Southeast Asia’s leading e-commerce platforms went through 2023 grappling with the same strategy conundrum – optimize for top-line growth and market share gains while sustaining losses or cut back on growth spending to reach profitability. Shopee opted for a zig-zag, pivoting to profitability in the beginning of the year only to re-focus on top-line growth and market share gains in the second half of the year. A big question remains unanswered – will Shopee ever be able to achieve growth and profitability at once?

In a series aimed at examining the rationale behind Shopee’s moves, we have previously explored ‘Average Order Value (AOV)’ as one of the key metrics to understand how internal and external factors affect profitability or Gross Merchandise Value (GMV) growth. Today we dive into another metric that describes many of Shopee’s moves on its windy growth and profitability path – its massive Sales and Marketing expense line.

Sales and marketing expense is primarily attributed to marketing incentives and online marketing effort, which mainly include events and brand marketing, vouchers and shipping subsidies. Spend more in these areas to drive growth, and your margins will suffer. Hold back your spending to increase your profitability, and your growth will suffer. It’s the perfect Catch-22!

The above exhibit depicts the correlation between sales and marketing expense as a percentage of GMV and GMV percentage growth year-over-year (YoY) for all the quarters since Sea’s IPO in 2017. Green represents positive EBITDA quarters, while red represents negative EBITDA quarters, with each point representing a specific quarter in time.

It is a chart with a clear if inconvenient message: Despite steadily reducing its Sales and marketing expense (as a % of GMV) over the last 6 years, Shopee has not yet been able to achieve profitability and GMV growth at once. Here’s how the company’s profitability journey has evolved over the years:

2015-2022: Growth through heavy investment

For many years following its launch in 2015, Shopee’s default strategy was to rapidly expand its market share and to prioritize long-term growth. Utilizing sales and marketing expenses enabled the company to incentivize both sellers and buyers through subsidies such as free shipping, cashbacks, and discount vouchers, fostering increased activity on the platform. In Q3 2017, for instance, the platform achieved a remarkable YoY GMV growth of 220% while allocating an eye-watering 10% of its GMV as marketing expenses, which just by itself wiped out the entire revenue that Shopee was earning at the time!

Obviously, this was not sustainable, and by 2022 Shopee had reduced its sales and marketing expenses to between 3-5% of GMV. The company was temporarily helped by the COVID years, when topline growth was being driven by lockdowns and did not need a corresponding increase in sales and marketing spend. But as the impact of COVID subsided by mid 2022, the conundrum returned. 

2022-2023: Trading off growth for profitability

In the 3 quarters from Q4 2022 to Q2 2023, Shopee’s sales and marketing spend had gradually shrunk to less than 2.5% of GMV. These are the only periods where Shopee has achieved positive EBITDA (illustrated as green dots on the chart above), but with the consequence of significantly stunting quarterly GMV growth. In short, Shopee made the strategic decision to curtail its sales and marketing expense in order to prioritize its bottom-line, trading off GMV growth. 

2023: Balance between growth and profitability

In Q3 2023, Shopee re-pivoted its direction towards higher growth instead of profitability, achieving 5% YoY growth with a 4% sales and marketing expense of GMV to secure its market share from new entrants, such as TikTok Shop. Although they did not attain the same level of growth before 2022, Shopee appeared to have conceded that it cannot achieve higher growth without investment in sales and marketing.

2024 and beyond …

After 7 years of market leadership, the underlying question for Shopee remains – whether it can still attain growth while delivering profits. Or in other words, can it spend less than 2.5% of GMV on sales and marketing — which appears to be a threshold for profitability — and still maintain growth?

The answer depends on how competition in e-commerce in Southeast Asia evolves.

Uber, for example, is a company that appears to have achieved both targets in the US – it has been able to maintain its 70-75% market share and remain profitable in 2023. But it has done so in conditions where Average Order Values are higher (read our last report on the link between AOVs and profitability), and where it no longer faces the unrelenting tsunami of competition that Shopee does in its own markets.

In the immediate term, it is likely that Shopee will persist in prioritizing growth over profitability in 2024, as the current tools at their disposal do not allow for a delicate balance between the two. The available growth levers are costly, and the competitive landscape remains intense. In the medium to long term however, it is unclear for how long will Shopee’s investors remain willing to go along for this ride.