Shopee, Southeast Asia’s largest e-commerce player, has been on a strict financial diet to reach profitability in the last year. That’s been welcome news for shareholders of its listed parent, Sea Ltd, but more challenging for sellers on the platform who have faced lower sales growth and higher selling costs after years of heavily subsidised operations.
In this blog post we report on the most important figures from Shopee’s newly published Q1-2023 results (released 16 May) as well as the key implications for e-commerce sellers in Southeast Asia.
By the numbers: Shopee continues to focus on profitability, rapidly increasing revenue and margin while sacrificing GMV growth
From its launch in 2015 and until last year, Shopee followed a simple and effective growth playbook: Invest heavily in branding and marketing, offer near-zero fees for sellers, and see Gross Merchandise Value (GMV) growth and market share continue to rise. We saw the first serious divergence from this model in Shopee’s Q4-2022 results, and it continues in Q1-2023. Here are the key figures:
- GMV is roughly flat year-on-year (per our Cube Asia estimate); this is a far cry from 2-3 years ago when Shopee was routinely posting high double-digit GMV growth rates and points to a new era of e-commerce with significantly slower platform growth
- Revenue is up 36.3% as Shopee continues to hike its commission rates, expand on-platform advertising programmes, and increase warehousing and fulfilment rates; this improved monetization is the main driver of Shopee’s new-found profitability
- Marketplace revenue take rate continues to climb, now reaching ~ 10.5% of GMV (per our Cube Asia estimate); Shopee is now commanding more than 10% of GMV as revenue, roughly 2x as much as two years ago and 3x as much as three years ago. We expect it to continue climbing, but at a more gradual pace since Shopee has now proven that it can be profitable and needs to weigh the benefits of further increasing seller commissions against the risk of losing market share to more aggressive channels like TikTok Shop
- E-commerce sales & marketing expense is down -51.7% year-on-year, driven by a substantial decrease in investments related to customer acquisition and retention; some of these previous investments, for instance in Google AdWords or Facebook Ads linking to individual product pages, was also a form of implicit seller subsidy which is now gone
All of the above numbers point in the same direction: Shopee has decided to trade off GMV growth in favour of profitability, and by doing so made it harder for online sellers to grow topline revenue (due to lower platform growth) and channel profitability (due to higher selling fees and lower implicit marketing subsidies from Shopee). So what’s next?
What’s next for Shopee: Single-digit GMV growth, modest growth in selling fees, more competition in Southeast Asia
2023 is shaping up to be a challenging year for e-commerce in Southeast Asia, with many brands and sellers fighting harder than before to secure revenue growth and healthy margins, including on Shopee.
However, while the ‘golden years’ of high GMV growth and low selling costs on Shopee will likely never return, we believe the hardest transition shock is behind us. We expect the next 12 months to be more stable, offering single-digit GMV growth in most categories paired with more modest growth in selling fees.
We believe in this scenario for two reasons:
- Shopee has publicly declared victory for its path to profit, describing its current situation as ‘having turned the corner’; the company is now likely to seek to maximise growth while roughly breaking even in favour of generating even higher profit margin, thereby limiting the incentive for further fee hikes and marketing expense cuts for now
- Shopee is facing tougher competition than ever; the threat of TikTok Shop, which is still fueling growth through heavy seller and consumer subsidies, has been covered widely, but we also see a more subtle threat from channels like Lazada that don’t appear to have pulled up the emergency brakes on investing in top-line growth as hard, and are gaining market share after Shopee has reduced its consumer discount subsidies. Further fee increases and subsidy reductions will only worsen this effect, making them less palatable for Shopee
Implications for sellers: As channel-led growth and subsidies fade away, spread your bets and focus on meticulous execution
The transformation of Shopee, and its impact on sellers, is a good indication of what’s to come in Southeast Asia e-commerce more broadly; less subsidies, less channel-driven growth, and increasing fragmentation of the channel landscape. In this new era, where revenue growth and market share gains will need to come from sellers’ own moves rather than passive channel growth, our advice is the following:
- Spread your risk across several online channels rather than getting tied to the destiny of a single platform; the new kid on the block, TikTok Shop, is the fastest-growing e-commerce channel in 2023, and we also see promising developments for direct-to-consumer (brand dotcom) and social commerce
- Intensify monitoring of channels and competitors to determine what assortment to focus on and which pricing and promo strategies to follow; e-commerce is turning into a game of tactics as much as than strategy, requiring meticulous execution to eke out the growth that is available
Cube Asia helps consumer brands, investors, and consulting firms access the highest-quality market data and insights for e-commerce in Southeast Asia. Get in touch on simon@cube.asia to hear more.
