Investors are eagerly awaiting the release of Shopee parent Sea Ltd.’s Q4 2023 earnings report in the upcoming month. After achieving profitability in Q4 2022 and in both Q1 and Q2 of 2023, Shopee had decided to prioritize growth over profitability in the 2nd half of 2023. Soon we will know how that strategic direction impacted results in the last quarter of the year.
In our previous reports about Shopee’s path to profitability, we delved into two key metrics influencing – average order value (AOV) and sales & marketing expenses. While the AOV reflects internal and external factors influencing EBITDA, sales & marketing expenses are contingent upon internal cost-side decisions—even as they may be informed by the external competitive landscape. In this report, we will explore the third key operational metric that also influences profitability and growth—Shopee’s take rate.
Except during COVID, Shopee’s take rate has been inversely correlated with GMV growth
The take-rate, an industry term for aggregate revenue Shopee extracts from its sellers, represents the fees a platform charges its sellers, including commissions, transaction fees, service fees, and other valued-added services (e.g., logistics) provided by the platform. A higher take-rate results in increased revenue capture for the platform, directly impacting its profitability. In this context, we examine the relationship between the take-rate percentage for third-party (3P) sellers—those selling products directly to consumers via Shopee’s marketplace—and the growth of 3P GMV.
Over the long term, there has been a consistent upward trend in take-rates across major e-commerce platforms, including Shopee. This trend is not surprising. New e-commerce platforms often attract sellers with low, appealing take-rates, which tend to increase over time as more sellers become reliant on the platform, consequently making the e-commerce environment more costly for sellers. According to the exhibit above, that has been the trend for Shopee since 2019. With the exception of the COVID-19 period of 2020-2021 however, this growth in take-rate has had an inverse relationship with GMV growth.
10% – the upper limit of take rates in Southeast Asia?
At the start of 2023 Shopee’s 3P take rate appeared to hit a ceiling at approximately 10%, around the same time when GMV growth became stagnant or negative. For 3 quarters, it seems that sellers were giving Shopee feedback that they were not willing to pay more. And perhaps unsurprisingly, when Shopee’s take rate dipped back below 10% in Q3 last year, there was a quick rebound in 3P GMV growth.
A combination of factors can explain why Shopee’s take rate was unable to grow past 10%, all somewhat interrelated but still worth being called out separately.
1. Greater competitive intensity with TikTok Shop entering all Southeast Asia markets in 2022
Post-COVID, the management at Shopee may have thought that they have done the hard work of building the market and assume its leadership, and so the time was now for them to start reaping the benefits. They would not however have foreseen the speed with which TikTok Shop became popular in the region, offering sellers a meaningful new sales channel with lower commissions.
2. Brands scaling back their marketing budgets
In 2023, many large brands had been scaling back their marketing budgets as the cost of operating in e-commerce environments has increased compared to the past. While overall ads spend is expected to still grow year-over-year, the growth rate has started to slow down since 2021. One of Shopee’s core revenue includes service fees, which includes online marketing services, such as coin cashback, free shipping, paid ads, and campaign. With brands trying to become more cost-efficient by using less of the offered service fees, it contributed to the decline in take rate of Shopee.
3. Increase in live streaming incentives
On top of brands scaling back their investment, with the integration of live streaming into e-commerce to compete with the emergence of TikTok Shop, platforms like Shopee and Lazada have been incentivizing sellers by offering vouchers in Q3 (e.g., Daily Shopee-sponsored, 30% no min spend with cap at $10 Shopee-Live vouchers) that are only available when ordered via live streaming. This strategy aims to drive more traffic and conversions to the feature. While the voucher incentives contributed to the rebound in GMV growth (many sellers in Indonesia for example almost immediately ramped up their live selling on Shopee after TikTok Shop shut down in October), it simultaneously reduced the take rate as the live streaming incentive replaced seller’s needs for service fees.
4. Rise of challenger brands/sellers
As consumers shift towards lower value products, we have observed a significant influx of Direct-to-Consumer (D2C) brands entering the market, especially in the beauty and fashion categories. Official brands/resellers under Shopee Mall, which are typically incumbents, are charged higher fees, while new challengers, less burdened by these fees, can operate at a lower cost. For example, in the FMCG category in Malaysia, seller commissions are charged at 0-4.24% for regular marketplace sellers, while official or Shopee Mall sellers are charged at 2-9%. This shift diluted the concentration of high-commission incumbent sellers in favor of challenger sellers.
Will Southeast Asia e-commerce players reach levels of profitability that justify multi-deca-billion-dollar valuations?
While Q4 2023 results are yet to be revealed, the factors listed above suggest that Shopee still doesn’t feel secure in its market share, and is using its lower take rate as a strategic move to fuel further growth, even if that means losing money in the short-term. However, the pursuit of profitability is inevitable, as the platform will ultimately need to fulfill its obligations to investors and shareholders in order to justify its current valuation and achieve a higher one in the future. And barring any other miracles – like multiplying the region’s GMV several times over or lowering logistics costs radically – doing that may require a take rate that is higher than 10%.
Our perspective is that in the short to medium term, the take rate will stay flat, or only gradually increase. Any significant acceleration will require market consolidation, which will only happen once one of the major competitors exits the market. Looking at the mature markets, there are two demonstrated ways in which e-commerce succeeds in the market. For a huge market with a high population like China, Tmall or Taobao manages to retain the take rate at a single-digit level of less than around 5%, thanks to its high volume, while in other markets such as the USA, the take rate of Amazon exceeds this significantly, reaching above 15%, depending on the subscribed fees. It is more likely that the Southeast Asian market follows the latter scenario, but Shopee is still operating in a low-AOV, cost-conscious, and highly competitive market. Should the day arrive when it emerges as the undisputed leader from this competitive fray, it may be able to charge a high teens take rate itself. Until then, while Shopee can choose to prioritize profitability, long-term profitability will remain so close, yet so far away.
