Shopee’s shift to growth shows fear over TikTok Shop’s rise

SEA’S latest quarterly showing, while profitable, missed analysts’ estimates on revenue. Its e-commerce arm Shopee also reported its slowest growth in years.

But that was not the reason why investors sold down Sea shares, which fell 29 per cent, losing US$16.32 to US$40.58 on Tuesday’s (Aug 15) market close.

In a shift in strategy, chief executive officer Forrest Li said the group would be investing in growing its e-commerce business, and “such investments will have (an) impact on our bottom line and may result in losses”. In an earnings call, Indonesia was mentioned as a key market for growth in e-commerce.

For some time now, Shopee has been feeling the heat from newcomer TikTok Shop, the e-commerce arm of ByteDance’s social media platform TikTok. A recent report from consultancy Momentum Works shows TikTok Shop making inroads in South-east Asia, capturing US$4.4 billion of the region’s US$99.5 billion in e-commerce gross merchandise value (GMV).

Indonesia is where TikTok Shop has advanced the most among South-east Asian markets, capturing 5 per cent of the the country’s GMV of US$51.9 billion. It has acquired 1 per cent of GMV in Singapore, along with 3 per cent in Malaysia and 4 per cent in Vietnam, the Philippines and Thailand, according to Momentum Works.

Sea is looking to take the fight to TikTok on its turf – video, with investments planned to beef up its livestreaming commerce and short-form videos. Logistics support will also be buttressed to provide faster delivery, as well as subsidies for free shipping, a tactic Shopee has used in the past to gain market share.

Clearly, Sea has trained its sights on the competition and zeroed in on TikTok, which appears to be a bigger rival for Shopee in the e-commerce arena than other key players such as Lazada and Tokopedia.

TikTok Shop has a lot going for it that Shopee’s other competitors lack. It already has a large captive audience via TikTok, and Indonesia has the second-highest number of TikTok users, after the US. Based on TikTok’s advertising statistics, Indonesia has 113 million active users, just behind the US with 116.5 million as at April 2023.

For TikTok Shop to reach this customer pool, it is a matter of turning on the shopping feature for users it already has. Pure e-commerce players such as Shopee have to spend on marketing and promotions to attract new customers to their platforms.

Indonesia’s e-commerce landscape is fiercely competitive; platforms have been known to order merchants to shut stores on rivals’ platforms. With TikTok’s entrance, things have become a lot more heated.

According to Instagram account Ecommurz – which caters to the Indonesian tech worker community – other e-commerce players have tried to lobby the Indonesian government to shut down TikTok Shop, claiming that it is operating without a licence.

In an official visit in June, TikTok CEO Chew Shou Zi said that the company is already registered as an e-commerce entity in Indonesia. He also announced an investment in the billions into small and medium-sized enterprises in the region, including US$12.2 million to support those keen to sell on TikTok Shop.

In August, news emerged that TikTok is in talks for a payments licence in Indonesia, underscoring its commitment to making its e-commerce channel work in the island archipelago. With a payments licence, TikTok can facilitate its own transactions and compete more effectively.

With TikTok Shop looming in its rearview mirror, Shopee is now racing to attract new users, said Sea’s Li.

“We have been attracting new users to our platform, especially those from the less accessible areas of our market,” he said at the company’s second-quarter 2023 earnings call.

There is also work to be done in attracting sellers to come on board and stay on Shopee as well, including improving the onboarding process, better seller tools and services, and more attentive seller management.

“We also provide our sellers with more upskilling and training opportunities to improve their competitiveness.”

Shopee’s track record as a profitable e-commerce platform will take a hit from the strategy shift to growth. A few quarters in the red are likely to follow. But the TikTok challenge is too big to ignore.

Consumers may rejoice at the thought of a retail price war. Investors will be less enchanted. Sea will have to convince investors that slogging it out in its renewed push for growth will pay off.