ecommerce market, which still has a lot of potential. According to RedSeer data, ecommerce penetration in the country is still relatively low at 8.7% – far below countries like China at 28%.

However, for Tokopedia at least, that upside will lie primarily in lower-tier areas – especially those outside the Java island. Hananto observes that consumers outside Jakarta and Java don’t order from Tokopedia because of expensive shipping costs. Indeed, most ecommerce sellers are still based in Java.

Tokopedia is mainly addressing this need through its Dilayani e-fulfillment service, which lets sellers store their goods in Tokopedia-managed warehouses across the country. A Tokopedia spokesperson notes that the hyperlocal initiative is currently centered in seven cities, including regional hubs like Makassar (in the Sulawesi island) as well as Medan and Palembang (Sumatra).

As of November 2021, Mitra Tokopedia has also reached more than 500 cities in Indonesia, a 2x increase compared to two years ago.

Of course, expanding to lower-tier cities would have its own challenges. First, consumers in these areas would have lower disposable income than big city urbanites. This could affect not only basket sizes or order frequencies, but it could also mean that these users have a predisposition to use budget-friendly platforms like Shopee (even as the latter appears to have scaled back marketing spend on things like free deliveries).

Farras Farhan, an equity research analyst at Jakarta-based securities firm Samuel Sekuritas, also points out Bukalapak’s significant presence in lower-tier areas, likely driven by its head start from pioneering the Mitra model in 2017.

“Why I find it not yet feasible for Tokopedia to enter Tier 2 and Tier 3 areas is mainly because of different consumer behaviors,” he says. “GoTo will need to adapt” its business models to those areas.

While Mitra Tokopedia has stayed competitive with Mitra Bukalapak – at least in terms of active users – Farhan points out that Bukalapak has also largely placed its focus on its online-to-offline Mitra business compared to its marketplace, which lags behind Shopee and Tokopedia.

Going all in on the mitra model has reaped rewards for Bukalapak. In Q1 of 2022, Mitra Bukalapak was the main engine behind the firm’s revenue growth – with revenue surging more than 3x to US$32.6 million for Q1 2022. The segment contributed 50% of overall quarterly revenue, up from 34% in the same period last year.

Tokopedia, on the other hand, will still need to commit resources to its marketplace, which is neck-and-neck with Shopee for the top spot.

“It has to have a different strategy from Bukalapak to increase its take rate, while also keeping the customer base [in top-tier cities] that they already have,” Farhan adds.

Keeping competitors at bay

Of course, Gojek is likely to play an important role in whatever Tokopedia’s future strategy is. Vivian Xu, partner at Tokopedia investor ZWC Partners, points out that unlike Tokopedia’s relative strength in Tier 1 cities, many Gojek users come from small or midsized towns with lower income.

“How to fully utilize the synergy between Tokopedia and Gojek is the next important growth milestone,” she says.

It’s currently unclear how that will look like in the context of lower-tier cities specifically. Xu notes that one obvious synergy lies in quick commerce, a burgeoning space in Indonesia where Tokopedia is also present through its Tokopedia Now service.

Angus Mackintosh, founder of CrossASEAN Research, agrees that Tokopedia’s post-IPO focus is partly on value-added services like Tokopedia Now. At the same time, he is skeptical about how significant the benefits of the quick commerce platform will be.

Quick commerce players are still mainly nascent and therefore keep a more limited amount of stock-keeping units (SKUs). This means that at this time, they likely don’t have direct relationships (or bargaining chips) with suppliers to lower prices at this point, he explains. The likely outcome is that eventually, quick commerce players will charge a premium to customers.

“I’m sure that quick commerce will attract investors to a certain level, but I don’t think it’s going to become a universal need,” he says. In addition, while quick commerce in Indonesia is still in the early stages, some players in other markets seem to be struggling.

That aside, it’s likely that Tokopedia’s key challenge in improving its take rate will be the same-old competition. Samuel Sekuritas’ Farhan believes that to begin with, ecommerce users in Indonesia aren’t completely loyal to one platform.

Price-conscious users usually use more than one app when shopping to see which has the best offers. In addition, there is little difference in types of products sold between the different platforms.

But perhaps the bigger challenge will be for Tokopedia to counter Shopee in the marketplace side at the same time it fights back Bukalapak in the lower-tier segment.

Patamar Capital’s Hananto says that it’s inevitable that Shopee and Tokopedia will influence how much the other spends on marketing budget (though he notes that Shopee is perhaps looking at this more closely, as its stock price declined recently).

ZWC Partners’ Xu says that as a GoTo investor, “we certainly want Tokopedia to fight for number one” over Shopee, and that the GoTo merger’s “synergistic” effects will ultimately put Tokopedia on top.

At the same time, she adds that considering the size of the Indonesian market, “there is no need to compete by burning cash.”