South-east Asia is on the brink of a new retail revolution

TECH industry stakeholders like to harp on the percentage of all retail sales that e-commerce accounts for year-on-year. Unless referring to the United States, where the Census Bureau says it's around 11 per cent, or China, where eMarketer believes it's now a whopping 35.3 per cent, this is usually a low single-digit number. South-east Asia is no exception. Singapore can boast that 6 per cent of all its local retail takes place online, but as of 2019, South-east Asia as a region still clocks roughly 1 per cent.

This is why investors are going all in on Indonesia. As the largest homogenised consumer market of the region, the archipelago by default blazes the trail for neighbouring nations. E-commerce accounted for 8 per cent of total retail sales in Indonesia in 2018. It is now on course to reach 18 per cent, or roughly US$53 billion, by 2023. The shift is being powered by the changing behaviour of tech-savvy shoppers who are now willing to spend more for convenience, according to a recent study by Morgan Stanley.

However, investors and entrepreneurs seem to agree that it's time to address the elephant in the room. Without some kind of radical bridge between e-commerce and shopping malls, online retail will not overtake offline retail any time soon. This goes for any market, anywhere in the world.

It's common sense, really. Touching and feeling products is part of the shopping experience. While not always the case, the majority of price-conscious mothers are not going to take their children back to school shopping without having them try on Nikes in the store. The same can be said for picking out that new sofa for the den. The buyer would be a fool not to sit on it first.

Chinese tech behemoth Alibaba took the liberty of coining the term new retail. Essentially, it means building a shopping landscape that blends online and offline channels in new ways. In the United States, we saw Amazon buy out Whole Foods and experiment with a cashierless convenience store concept. Strategically speaking, the idea of new retail, at its core, is simply a manoeuvre for e-tailers to gain access to the entire retail pie.

Born digital In the past, it was a real risk to start a brick-and-mortar store. The fixed overheads alone represented a barrier to entry for entrepreneurs in South-east Asia, and teams really had no idea how the market would receive their brands. Today, web and mobile act as a sandbox environment where retail startups can experiment and find product-market fit before spending a dime on rent or equipment.

Indonesia-based furniture e-store Fabelio is an interesting case study. The startup launched in mid-2015 as an online alternative for middle-income Indonesians to furnish their homes, without needing to go to the nearest IKEA or Informa department store. The startup set itself apart by offering unique furniture designs that shoppers wouldn't otherwise be able to find at the right prices.

In part thanks to its unique positioning as a digital native, Fabelio was able to pull in multiple rounds of venture capital funding. This in turn helped propel its brand and today Fabelio has "showrooms" in major cities throughout the country.

This is not to be confused with furniture stores. Like a Tesla gallery, there's no additional inventory on location, so buyers cannot drive home with a new table in their minivan. Fabelio's showrooms are meant for customers to touch, feel, and experience the furniture prior to making a purchase online.

Perhaps the most vibrant space where we see new retail transformation is cosmetics and apparel. Cosmetics giant Sephora likely saw the threat coming back in 2015 when it acquired Singapore-based cosmetics e-commerce platform Luxola. A tsunami-like trend is taking place now, in which South-east Asia's fast fashion tech startups - think Zalora, Pomelo, BerryBenka, Sorabel (formerly Sale Stock), Sociolla, HijUp, and others - can now be seen opening storefronts to compete head-on with names like Zara, Mango, Stradivarius, and H&M. These stores come after nearly a decade of online trial, error, and ultimately success.

Set aside the on-demand food delivery features in Gojek and Grab, as well as their built-in e-wallet champions OVO and GoPay (too much is said about them anyway). Food and beverage retail giants like Starbucks are still not safe from new retail comers. Mimicking the model of China's wildly successful Luckin Coffee - a firm which is now publicly traded on Nasdaq with a market capitalisation of US$4.97 billion at the time of writing - venture-capital fuelled app-based coffee names like Fore Coffee and Kopi Kenangan have surfaced in Indonesia.

Coffee is now an everyday purchase for middle-class consumers in Indonesia. This is particularly true for urban professionals in cities like Jakarta and Surabaya. Global market intelligence agency Mintel estimates that the compound annual growth rate in the coffee retail market in Indonesia will rise by 11.4 per cent between 2017 and 2021, making it the fastest-growing coffee retail market in the world. Between 2012 and 2016, the number of specialty coffee outlets and chain-store shops in Indonesia doubled to 1,025 and 1,083 respectively, according to Euromonitor.

The Luckin model is simple. Players like Fore offer a subscription-based coffee delivery or pick-up service via mobile app at discounted rates for groups and individuals. With apps like Fore, queuing up during rush hour for a US$5 latte at a crowded Starbucks is no longer an issue.

Playing a different game While some consider new retail to be an amorphous buzzword, it's actually just another way to say leveraging new tech to compete faster and more aggressively in an otherwise traditional space. It's a way of creatively storming the gates.

An online-first play is what made brands like Luckin seemingly famous overnight. While these kinds of players in South-east Asia position themselves as the digital alternative, they simultaneously open up brick-and-mortar shops for direct competition. At the time of this writing, Fore Coffee - which launched in 2018 - has opened more than 75 locations across Indonesia. Some are for take-away only, while others offer a sit down cafe experience.

Companies like Pomelo, Fore, and Fabelio have a few advantages over their traditional counterparts. In many cases, they can win on pricing and selection because their online-first model enables them to not worry as much about on-site inventory. In other cases, a digital-first model allows startups to rapidly gather actionable data on the target audience prior to making any offline investment decisions.

Overall, just like in the United States or China, new retail companies in South-east Asia will continue to be characterised by their ability to iterate quickly in all the areas where big, traditional, offline incumbents cannot.

Long-standing retail companies in the region that have failed to act competitively on web and mobile so far will need to start forming alliances with these businesses, or suffer the consequences at the cash register.