Garena is expanding into e-payments and e-commerce. Both industries are well populated with players that do not seem interested in making money. Is Singapore’s most valuable start-up likely to come out ahead?

Singles’ Day sales in China are running out of steam after eight years. The oneday shopping bonanza saw growth slow to a modest 32% this year, compared with 60% in 2015. But consumer confidence in Southeast Asia is still holding up, with some industry watchers expecting the numbers to climb this year, as more consumers — armed with smartphones — are swinging towards online shopping.

In Southeast Asia, sales on Singles’ Day increased 167% last year, with Singapore at the top of the list, according to advertising and market research firm Criteo. Singapore-based Zalora’s overall sales was 30 times more than on an average day, and Alibaba Group Holding backed Lazada saw orders triple in Thailand, based on data compiled by Tech in Asia.

This year, a newcomer joins the ranks to capture a slice of the online shopping pie: Shopee, powered by Southeast Asia’s most valuable start-up Garena. During its inaugural 9.9 Mobile Shopping Day sale this year, orders increased fivefold.

In fact, Shopee has been gaining ground in the Southeast Asia e-commerce space. The two-year-old start-up is present in six Asean markets, as well as Taiwan, and has an annualised merchandise volume of US$1.5 billion ($2.1 billion) — a touch above Lazada’s 2015 gross merchandise volume of US$1 billion.

There are about 1.5 million registered sellers on Shopee, while 70% of the user base are repeat customers. Garena recently raised US$170 million in Series D funding to help Shopee grow in Southeast Asia.

But the rise of flash sales and online shopping also signals an underlying problem in Southeast Asia: Many e-commerce platforms have not started to think about profits. Meanwhile, retailers and logistics partners are starting to feel the pinch from lower margins as competition among marketplaces grows.

Over the years, Garena has built a sucessful e-sport and online gaming business. The company grossed revenue of more than US$300 million last year and its gaming business is profitable, says an industry source. It counts Tencent Holdings as a backer and is valued at US$3.8 billion today. But the company is trying to grow beyond the gaming industry. Last year, it started Shopee, and in 2014, an e-payment services firm, AirPay, as an attempt to transform itself from a gaming arena to an internet consumer giant — much like Tencent.

Although both Shopee and AirPay have seen some early success, the cards are still up in the air on whether Garena will be able to replicate the same long-term success it has had with games amid the stiff competition and razor-thin margins in the e-commerce and e-payment spaces.

Garena in the making
Founded in 2009, Garena started as an online gaming company distributing popular titles such as League of Legends and Fifa Online 3. League of Legends has been a major contributor to its success. The game has helped the company amass a user base of more than 40 million gamers and turned Garena into an e-sports powerhouse in the region. Its e-sports business contributes more than 70% of the company’s total revenue. Company officials say the group’s total revenue has grown 90% per year from 2011 through 2015.

The man behind Garena’s vision is Forrest Li, an ex-Motorola Solutions manager and a lifelong gamer. He rarely assumes the public face of Garena today but keeps a tight rein on the company’s business direction and corporate culture.

Nick Nash, a former private equity investor with General Atlantic, says: “In 2014, before I joined Garena, Forrest sent me a copy of the company’s manifesto [he created], which is a list of values that Garena stands for. It took me by surprise because it is the only company I know that states staying humble as a core value.” Nash’s former firm backed Garena. The same year, he hopped over to Garena and became both its group president and public spokesperson.

The company has already raised more than US$500 million and plans to go public in the US in two to three years. It is mulling a secondary listing in Southeast Asia, but Nash plays down the possibility that the listing will happen soon.

He shows plenty of confidence in the company’s e-commerce venture, saying: “In the last 25 years, the most sustainable business in the e-commerce space is one that is asset-light and skewed away from electronics [like Alibaba]. Shopee follows this model.”

Garena has not always been successful with new ventures. The use of BeeTalk, an online chat app launched in 2013, is still mostly confined within Garena’s own gaming circle. For now, AirPay and Shopee seem to have better luck. AirPay, which works like an EZ-Link card, reportedly has an annualised gross transaction volume of US$510 million. It has also added 130,000 locations to its regional network, where customers can top up their e-wallets.

Building marketplaces in Southeast Asia
For gaming companies, growth mostly comes in two forms: diversification into other fields and building different types of games. “Companies in the gaming industry operate in a ‘high risk for high return’ environment. Diversification strategies can help reduce capital risk,” says Wang Joongshik, EY Asean transactions leader for technology, media and telecommunications.

Nash believes the answer for Garena lies in building marketplaces, such as e-commerce platforms. Although online marketplaces see stiff competition, Nash says Garena has some advantages. At its fundamental level, the technical skill sets required to build e-commerce or e-payments platforms are not significantly different from an online gaming arena. It also helps that Shopee and AirPay can tap into Garena’s massive user base.

“In the process of building the game business, we got involved with a diverse range of consumers, from cities to remote villages in Southeast Asia. It gives us the opportunity to learn about their needs and demands [beyond games],” he says. The insight helped shape the services on Shopee and AirPay today.

