On the face of it, Sri Lanka is primed for e-commerce success. Internet access is ubiquitous and affordable, its young are all online and at least half of those who own a mobile, have a smartphone.
Nearly half the island’s population and it’s most affluent live in a concentrated area no more than 60 kilometres from its capital Colombo, the biggest city. GDP per person now at $3,900 is near levels that can soon elevate Sri Lanka into the league of an upper-middle-income country. But it’s simplistic to assume consumers will rush online to shop due simply to island-wide internet coverage, rising household incomes and reliable order fulfilment. These are all signs the market may be ready for e-commerce, but not proof that e-commerce businesses can thrive at scale. Buyers are slowly moving with the idea of significant online purchases. In the months following the easing of a lockdown to control the spread of the Covid-19 pandemic, Sri Lanka’s e-commerce market leader Daraz sold a motorcycle online. A motorcycle isn’t a typical online purchase.
It’s the sort of product someone would test ride, obtain a lease for, obtain the vehicle registration, and then ride it home. Daraz Sri Lanka’s Managing Director Rakhil Fernando says only when people trust the process will they be comfortable shopping online regularly, and for significant purchases. In rich countries, e-commerce firms have taken market share from organised retail. Bookshops were the first to beswallowed up by e-commerce followed by electronics retail stores.
Global e-commerce behemoths – like Amazon in the western world and Alibaba in China – have piggybacked on existing logistics, payment and wholesale infrastructure to build commanding market positions. In frontier markets like Sri Lanka people shop at malls, supermarkets and branded chains; the so-called organised retail. E-commerce firms like Daraz aim not just to grab share from organised retail but beat their own path by attracting new consumers.
“E-commerce is still incredibly nascent in Sri Lanka,” says Fernando who was appointed to his position heading Daraz in 2019.
He has overseen a tripling of value of goods sold (gross merchandise value or GMV) to $28 million in the financial year that ended in April 2020. Fernando, who wears distinctive thick black spectacles and has a casual demeanour, suggests he aims to lead the business to $100 million value of goods sold (GMV) in the next year and a half. “We were looking to hit $75 million this year, but now I think that may turn out to be more like $50 to $60 million,” he says discounting the impact of the disruption due to the lockdown to contain the spread of the Coronavirus in 2020.
At current exchange rates, Daraz’s $100 million goods sales target (gross merchandise value) would position the firm alongside electronics, appliance and furniture retail elites. For comparison, in the nine months to December 2019 Softlogic’s retail division, which includes the department store Odel and branded chains selling clothes, electronics and furniture, had revenue of Rs31.4 billion.
Softlogic Holdingsearns half its revenue at its retail businesses. Listed Singer Group, which includes appliance manufacture, a finance company and one of the islands largest white goods and furniture retail chains, had revenue of Rs54 billion in the year to March 2020. I n frontier markets, e-commerce is about far more than convenience and keen prices. It faces three challenges. The first, when its successful, e-commerce leads to faster financial development because transactions have to be completed regardless of a customer having a credit card or not.
However, e-commerce firms, often, must themselves spark this financial development. Second is the ability of e-commerce firms to overcome Sri Lanka’s poor infrastructure both for distributing goods and for online services. And third is the impact of e-commerce on retail itself. Importers and producers have a far greater reach by partnering with e-commerce firms’ established marketplaces. Since launching as an online store is 2014, Daraz has undergone several changes of ownership. The last of these saw China’s Alibaba Group acquire the company.
In China, Alibaba is a one app wonder, a destination for everything. People use it for diverse things like reserve a table at a restaurant, book a holiday or auction a product. An app like Alibaba, ubiquitous in China, is referred to as a “Super-app” a term Rakhil Fernando is keen to distance Daraz’s Sri Lankan operation from.
“Honestly, I think it makes us sound a bit predatory,” he cuts in. “I just want Daraz to be a convenient destination for people. I don’t want us to be the only destination. I have no plans of being a monopoly in anything,” he muses.
Daraz’s technology superiority is unassailable. Before the Covid disruption, Fernando and his team were reading the tech infrastructure and product, to launch travel services on Daraz. “We’re in such a sweet spot to have financial security and room to also operate like a startup and be aggressive. It’s really stellar,” he suggests in a rare moment of candour during one of his two interviews with Echelon for this story. A co-branded credit card, partnering a bank, with unparalleled value addition, will launch asplanned, he says, although a planned travel product launch has had to be pushed back.
Launching a co-branded credit card addresses, albeit in a small way, the first challenge confronting e-commerce adoption, that the payment infrastructure is weak. Most purchases on Daraz are paid for by cash at delivery. In China, Alibaba overcame this challenge. Ant Financial, part of Alibaba before it was spun off as a separate company, overcame the mistrust between buyers and sellers with Alipay which safely held a customer’s money until they had received the goods.
