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Is the e-commerce business profitable? Lazada thinks so

Samantha Chiew
Samantha Chiew10/6/2022 10:36 PM GMT+08  • 7 min read
Is the e-commerce business profitable? Lazada thinks so
Lazada Group CEO Dong (left) and Singapore CEO Loh remain positive about the future of its business and e-commerce. Photo: Lazada
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The leading e-commerce players have been grabbing headlines for the wrong reasons. Shopee, the e-commerce subsidiary of gaming company Sea, is undergoing significant cost-cutting to get its finances in order, be it from reportedly rescinding job offers, staff layoffs or forgoing salaries for top management. While the likes of Grab have signalled that growth comes at the expense of profitability, how long before these losses become a concern?

E-commerce platform Lazada seems unfettered by these developments and claims to have a plan in place. Never mind that they are bolstered by a parent company as big and profitable as Alibaba Group. Lazada says it has a better chance of sustaining its growth and eventually turning over a profit.

Lazada Group CEO James Dong says it faces a similar operating environment as most e-commerce companies: One where inflationary pressure is growing amid slowing economies, reducing consumers’ appetite to spend freely. Nonetheless, Dong emphasises that it is focused on profitability and intends to grow the company sustainably over the next few years.

Lazada, for now, is reliant on its parent company, as it receives backing in terms of technology and continuous funding from Alibaba. But Dong says this will change. “We see a very good path to profitability in the next few years.”

Strong backing

Although the Hong Kong and New York-listed Alibaba’s share price has floundered recently, it closed at US$84.11 on Oct 5. This is a 30.1% decline ytd and a 10.4% drop since it was first listed. The company now boasts a market capitalisation of US$222.7 billion ($316.8 billion).

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Alibaba remains a dominant force in China, with interests in entertainment, cloud computing and AI technology. Its e-payment platform Alipay commands the most significant market share, as it is one of the standard payment methods across the country.

An economic downturn, however, doused its once rapid pace of growth. Co-founder Jack Ma also became a government target after the billionaire publicly criticised China’s state-dominated banking system in 2020.

Given its problems at home, Alibaba is intent on revitalising its fortunes by tapping overseas markets. Lazada is that gateway into this region: Alibaba acquired a majority stake in Lazada in 2016 and has increased its stake and funding.

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In early September, Alibaba was said to have invested another US$912.5 million in Lazada after injecting US$378.3 million in May — bringing its total investment to US$1.3 billion since the beginning of this year.

The cash infusion underscores Alibaba’s plans for Southeast Asia, as it has targeted Lazada to lead this race in the region. Another part of the plan is to grow its gross merchandise value (GMV) to some US$100 billion and user base to about 300 million, reports Bloomberg.

In Alibaba’s FY2022 ended March report, Lazada recorded a robust order growth of 60% y-o-y due to the success of its localisation strategy. This includes increasing its local and global product supply assortment and offering value-added services like free shipping. This effectively translated to higher revenue growth from Lazada, the main reason Alibaba’s international commerce retail business saw a 24% y-o-y revenue growth to RMB42.7 billion ($8.5 billion) from RMB34.5 billion.

Overall, Alibaba’s international commerce retail business — of which Lazada is a part — contributed to about 5% of Alibaba’s total group revenue for 1QFY2023. During the quarter, Alibaba shared that Lazada exhibited a healthy order growth of 10% y-o-y.

In response to email queries sent by The Edge Singapore, an Alibaba spokesman says that in Southeast Asia, the company aims to serve consumers and merchants through localised and cross-border offerings. “To support Lazada and other commercial businesses’ globalisation initiatives, we plan to continue developing critical international infrastructure and capabilities, including logistics and payment, to drive differentiated and superior experience for our users in key strategic markets.”

Sustainable growth

Lazada sees itself as a tech company and is heavily spending on infrastructure to ride through prevailing market conditions.

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“The market has been overly aggressive over the past few years, and this situation is likely to change in the next few years,” says Dong, a one-time business assistant to Alibaba CEO Daniel Zhang, who took the reins of Lazada in June after heading the company’s Thailand and Vietnam operations.

Despite the volatility in market trends and industry changes brought on by Covid-19, Dong says there is potential within the e-commerce sphere. Still, investors are becoming more cautious with their funding. “The capital market appetite has changed lately, and investors are looking for start-ups that can provide financial stability and profit.” He expects competition in the e-commerce space to “not be as tough” as investors inject less into the industry and keep a cautious stance.

Dong adds that Lazada’s top spot in the market is due to its decisions to invest not just in acquiring companies they see potential in — like the online grocery platform RedMart and its technology infrastructures. “The path to success for investors and startups has changed,” he says, adding that investors are now becoming more cautious about growing too big too fast and, in the process, harming margins and profits.

“For us at Lazada, we invest heavily in infrastructure — technology, logistics, payments, warehousing and consumer experience,” says Dong, adding that this is the company’s strategy towards sustainable growth — through its solid and steady infrastructure base.

Meanwhile, Lazada Singapore CEO Loh Wee Lee says the company has recently invested $100 million into the warehousing infrastructure for RedMart. Specifically, the money is to improve the automation in the warehouse for increased productivity and to address the current staffing challenges in the city-state.

“This move has provided us with increased business sustainability and efficiency. Also, during the pandemic, when there were social distancing measures and a lack of foreign workers in the market, we could still manage thanks to all the infrastructure,” says Loh, who joined Lazada after helming various senior management roles in Singapore-listed companies.

Empowering retailers

But having a solid back end is not enough, and grabbing consumers’ attention is vital. Alibaba created one of the world’s most significant shopping events — Single’s Day, or 11.11, on Nov 11. It has consistently broken its record yearly, and the annual event has inspired other retailers to launch similarly themed sales events.

Dong says consumers are becoming more comfortable spending online because of the 11.11 event and the Covid-19 pandemic, and this is where Lazada needs to step up and be relevant to consumers. Both maintain that online platforms such as Lazada are not around to compete with the bricks-and-mortar retailers.

Instead, they see the online and offline stores as complementary. “There is a good number of retail merchants out there who see more than 50% of their sales come from their online presence,” says Loh.

In July, Singapore’s retail sales expanded by 13.7% y-o-y to $3.9 billion, with online sales representing 12.7% of that total number. The growth in retail sales was mainly attributable to the higher demand for apparel and footwear, food and alcohol, and departmental store products — all of which are also available on Lazada.

Ultimately, Loh says the platform aims to help merchants achieve their digitalisation goals and educate them on the benefits of an online presence.

“For the early adopters, it is common to see the online and offline borders become blurry, as the trends evolve very fast,” he continues, adding that these merchants have embraced their retailing strategies while incorporating social media marketing into their business.

Photo: Lazada

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