Consumers give e-commerce a leg up

Font Size

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 (e-commerce).

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 e-commerce market is expected to be valued at $9.4 billion by 2025, at a 34% CAGR. In 2015, the e-commerce 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 e-commerce 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 roadmap aims to support small- and medium-enterprises (SMEs), as only 1% of is said to have a working website according to a 2014 finding of Google’s Global Index Study. SMEs comprise 99% of the country’s establishments and employ 62% of the workforce.

The roadmap 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, 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 vice president 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 mobile-cellular 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 (CEO) 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% (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, to so-called cash-on-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 public-private 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, e-commerce 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 meetups 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 po tential. 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 e-commerce 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 (DCOM), 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 manmabagal anginternet sa lugar nila… So, it’s not a resistance, it’s more of a barrier,”’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 roadmap, 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.

While online retail is disrupting its brick-and-mortar counterpart, 54.9% of Filipinos still prefer to look at the physical product in-store, according to a research conducted by MasterCard.

De spite Lazada being the current leader in the industry — not just locally, but also in Southeast Asia — the company encourages SMEs to contribute to the growth and promote more competition to tap the full potential of the e-commerce in the Philippines.

The inflection point of online shopping happened two to three years ago in the country, according to Mr. Balci. This also means that the trend is still young and is on an upward slope, as users of the platform would keep on increasing over the years.

“I think it has become a part of people’s lives and what will happen over the next couple of years, more and more millions of people will start using it.”

Department of Trade and Industry Assistant Secretary Arturo P. Boncato, Jr. agrees that the low penetration rate of e-commerce in the Philippines remains a challenge.

“The amount of our mobile subscribers is considered one of our comparative advantages when it comes to our neighbors. The main challenge here is that we have a low penetration rate when it comes to using e-commerce and for us, it is an indication of the lack of trust. Our challenge then is to make sure that we convert that presence into actually purchasing something using e-commerce,” he said.

Mr. Boncato said Filipinos are accustomed to lining up to pay, adding that even big corporations still pay with their checkbooks for the most part.

“We can’t change everybody overnight, but we can start with the digital natives, that is, the millennials, because we can convince them to pay taxes through their mobile phones and they will have no issues about it. But when you ask your parents or grandparents, there is no way that you can c onvince them,” he said.

Darating din tayo doon (We’ll get there),” he added.