Using the service, consumers now buy stuff online, transfer money and pay bills. Fernando agrees that having access to Alibaba’s technology is an advantage (Ant Financial is an independent company), and suggests it has the potential to allow Sri Lankans to experience e-commerce at a level of sophistication that has gone through 15 years, a billion people transacting and proven at that. Even in India, something similar to what started in China more than a decade ago is taking place.
Paytm, which provides digital wallets and is itself backed by Ant Financial, has 350m accounts, more than seven times the number of credit cards in India. Fernando suggests that Daraz has no immediate plans to launch its own digital wallet. However,the torrent of information that it now gathers on merchants and consumers can be the basis for launching more services. At the end of the day, it’s the benefit to the consumer that matters, he argues. Sri Lanka is a laggard in the region on cashless payments.
Besides credit and debit cards, consumers don’t widely use any other product. For e-commerce to take off faster, financial development is the first bottleneck that needs addressing, so that people can and will be comfortable with electronic payments for most, if not for all, everyday transactions.
Normally logistics, wholesale and payments industries grow alongside organised retail market development. E-commerce firms enter the fray to exploit the cost arbitrage of running a business virtually, freeing them from the overheads of establishing stores.
In rich countries, e-commerce relies on existing payments, logistics and wholesale markets to scale. Shareholders, who share the business vision, back its relentless push for market share ahead of profitability. Amazon is an example of this e-commerce model, leveraging high quality existing infrastructure. Amazon also isn’t currently profitable to the level of its stock market valuation. The experience in India for e-commerce was different. To overcome India’s clogged roads and ramshackle distribution infrastructure, firms there are taking the expensive route of setting up their own warehouses across the country and investing in vehicles and distribution infrastructure.
India’s e-commerce companies are focused on two things; growing the number of customers and increasing sales. So far it has helped that shareholders of these companies, Flipkart, Snapdeal and Amazon, have ruthlessly disregarded profits. Although Sri Lanka’s infrastructure isn’t as derelict as India’s, the island’s e-commerce firms face similar challenges. These firms – unable to count on available infrastructure – are contributing to developments in logistics, payments, wholesale and import trade.
All over emerging Asia, e-commerce companies overcome the handicap of derelict supply chain infrastructure by investing in their own. This is the second challenge, of building and encouraging investment in delivery infrastructure. For Daraz’s Sri Lankan operation, the largest cost is logistics, according to Fernando.
“That’s what eats up most of the capex and that too upfront.” Daraz has had to ramp up its logistics capability quickly in the last year as its daily order count tripled to 15,000. Around 15 third-party logistics (3PL) firms handle around 30% of its delivery volume. He saysthe 3PL market is incredibly fragmented and not geared towards the service levels of e-commerce, which can involve collecting cash payments upon delivering the product. In Colombo’s Grandpas area, Daraz operates a 100,000 square foot warehouse and has three other buildings totalling 70,000 square feet for sorting centres. (see chart 2) Daraz has little inventory of its own.
Around 95% of the products listed online are from third parties, 30% of which are from overseas sellers. Like its parent Alibaba, Daraz runs a marketplace. How this works is when a product is sold and it’s not in the warehouse, Daraz has to pick it up from the seller to be dropped off at a sorting centre. From the sorting centre, the product is sent to one of its 40 hubs (to be expanded to 80 hubs by end 2020) for more sorting before one of 300 riders delivers it to the customer. Of Daraz’s 850 staff, 500 work on order fulfilment (delivery and sorting).
“In an ideal world, we would want the entire logistics business done by third parties and not by us because we’d rather use the capex we currently invest in logistics on improving the customer experience.” A partnership with the post office for product returns, allowing customers to drop off the package at the nearest one, is now being finalized. Possible tie-ups with supermarket chains for delivery hubs are also being discussed.
Customers don’t behave online in a linear or predictable fashion. So ramping up capacity needs to happen ahead of demand, even if some capacity is idle some of the time. For most orders, Daraz adds between Rs200 to Rs300 for delivery and 95% of packages are delivered within three days. Most third-party logistics partners are used in the last mile.
“It’s a huge balancing act to make sure we commit to them certain volumes, but they must also commit to high service standards.” Daraz’s marketplace model means the site already lists over a million products. India’s top e-commerce players, who have been on a discounting spree, often subsidize buyers out of their own pockets to boost the total value of goods sold.
E-commerce players in Sri Lanka don’t have deep enough pockets for such aggressive land grabbing. Fernando points out these strategies: the Indian model of growing sales at any cost or the US one of piggybacking on available payments, logistics and wholesale infrastructure doesn’t work in Sri Lanka.
