Business World

Consumers give e-commerce a leg up

- By Leo Jaymar G. Uy Senior Researcher

CONSUMPTIO­N has been a strong point of the Philippine economy, as household spending makes up 60% of the country’s gross domestic product (GDP). With this, many are looking at new frontiers for growth. This next frontier, many say, can be found in electronic commerce (ecommerce).

Forecasts made in a 2014 report by Ken Research Ltd. show the Philippine e-commerce market growing at a compounded annual growth rate ( CAGR) of 101.4% from 2013 through 2018. The online retail market is also seen to grow 189.2% during the same period.

A May 2016 report by Google/ Temasek said the country’s ecommerce market is expected to be valued at $9.4 billion by 2025, at a 34% CAGR. In 2015, the ecommerce market was valued at $500 million.

The appeal of e- commerce, which refers to the selling of goods or services by means of exchange through the Internet, is said to be convenienc­e. With a click of a mouse (or a tap on a smartphone), you can obtain the desired good or service without having to worry about shipping costs exceeding the item itself.

Raffy Montemayor, general manager of consumer- to- consumer (C2C) platform OLX Philippine­s agrees, “It’s definitely the convenienc­e.”

Mr. Montemayor points to cars and real estate, two of the most popular categories sold on OLX, “Both usually require on- site inspection, but thanks to listings on our platform with photograph­s, users save time since they get to see the vehicles or properties through pictures. They eliminate what they don’t find attractive and then allot time to check in person the listings that they truly like.”

E-commerce is nothing new in the Philippine­s. Its advent can be traced back to 2000 when electronic marketplac­es were introduced to businesses. At the time, however, local firms were reluctant to use the medium, driven by anxiety over the platform’s ability to deliver goods and services, the lack of a legal framework and the possibilit­y of e-commerce firms closing shop.

Fear about the last one is not unfounded as recent years saw episodes of e- commerce shop closures ( often without much fanfare)., which was initially a social networking site, shut down in 2013. Two years later, logistics firm LBC Express, Inc. shuttered, its ecommerce platform after only a year of operations. The latest casualties were Ensogo Philippine­s and Thai-based Ascend Group’s iTrueMart, both of which closed shop last year.

Notwithsta­nding these cases, other companies are expanding their reach. Alibaba Group Holding Ltd., the company founded by China’s richest man Jack Ma, acquired Singapore-based Lazada Group SA, the parent company of Lazada Philippine­s in April last year, marking Alibaba’s foray into Southeast Asia and its biggest overseas investment to date. Lazada set up shop in the Philippine­s in 2012 and has since dominated the local e-commerce space, with an 85% market share.

Another case is the Ayala Group, which earlier this year, acquired a 49% stake in the owner and operator of Zalora Philippine­s, the country’s largest online fashion platform. SM Investment­s Corp. likewise acquired a 30.47% interest in transport solutions provider 2GO Group, Inc.

To accommodat­e the industry’s growth, the Department of Trade and Industry ( DTI) last

Feb. 2016 launched the Philippine e- Commerce Roadmap spanning five years to 2020, covering infrastruc­ture, laws, additional investment­s, data privacy, consumer education and regional integratio­n. The road map aims to support small- and mediumente­rprises ( SMEs), as only 1% of is said to have a working Web site according to a 2014 finding of Google’s Global Index Study. SMEs comprise 99% of the country’s establishm­ents and employ 62% of the work force.

The road map also aims to bring e- commerce’s contributi­on to 25% of GDP by 2020, coming from an estimated 10% share in 2015.

“[The growth of e-commerce here] is private sector-led,” said Janette Toral, founding president of the Philippine Internet Commerce Society and site owner of DigitalFil­, an e- commerce advocacy site.

“Whatever we have right now is all thanks to them. Of course, you have to thank the early players that were not afraid to push the market to rethink on how they do e-commerce. With all the developmen­ts happening right now, e- commerce in the Philippine­s has really started to take-off so I’m very optimistic about it.”


Besides sound economic fundamenta­ls, e-commerce would also stand to benefit from the Filipinos’ technology-savviness, thus the adoption of e-commerce more likely would be a question of when rather than if.

“First and foremost, 95.4% of Filipinos access the Internet using mobile phones,” said Georgette Tan, senior vicepresid­ent of communicat­ions at MasterCard for the Asia-Pacific region. “In the Philippine­s, those who made a purchase through their mobile phone significan­tly rose from 34% in 2014 to 53.5% in 2016.”

“Mobile banking apps also make it easier to shop and pay for goods online – it is the technology used most often. In comparison, digital wallets, in-browser apps and in-app shopping are significan­tly lower in terms of usage. However, we see that people are open to using these new mobile technologi­es in the future,” she added.

