ALIBABA'S investment in Lazada has helped the online retailer understand business in South-east Asia: that success entails setting up partnerships that also build up a fledging infrastructure in this region, a top executive at Lazada said.
That has meant shifting from an "Amazon-focused" model of controlling all elements of the online shopping process, to focusing on strength in data analysis for the merchants that have listed products on the website, said Alexis Lanternier, chief executive officer of Lazada Singapore, in an interview.
"Initially, we started (being) Amazon-focused, by doing everything ourselves," said Mr Lanternier. That ranged from buying products to handling warehouse delivery, he added.
"What we discovered in South-east Asia is that the infrastructure is not as developed as in developed markets. If you want to win, you cannot win by yourself. So we shifted the model from doing everything ourselves, to relying on partners that we help grow, that we give business to."
It was a lesson Alibaba brought to the table, along with its now US$2 billion investment in Lazada. Last week, Alibaba raised its stake in the online shopping mall to 83 per cent. The management and Singapore's Temasek Holdings are the remaining early investors in Lazada, which is now valued at US$3.15 billion.
Alibaba also brought connections; Lazada Singapore moved its warehouse operations in May to SingPost's regional e-commerce logistics hub in Tampines. Alibaba is SingPost's second-largest shareholder.
"When we started, we didn't understand the importance of it, until Alibaba bought us," said Mr Lanternier of Lazada that was founded in 2012. "You can only win in an ecosystem model in South-east Asia."
That means selecting the most suitable transportation company, warehousing company, and merchants to supply goods in each of the six markets it operates in. This process may be less complex in small countries such as Singapore, but poses more variables for larger nations. In Philippines alone, the best logistics partner in the eastern part may not be the same company in the south of the country, Mr Lanternier observed.
In Vietnam, Lazada has created a big competitive edge by expanding its modes of payments and offering cash on delivery to online shoppers, said Mr Lanternier. Lazada has also merged its wallet solution with the one offered by Alibaba's Ant Financial, leveraging off the latter's expertise in payments.
With the most investments today going into the data team at Lazada, the online retailer is also ensuring that the recommendation engine is as efficient as it can be, since it drives most of its sales, having the highest sales conversion, said Mr Lanternier.
A data-driven platform is effectively one that rewards the best merchant with more traffic. Merchants get instant and constant data on their sales and traffic. That data is used to assess merchants' competitiveness and inventory availability.
Lazada gets a cut from sales based on the product price, ranging between one and five per cent depending on the margin structure of the product category - in effect, it means the amount earned from the sale of fashion products would be higher than electronics.
"We see how competitive they are, how fast they are for shipping (and) how often they have the products. We are going to push the traffic and business to the merchants that are the best," said Mr Lanternier.
"We are going to focus more and more on being a data-driven platform that gives business to its ecosystem, based on their performance, to make sure everybody is performing the best, and deliver the best customer experience."
Mr Lanternier said Alibaba is "very respectful of our strategy", and does not ask for specific sharing of data from the online shopping done at Lazada. Alibaba's emphasis is on building homegrown brands and developing the strength of domestic players, he said.
In Singapore alone, Lazada has more than 5,000 retailers listed on its site, including Watsons, Best Denki and Gain City, and it has "very high ambition" to increase this number, though Mr Lanternier shied away from giving a projection. Sales in Singapore have jumped by 2½ times from a year ago, fairly similar to the growth in the other South-east Asian markets. It is in six countries in South-east Asia, namely Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam.
Mr Lanternier observed that brick-and-mortar brands are reluctant to turn to online platforms such as Lazada because they hope to build their own platform. The toss-up then is between absolute control of their own website, and a loss of scale from being on a single platform.
"They hope they can build their online platform ... but it never really works," he said. "Customers on the Internet just want to save time. They want to have one platform, they want to have everything."
He said there is fear from potential merchants of cannibalisation - that going online would reduce in-store sales, which then hurts their ability to meet the rent. "(But) whether they do it or not, they will be cannibalised," Mr Lanternier said.
It is also an economic imperative for online retailers such as Lazada to build scale, given the logistics costs.
"When you don't have the volume, logistics cost is high. If (you) charge the customer the full logistics costs, you will never grow e-commerce," Mr Lanternier said. "You need to estimate your long-term cost of shipping, and say, 'I'm going to price at that point'."
Lazada declined to say if it has a target for profitability or for any reduction of cash burn.
"It also depends on competition," said Mr Lanternier. He does not mention the expected entrance of Amazon, among other competitors. "We need to build a sustainable model."