“We’re not a business that will grow at any cost, meaning, we have very specific profitability margins and other targets,” he says during an interview at Daraz’s main office at Colombo, which it will soon give up because it has run out of space. Gross margins at Daraz range between 5% to 40% depending on the product line and arrangement with the sellers.
“Right now we choose not to be profitable and invest in the market instead, because there’s so much room to grow.” Its estimated less than one percent of Sri Lanka’s retail sales are made online, compared to about 8% in India, 18% in the U.S. and 28% in China. (See chart 3) “The share of retail is tiny compared to the overall opportunity out there.
So, our priority is to grow and we don’t want to distract from that,” he says. “We’re throwing most of our financial assets at this opportunity.” Daraz’s dominant position was a few years in the making. E-commerce value of goods sold data is not readily available. Kapruka.com a Sri Lankan e-commerce player in 2017 had annual revenue of Rs1.5 billion or $10 million based on the 2017 exchange rate.
A third specialist e-commerce player Takas.lk, founded in 2012, is also part of the landscape. Besides the specialists, most supermarket chains and other retailers also run their own e-commerce. Sri Lanka’s e-commerce has seen plenty of consolidation, and much of it around Daraz, propelling the company to the top of the league table. The company started Sri Lankan operations as Kaymu in 2014, one of 32 startups in Asia, Africa and Europe backed by Germany’s Rocket Internet.
In 2016 Daraz group, also Rocket Internet backed, acquired Kaymu’s business in Sri Lanka and Nepal. However, the game changer was the May 2018 acquisition of the Daraz Group by Alibaba Group for an undisclosed amount. This was two years after Alibaba’s acquisition of Lazada Group, which was also a startup by Rocket Internet in the SouthEast Asian market. Daraz Group’s five markets (Bangladesh, Myanmar, Nepal, Pakistan and Sri Lanka) cover more than 460 million people, of whom 60% are under the age of 35. In 2019, a telco Dialog Axiata merged its e-commerce business wow.lk with Daraz.
The terms of the deal are unknown, however, at the time of the merger, wow.l was a significant e-commerce player in the Sri Lankan market. Across the economy, business will start feeling the pressure of e-commerce firms grabbing market share with lower prices, wider selection of goods and delivery island wide. Because Daraz and other e-commerce players are making determined investments to leapfrog the infrastructure shortfall in the market, the importance of e-commerce will stretch beyond these individual firms and into the wider economy.
The third impact that e-commerce has is the one on retail. Importers and producers have a far greater reach by partnering with e-commerce firms’ established marketplaces. This is called the long tail strategy and Daraz can amplify this. Products that are either low or very high value, ignored by other virtual stores, can also contribute massively towards the topline. Of the listed products around 30% are from marketplace vendors overseas.
The rest of the products sold from Sri Lanka mostly come from large and small third party vendors including large consumer goods retailers here like Abans and Softlogic. Suppliers from overseas pay to list their products and Daraz collects a commission when they process a payment on behalf of a seller. When their inventory is sold the overseas supplier themselves manages the fulfilment, working with a logistics company the seller engages. Daraz expects to work on the long tail of products by encouraging more products from overseas to be listed.
“So, we’re essentially a facilitator, in that we don’t do the clearing at the border of the product because that’s handled by the seller’s logistics company. We only provide the service of a marketplace. That’s it”. Rakhil Fernando started his career in banking in Singapore and later co-founded two startups in a 14 year stint working there. In Singapore, where despite the ubiquity of smartphones people use notes and coins for small transactions, Fernando co founded a payments startup Kashmi for which the founders raised over 1 million singapore dollars . With a young family, Fernando was keen to move back to Sri Lanka and accepted the position at Daraz as it afforded both a startup-like challenge and stability due to the behemoth backing the business.
“When I came, I had two challenges. One was to present ourselves to the market as a truly reliable experience where people can find what they need and have it delivered to them on time. The other aspect of it was, how do we build Daraz as a service. That’s the customer experience side of things.”
Early on, Fernando figured that Daraz cannot position itself as an entertainment app simply by delivering its inventory efficiently. It’s readying to launch online games on the Daraz app now. Significantly he suggests partnering service companies, offering experiences like travel which will endear the brand to its users.
“So, yes a super app, but an app that really encompasses both commerce, not just of products, but of services too. What we really want is to position ourselves as an entertainment application. And then making the customer experience something that is far more than just transactional.”
The contest for dominance online and offline will be frenzied because of the outsized prize of market leadership and the pivotal position that it would afford in Sri Lanka’s digital landscape. If like in the rest of the world Sri Lankan e-commerce firms can also nudge more consumers online by improving the payments infrastructure, overcoming the limitations on logistics infrastructure, and building large enough markets that include plenty of services, they may succeed in shifting consumer habits.
Then as more consumers start buying more stuff online, those who have built the supply chains for smooth order fulfilment at scale will win.