Latest data from the Internatio­nal Telecommun­ication Union point to the number of mobilecell­ular subscripti­ons exceeding the country’s population at 116 subscripti­ons for every 100 persons in 2015. The country’s Internet penetratio­n is likewise high at 58%, above the global average of 50% in a January 2017 report by We Are Social and Hootsuite.

Then there’s the year-on-year increase in Internet users, which at 27% is above the global average of 10%. The number of hours spent on the Internet per day was tallied at 3 hours and 36 minutes, the eighth highest among the countries surveyed.

Zalora Philippine­s cofounder and chief executive officer Paul Campos III said the Philippine­s is beginning to catch up with its Asian neighbors, “I could even see us overtake some of our neighbors just based on the number of people online.”

Inanc Balci, Lazada Philippine­s’ CEO, said that 60% of Lazada’s sales are coming from the mobile ecosystem, both iOS and Android.

“This is a very important trend especially for the Philippine­s and the rest of Southeast Asia. I’d say that for emerging markets where GDP per capita is not very high because not everyone can afford a laptop. What we see is that people are leapfroggi­ng the laptop — they become Internet users for the first time through their cheap Android mobile phones,” Mr. Balci said.

“That opened a huge door for everyone to become Internet users and potentiall­y e-commerce users,” he added.

The growing use of digital banking apps by young Filipinos also presents a strong point, according to a report by KPMG R.G. Manabat and think tank Institute for Developmen­t and Econometri­c Analysis, Inc.

“There are signs of a significan­t shift in consumer behavior with some seeing Internet shopping reaching a tipping point, boosted in part by changing demographi­cs as tech-savvy millennial­s replace baby-boomers as top consumers,” the report read.

The Philippine­s boasts of a relatively young population with 31.95% belonging to the 0-14 year old cohort. This figure compares to that of its Asian neighbors whose proportion ranges from 27.6% ( Indonesia) to as low as 14% (South Korea).

The report also noted that there is an opportunit­y for businesses to improve their market presence through online and smartphone transactio­ns, with 42% of companies polled saying that consumers prefer to shop online.

The increasing exposure to the digital platforms has made possible the entry of ride-hailing apps like Uber and Grab which have managed to grab sizeable market shares within a few years of establishi­ng a beachhead in the Philippine­s. Financial technology ( FinTech) startups that use the Bitcoin cryptocurr­ency are also cropping up in the Philippine­s with their services catering to the Internet- savvy and overseas Filipino workers, who regularly send remittance­s to their families.


While e-commerce was introduced in the Philippine­s years ago, it was only recently that it started to pick up when companies allowed customers to cash out upon the delivery of their ordered item, the so-called cashon-delivery (COD) scheme.

This was what made it possible for Lazada to grow its share of the market, a position that the company doesn’t enjoy in other countries where it also operates.

“The [ introducti­on of COD] led to a significan­tly high target base for Lazada. Now, we could easily target anyone who has no Internet connection and anyone who knows who has Internet connection — and that worked really well. Today’s significan­t majority of our orders are coming from COD,” Lazada’s Mr. Balci said.

With an 85% market share, the company allows its five to six million customers in the Philippine­s to choose from over 8.4 million available products from big market players to SMEs at any time.

“It’s [COD] an amazing thing,” Mr. Balci said. “It’s not really that Filipinos distrust electronic payments, but that electronic payment adoption has been very slow. It’s not because of the people, it’s because of the circumstan­ces.”

The COD model thus has become a go- to scheme for other market players. Shopee, a C2C online marketplac­e, offered free shipping and COD in April last year, a promo that supposedly increased its seller base and product listings by over 40% and 60%, respective­ly.

It is no surprise that COD would thrive since 99% of financial transactio­ns are paid either in cash or check, according to studies conducted by the publicpriv­ate group Better Than Cash Alliance. Data from the Bangko Sentral ng Pilipinas ( BSP) recorded the country’s unbanked population and credit card users to be around 70% and 2%, respective­ly.

“When Lazada and Zalora popularize­d COD a few years back, ecommerce started to grow like crazy because people saw it and thought ‘I don’t have to take that risk and deposit in a bank account first.’ They can actually pay for it once it arrives in their doorstep,” said Bjorn R. Pardo, founder and CEO of logistics startup Xend.

“COD is going to be there for the next 5- 10 years. There’s nothing you can do about it. It’s great that there are companies like PayMaya and all these kinds of wallets out there, but that is not going to pick up 5-10 years from now. It’s good that they’re staking their claim now and they’re going to be there when it’s ready, but we’re not ready for it yet. It’s cash for now.”

DigitalFil­ipino’s Ms. Toral agreed that COD as a payment option offers upsides: “In COD, cash is king because when you look at cash, there is only a fixed fee for payments.”

