How did TikTok Shop expand its territory in Southeast Asia?

I thought that after experiencing the fierce competition in domestic e-commerce, I would basically face a dimensionality reduction attack after going abroad. However, in Southeast Asia, where traditional shelf e-commerce is the main industry, the exploration of social e-commerce is not an easy road.

Practitioners always say that cross-border e-commerce is becoming more and more difficult. However, at a time when the three major drivers are struggling, cross-border e-commerce is still making great contributions to "exports".

A spokesperson for the General Administration of Customs said that in the first three quarters, my country’s cross-border e-commerce exports totaled 1.48 trillion yuan, up 15.2%. Whether it is AliExpress and SHEIN, which have been deeply involved in cross-border e-commerce for more than 10 years, or TikTok and TEMU, which have only entered the market in the past two years, their scale and performance are very impressive. [1]

I have seen news in the past few days that starting from December, Tokopedia's backend will be fully connected with TikTok Shop's backend in Indonesia, and TikTok Shop's backend will be the main one. In layman's terms, it is like Taobao and Douyin in China have connected their backends, and shelf e-commerce and content e-commerce are going to work together to make the cake bigger.

Indonesia is just a microcosm.

Looking back at the “2024 Southeast Asia E-commerce Report” released by Singapore-based Momentum Works in July this year, it showed that TikTok Shop’s annual GMV (gross merchandise volume) almost quadrupled from US$4.4 billion in 2022 to US$16.3 billion in 2023, making it the fastest growing e-commerce platform in the region. [2]

The report stated that Shopee maintained its leading position with a market share of 48%, followed by Lazada with 16.4%, and TikTok and Tokopedia with 14.2% each. After acquiring Tokopedia, TikTok Shop has become the second largest e-commerce platform in Southeast Asia with a market share of 28.4%. [2]

Therefore, we are very curious: TikTok has been popular all over the world for a long time, but TikTok Shop has always been disappointing. Why did it suddenly become popular in the Southeast Asian market this year? Are there any crises or hidden dangers behind this popularity?

PART1 "Dimensionality reduction attack"

"Even if Tokopedia is not acquired, TikTok Shop will surpass Lazada sooner or later." Lin Chao, founder of cross-border guide Cpsea, told Growth Black Box that his Thai e-commerce operation team currently operates local stores such as Shopee, Lazada and TikTok Shop, with a monthly GMV of 10 million yuan, of which TikTok Shop accounts for about 1/4, or a monthly GMV of two to three million yuan.

In early 2021, TikTok launched the "Little Yellow Car" function in Indonesia, the largest e-commerce market in Southeast Asia, completing the in-site shopping loop. This was the earliest test of TikTok Shop. By mid-2022, TikTok Shop had fully landed in the remaining five countries in Southeast Asia and began to roll out the social e-commerce business of "short video + live broadcast" to bring goods.

In just two years, TikTok Shop has established a firm foothold in Southeast Asia, squeezing out the position of Lazada, which has always been the second. With its rise, many domestic brands have also created greater popularity in Southeast Asia and achieved higher sales.

As a latecomer, TikTok Shop must have its unique advantages. From the perspective of e-commerce market factors, in addition to market share, TikTok has advantages in many core indicators such as traffic attraction and user engagement in Southeast Asia, which is also an important reason for its rapid growth. TikTok has a large user base in Southeast Asia. According to TikTok's official data, as of mid-2023, TikTok's total number of monthly active users in Southeast Asia reached 325 million. TikTok for Business commercialization data statistics show that TikTok's user penetration rate in Southeast Asian countries exceeds 50%.

Southeast Asian consumers are keen to buy products on TikTok. According to FastMoss’s “TikTok Ecosystem Development White Paper in the First Half of 2024,” more than half of Southeast Asian consumers will buy trendy products on TikTok and will be satisfied with it. [3]

Some people believe that the success of TikTok Shop in the Southeast Asian market shows the huge potential of the young population, Internet penetration rate and new consumption patterns. After all, it is impossible for overseas markets to be more competitive than domestic ones. For those who have experienced the fierce competition in domestic e-commerce, going abroad is basically a dimensional attack.

However, TikTok has obvious advantages as a short video platform, but in the Southeast Asian market where traditional shelf e-commerce is the mainstream, the exploration of social e-commerce has not been a smooth road.

PART2 "Wild Growth"

As a new thing, social e-commerce has been accepted by Southeast Asian consumers at different speeds. Many sellers reported that the number of viewers of a live broadcast was less than 10,000, and the number of converted orders was less than 100, which is a far cry from the popularity of live broadcast sales in China.