Wang says it may be easier and quicker for Shopee and AirPay to acquire customers compared with many of their peers in the region. “This helps to mitigate a common challenge faced by B2C digital companies in Southeast Asia, where they burn cash mostly to grow the customer base. So, when the game company has a loyal customer base, it should benefit from entering new businesses even when the profitability of the industry is relatively small,” says Wang.

But Sim Hwee Hong, a partner at PwC Singapore, says pure e-commerce and e-payment businesses may still be able to grow faster than a game company. “The target audience and technical capacity between gaming platforms and retail marketplaces are different,” he says. “[As such, the latter have more resources to focus] on developing the optimal platform for customers and suppliers.”

E-commerce should be a means to an end
In Southeast Asia, industry watchers are generally optimistic about e-commerce. Most believe there is still a lot of room for growth, citing various market reports that project a doubling or tripling of e-commerce values in less than a decade.

What is clear is that there is no dominant player in the Southeast Asian e-commerce space. Tokopedia, Carousell and Shopee, to name a few, would have to duke it out for the top spot. According to App Annie, Carousell and Shopee are equally popular. Tech firms such as Facebook and Instagram are also slowly moving into these spaces. Earlier this year, Facebook allowed authorised Facebook groups to sell products.

Christopher Quek, managing partner at Tri5 Ventures, says Southeast Asia will not be an easy stage to conquer. “Many e-commerce companies fail, as they regard Southeast Asia as a single market, when in fact it has 10 different regulations and non-homogenous cultures and shopping habits,” he says.

His solution: E-commerce start-ups need to integrate with other types of businesses. For instance, Carousell uses its e-commerce platform to raise capital to acquire other companies, which helps it become something a lot bigger, he says. Amazon.com, too, is branching out into cloud services and logistics. “Garena should maintain its strategy for Shopee and AirPay to stay within Garena’s core business and not just be isolated businesses,” he says.

About 30% of AirPay’s transactions come from Garena’s main platform and Shopee. A large number of Shopee’s customers came from Garena’s gaming platform. Nash plans to add “lending services” on AirPay for Shopee’s merchants.

“Many of our sellers have working capital [issues] to deal with when they encounter a mismatch between payables and receivables,” he says. “As their e-commerce platform, we have direct insights into how much credit they may need and the [interest] rates to give.”

On its own, Shopee is focused on building communities as a way to gain customer loyalty. “We bring in merchants with prior experience in selling online [on sites like Facebook],” says Shopee CEO Chris Feng. This provides a better customer experience for buyers, particularly in dealing with queries or when a transaction goes wrong. Shopee has also made it easier for merchants to transfer the products they post on Instagram to their Shopee accounts in certain markets.

The e-commerce platform is also one of the few that uses Escrow services to prevent fraud. “Only when buyers are satisfied with their products do we release the money,” Feng says. He has a team of 40 data scientists to screen for fraud as well.

Other e-commerce players like Carousell also have “group features” to connect buyers and sellers. Recently, Carousell launched a new feature: sub-categories specifically tailored to the different markets in Southeast Asia. “We want to be more than just a platform to transact on, and we pay a lot of attention to offer our communities a localised experience,” says Chai Jia Jih, Carousell’s international vice-president.

Battle for dominance in e-payment services
The e-payment market is set to grow, says Igor Pesin, investment director of venture capital firm Life.SREDA, which backs a string of Air- Pay-like companies. “In 2015, e-commerce had US$11 million in total retail sales, with shares of 35%, 25% and 20% taken by Indonesia, Thailand and Singapore respectively. It’s expected that by 2025, the total sales volume would increase by eight times and, as a result, would facilitate the growth of complementing activities such as e-payments,” he says.

But as what is similarly happening in the e-commerce sector, e-payment start-ups are facing pressures. Competition is brutal as it does not take much to start an e-payment company, says Pesin.

Margins are also poor — between 1% and 1.5% on average, says Paddy Tan, founder of InterVentures Asia. “Providers that will stand out are those that have offerings beyond [e-wallets]. Not just paying for online purchases but day-to-day usage such as utility bills and buying a movie ticket.”

The e-payment start-ups also face competition from emerging B2B tech companies that want to help start-ups build e-payment capabilities. MatchMove is an example. “It is a payment operating system that enables companies to quickly create their version of PayPal or AliPay, thereby sharing in revenue transactions,” says Finian Tan, co-founder of Vickers Venture Partners. The firm is a backer of MatchMove.

“AirPay still has a head start,” Nash says. “First, our in-house businesses use AirPay. Second, we have more than 130,000 top-up locations. It will be very hard for an independent start-up to reach that scale quickly.” He plans to double or triple the number of top-up locations in Southeast Asia in the near term.

While AirPay is profitable on a “gross profit” level, Shopee is not. When asked, Feng is secretive about revealing exactly how Garena plans to monetise Shopee. “We plan to charge value-added services such as promoting [a listing],” he says. It is hoped that, by the time Singles’ Day rolls around next year, the picture will be a lot clearer.

This article appeared in the Enterprise of Issue 755 (Nov 21) of The Edge Singapore.