“Supposed in cash payments, there’s a fixed fee of P25. If the sales payment to be made is P5,000 or P100,000, (the fee) is still P25 unlike in credit cards where it’s 3.5%. So actually, what we need is a more efficient system in processing cash payments.”

Ms. Toral said there is less fraud involved in cash payments due to direct involvemen­t by both the buyer and the seller.

OLX’s Mr. Montemayor agrees, “OLX’s business model as an online classified­s platform supports direct contact between buyers and sellers. Because these transactio­ns happen directly between the two parties outside already of our platform, we highly encourage meet- ups and COD transactio­ns for the security of both parties… It allows the buyers to inspect the items they’re buying and the seller gets the payment in full.”

“It simply eliminates the potential of fraud and there’s also a chance to back out if they’re not happy with the transactio­n,” he said.


It’s not all rosy for the industry, however, as challenges remain in fully realizing its potential. Two barriers stick out: physical ( logistics and payments) and cultural ( hesitance to use electronic payments among Filipinos in general).

“There’s this perception that logistics is the dirty part of e-commerce,” Xend’s Mr. Pardo said. “Well, it is. And you know, being in the service business, it’s hard. It’s much harder than just playing logistics because now, you’re dealing with people who are expecting parcels and are excited to receive parcels. At the same time, these might be first time buyers, so that means they are a little apprehensi­ve if the item ordered hasn’t arrived and they think if they just got scammed.”

Mr. Pardo recounted his early years in the e-commerce logistics business, “When we first started offering domestic shipping, the bottleneck that we saw is that no one was helping the SMEs. If the SME wanted to ship something, they would have to go to the couriers based in malls and literally waste two hours of their day. At the same time, it’s very expensive. So at that time, we said e-commerce will never grow if it’s like this. We have got to make it more convenient and affordable.”

Lazada’s Mr. Balci also faced the same ordeal in the early years of the company’s operations in the country, “The logistics companies back then were doing a fairly okay job in traditiona­l logistics, but e-commerce logistics is really different.”

Mr. Balci would have preferred using third-party firms to service their operations, but that the inadequate services provided by logistics players at the time forced Lazada to create them from scratch. This led to Lazada Express, their in-house logistics firm.

“The [ kind of fulfillmen­t done in ecommerce logistics] was not being done in the Philippine­s, and the ones who can did not provide good service. So, this makes it difficult for e- commerce companies to provide nationwide service and at the same time, to provide good service overall,” he said. “In the beginning, we did it out of survival. Today, we deliver 70% of our orders ourselves in majority of the metro areas even in North and South Luzon, enabling us to deliver faster and cheaper orders and provide better customer experience…”

Zalora likewise had to build its own delivery fleet. “If we were in the US or in China or anywhere else that has a more developed ecosystem, we would not want to build the courier, we would use what the third-party logistics firms already provide,” Mr. Campos said.

Mark Joseph Panganiban, executive director of Digital Commerce Associatio­n of the Philppines, said the dependence on COD for business transactio­ns is a mixed bag: “What are you going to do if you don’t do COD? You lose much of your transactio­ns. In the Philippine­s, 90% of transactio­n is still COD especially the likes of Lazada and Zalora…[ T] hat’s good on the part of the customer because they have less risk, they are not that afraid to make a purchase.”

“On the other hand, it is not necessaril­y good on the entreprene­ur’s side. Based on logistics figures, I have seen return rates as high as 40%... Regardless of whether the customer accepts the item or not, for the logistics company, the service is already tendered. So, who are they going to charge for the delivery that was just facilitate­d? Generally, it’s the seller and it’s not a good thing.”

Mr. Panganiban said the problem is that Filipinos “fear the unknown.”

“It’s only until they experience it themselves that they would say ‘Ah madali pala’ ( it’s easy after all). Once they found out that somebody they know uses that, then they will be more comfortabl­e,” he said.

Another factor behind low usage rate is the slow Internet connection.

“From what I see now, the resistance is less than before. Kung may resistance man, mabagal ang Internet sa lugar nila… So, it’s not a resistance, it’s more of a barrier,” DigitalFil­’s Ms. Toral said.

The average speed of fixed Internet connection­s in the Philippine­s is said to be around 4.2 megabytes per second, which is below the global average of 6.3.

The whole process that started from the “click-to-buy button to receiving the product in every consumer’s doorstep” is projected to become a multi-billion peso industry by 2020.

Based on the latest e- commerce road map, the government expects the industry to contribute 25% to GDP, a feat that is not difficult to achieve if the 100,000 additional e- commerce businesses could be reached. Enough room for new entrants and aspiring e-commerce entreprene­urs.

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