A large number of cross-border e-commerce sellers from Shopee and Lazada entered TikTok Shop in 2022 to seize the dividends of the emerging platform. TikTok Shop did not charge merchants commissions in the early stage, and gave consumers many subsidies, such as free postage, coupons, and discount coupons. However, although the market was bustling at the time, there were only a few sellers who were able to form a sales scale.

Alice, a TikTok anchor, started to enter the Southeast Asian TikTok cross-border store in mid-2022. Her company mainly sells Muslim women's clothing. She told Growth Black Box that in the second half of 2022, the live broadcast room of the Malaysian store could sell 4,000 to 5,000 Malaysian ringgits a day, with monthly sales of 50,000 to 60,000 US dollars. This result was already the first in the Muslim women's clothing category ranking. Despite this, the team failed to make a profit. In the early stage of wild growth, it was difficult for sellers to maintain stable operations.

In the early days, TikTok Shop had loose requirements for sellers to enter, and there were chaos such as distribution, follow-selling, and price wars. The sales of Alice's team quickly went downhill. In January 2023, the platform gradually began to rectify the bad phenomena. A new member of the team accidentally put an illegal product on the shelf, and the store was closed. In March 2023, the team disbanded the live broadcast sales department, and Alice had to leave.

Mr. Zhao, a seller on Shopee, Lazada and other platforms, was one of the earliest distributors of TikTok Shop. He told Growth Black Box that in April 2022, he registered hundreds of stores and listed thousands of SKUs. At that time, there were few sellers on the platform and the traffic was large, and the number of orders per store was hundreds.

This era of store clusters ended in the first half of 2023, and most of Zhao's stores were closed, leaving only two or three. He said that in the early days, TikTok Shop had mostly homogeneous products, which basically came from the trays of Shopee and Lazada sellers, and the platform was full of stores with no source and a drop shipping model.

In February 2023, TikTok Shop began to rectify the platform, requiring sellers to have a main category, and shortened the delivery time from 15 days to 3 days, strictly limiting the survival space of sellers without sources. At the same time, in addition to the social e-commerce model, TikTok Shop also launched the mall function in Southeast Asia, cutting into the shelf e-commerce scene, that is, in addition to the existing model of "goods find people", it has opened up the closed loop of "people find goods".

Gradually, TikTok Shop turned to refined operations and vigorously developed live streaming by influencers to bring goods, and many brand players also entered the platform. This year, the scale of TikTok Shop began to expand.

In June this year, data officially released by TikTok Shop showed that the number of cross-border sales in Southeast Asia in 2023 increased by more than 19 times year-on-year, and the number of cross-border merchants increased by nearly 5 times.

According to the 2023 TikTok E-commerce Industry Trend White Paper released by Chaodianyoushu, TikTok’s in-app purchase revenue achieved a significant breakthrough in the third quarter of 2023, doubling compared to the same period in 2022. [4]

The report pointed out that in TikTok's e-commerce data, most Southeast Asian countries showed a growth trend, among which Thailand, Vietnam and Malaysia had significant sales growth, and the growth rate in the second half of 2023 was significantly faster than in the first half.

Lin Chao's Thai e-commerce company started TikTok Shop in October 2022, selling mobile phone accessories. In 2023, the average customer price of Lin Chao's TikTok Shop products was 20 to 30 US dollars, and some popular products had an average of 2,000 to 3,000 orders per day, among which chargers ranked first in sales.

Uncle Li, the founder of Vzone, one of Vietnam's top MCNs, started operating more than 20 TikTok accounts in Vietnam in 2019, and cultivated several local influencers with tens of millions of fans. After TikTok Shop was launched in Vietnam in 2022, Uncle Li started to do TSP (Tiktok Shop Partner, i.e. store operation) business, selling products for many domestic brands and local Vietnamese brands, and one of the influencers, Ya Ying, became a top influencer.

At the end of 2022, the average GMV of a single Vzone live broadcast was $10,000 to $20,000, and the highest was $100,000. In 2023, Vzone experienced rapid development, the team expanded several times, and the number of live broadcast rooms built increased from 4 to 20.

In the past year, the Thai and Vietnamese markets have created momentum for the growth of TikTok Shop.

In July 2023, the e-commerce market report for the first half of 2023 released by Vietnamese data research company Metric showed that in the first half of 2023, TikTok Shop surpassed Lazada in the Vietnamese e-commerce market, with sales of 16.3 trillion Vietnamese dong, ranking second in the e-commerce market revenue share, second only to Shopee. This performance has been maintained to this day. By the first quarter of 2024, TikTok Shop's market share in Vietnam has risen from 15.5% in the same period last year to 23.2%.

The explosion of the Thai market is even more obvious. According to the "TikTok E-commerce Data Report for the First Half of 2024" released by Chaodian Youshu, Thailand ranks first in Southeast Asia in terms of sales and sales volume. The Bangkok Post also pointed out that in the first eight months of 2024, the GMV (gross merchandise volume) of TikTok Shop Thailand's live e-commerce business increased by 500%.

According to data analysis, TikTok Shop has seen an astonishing growth in the Southeast Asian market over the past year. At the beginning of 2022, the monthly sales of cross-border sellers were only tens of thousands of dollars, but by June this year, according to FastMoss data, TikTok Shop had already seen five stores with sales exceeding 10 million dollars in Southeast Asia.

PART3 Scale increased, profit decreased

TikTok Shop combines short videos, live broadcasts, display windows, and shopping malls in Southeast Asia, completing the construction of "people, goods, and venues" for e-commerce. Short videos are used for content marketing, live broadcasts stimulate shoppers' impulse shopping needs, and shopping malls are used to form product supermarkets. TikTok Shop has achieved a seamless connection of "watching videos - planting grass - placing orders".

TikTok Shop's rapid growth in Southeast Asia is obvious to all, and its social e-commerce ecosystem is becoming increasingly mature. However, for many sellers in it, the experience is different.

Zoey, a Vietnamese cross-border seller, mainly operated Shopee and Lazada in 2020 and 2021, and started to go all in on the TikTok Shop business in 2022. She told Growth Black Box that she initially entered the popular beauty and personal care categories, and combined short videos with live streaming to seize the first wave of traffic and launch a number of hit products. For example, a hand sanitizer with a unit price of 30 yuan can receive 2,000 orders per day, and some makeup products have an average of 500 to 600 orders per day.

Zoey said that in 2022, as long as the average customer spending on white-label cosmetics is less than US$5, it will be possible to make a living. By then, the natural traffic will be large, the traffic cost will be low, and the ROI (return on investment) will once reach 1:5.

However, the good times did not last long. After entering 2023, market competition intensified, investment costs increased, the dividends of the beauty track disappeared, the life cycle of explosive products became shorter and shorter, and product iterations were extremely fast.

In order to do business with a longer cycle, Zoey has embarked on a branding path, cooperated with domestic supply chains, entered the smart home track, launched the 4G camera brand Drcam, and cooperated with local MCNs in Vietnam. In mid-2023, despite the high average order value of 40 to 50 US dollars, some of Drcam's small hits can have about 100 orders per day.

Vietnam's retail industry has a clear trend towards onlineization, but the e-commerce market size in 2023 is only US$20 billion, far from the trillion-dollar scale in China. Zoey found that although Douyin sold tens of thousands of 4G cameras in China, the Vietnamese market had no knowledge of it, and sales on TikTok Shop did not improve.

In order to save costs, Zoey set up his own live broadcast team in July last year, spending tens of thousands of yuan on labor and equipment. As a result, sales failed to increase, and the return rate reached 25%. It turned out that on the one hand, TikTok Shop advertising traffic was not accurate, with a daily traffic of 300 US dollars and a low ROI of less than 1:2. On the other hand, Vietnamese consumers only knew about Wi-Fi cameras, and after receiving the goods, they found that they were 4G cameras and returned them one after another.

By November last year, Zoey had to disband its livestreaming team, reduce investment in TikTok Shop, and return to Shopee and Lazada. This year, Zoey has returned to where it was a few years ago, using TikTok as just one of the channels for brand exposure, along with Facebook and Google, to drive traffic to Shopee and Lazada.

Currently, Zoey’s monthly sales on Shopee are about 500 orders, while the average daily traffic of Facebook, Google and TikTok combined is only US$100, and the ROI has significantly increased to nearly 1:4.

Zoey said that in the Southeast Asian market, it is very difficult to pursue branding without long-term capital investment. Currently, she is preparing to do some user data research, develop some products that meet user needs, and enrich the product matrix. She wants to hold on until the end of the year and strive for the year-end KPI. If it is still difficult to make a breakthrough, she must adjust her strategy again.

Competition in the Southeast Asian market of TikTok Shop has intensified, and the profit margins of sellers have been gradually squeezed. Lin Chao has also deeply experienced this. Last year, the sales volume of some products in TikTok Shop's Thailand store was the first in the category. In 2024, the ranking declined, and the profit also declined.

In order to maintain competitiveness on the platform, the average customer price of Lin Chao's store products has dropped from more than US$20 to more than US$10 this year. In order to control profit margins, sometimes the cost of product production has to be reduced, such as using cheaper materials. Despite this, Lin Chao told Growth Black Box that the company's TikTok Shop Thailand store's net profit margin has dropped by 3 to 5 percentage points.

As for the reasons behind this, he believes that on the one hand, the platform is vigorously attracting investment, and on the other hand, there is an overall domestic craze for going overseas and support at the government level, such as officials organizing Southeast Asian inspection tours. Industrial belts and e-commerce sellers all want to look for opportunities overseas. These two reasons have led to an increasing number of sellers entering the platform.

Back to the Thai market, since the second half of last year, there have been more local policy controls, which has increased compliance costs and further squeezed profits. Law enforcement agencies often check warehouses, such as product certification and import certificates. If there is any non-compliance, a fine will be imposed, ranging from several thousand yuan to tens of thousands of yuan each time. In addition, customs will charge value-added tax on goods imported into Thailand starting from the second half of the year.

On June 21, the Thai Ministry of Finance announced that from July 5 to December 31 this year, customs will impose a 7% value-added tax on cross-border e-commerce sellers for goods priced below 1,500 baht (close to RMB 300). After that, the government will promote the revision of the Tax Law, and the tax department will uniformly collect value-added tax from cross-border e-commerce platforms.

For many TikTok Shop Southeast Asian sellers, the platform's significant increase in commission rates in the past year is also one of the important reasons for the increase in operating costs.

TikTok Shop Indonesia announced that the platform commission rate will be further increased to a maximum of 10% from September 16, 2024. Prior to this, TikTok Shop Indonesia had adjusted the commission rate of mall sellers to a maximum of 8.5% from September 1, 2024. TikTok Shop said that the adjustment of the platform commission is to improve the platform functions and services, thereby enhancing the seller experience.

TikTok Shop Indonesia Commission Rate

Since September, not only Indonesia, but also TikTok Shop Malaysia and Thailand have increased their commission rates to varying degrees. The commission rate of the Malaysian site is the highest, with the commission rate of fast-moving consumer goods mall sellers reaching 14.58%. In June this year, the Philippine site also increased its commission rate, with the highest commission rate in the fashion category reaching 5.2%.

Obviously, TikTok Shop has been unable to maintain seller experience and revenue well in its pursuit of scale expansion in Southeast Asia. After a surge in the number of sellers and transaction volume, problems with platform operations have also been exposed.

Lastly, can future growth continue?

If we ignore Lazada, the only competitor of TikTok Shop in Southeast Asia is the powerful Shopee. This platform, known as the "Pinduoduo of Southeast Asia", has long occupied the position of the leader of Southeast Asian e-commerce.

In the third quarter of this year, Shopee's parent company Sea's total revenue was US$4.33 billion, of which Shopee contributed US$3.14 billion (about RMB 22.683 billion), a year-on-year increase of 42.6%. It can be said that Shopee supported half of the parent company's revenue. Shopee's core profit in the third quarter was US$34.4 million, compared with a loss of US$347 million in the same period last year. [5]

Starting from 2022, Shopee adjusted its strategy and stopped burning money for growth, instead pursuing profit margins, hoping to turn losses into profits. After two years of cost reduction and efficiency improvement, Shopee has made a good transformation. While maintaining a stable scale growth, its losses continue to narrow, and it has firmly grasped nearly half of the market share in Southeast Asia.

In fact, Shopee has not ignored the competitive pressure brought by TikTok Shop. The biggest manifestation is that Shopee has increased its investment in live e-commerce. When announcing the Double 11 sales data in 2023, Shopee specifically emphasized the outstanding performance of the live broadcast business. The cumulative number of views of Shopee Live reached 6.7 billion, which greatly increased the sales of many brands.

Compared with Shopee, a long-established e-commerce platform, TikTok Shop still faces some objective challenges in its future refined operations. In addition to the shortcomings in the platform's own operations, government supervision and local compliance remain major problems.

For example, in September last year, Indonesia used regulations to require TikTok to separate its e-commerce business from social media; this year, Thailand and Malaysia imposed a 6% value-added tax on logistics service fees incurred by packages imported through e-commerce platforms; and so on.

If these challenges can be overcome, TikTok Shop is expected to occupy a more important position in the Southeast Asian e-commerce market.

(Alice, Zhao Sheng, and Zoey are pseudonyms in this article)

References:

[1] A new blue ocean in e-commerce, a platform that is not competitive has emerged｜Paidai

[2] “Southeast Asia E-commerce Report 2024” | Momentum Works, Singapore

[3] "TikTok Ecosystem Development White Paper in the First Half of 2024" | FastMoss

[4] "TikTok E-commerce Industry Trend White Paper 2023" | Chaodianyoushu

[5] Shopee’s latest financial report is out, with revenue of over 22 billion in three months｜Cross-border News

Author: Lin Xuan Editor & Graphics: Zou Xiaokun