Will cash-burning Shopee bring its parent firm Sea to the next level?

After reporting its first operating profit, Sea Group replaced DBS as the largest Singaporean company by market capitalization in July 2020. Investors are now likely to turn their attention to Sea’s ecommerce business Shopee, whose expansion has been expensive, costing nearly 75% of the US$436.2 million profit that Sea’s digital gaming business had brought in the same quarter.

Photo credit: Shopee

However, Shopee, with its app-first localized marketplace approach, is also the number one application in Southeast Asia in terms of monthly active users, downloads, and mobile/desktop visits.

Sea’s continued success will likely hinge on Shopee becoming profitable or minimally reducing its costs going forward. In this article, we assess the viability of Shopee’s internet marketplace model in Asia and consider whether it has what it takes to bring Sea to the next level.

Shopee knows how to create a massive network of users

Shopee wins through the tactful yet very aggressive execution of its mobile-first approach. Across its seven markets, Shopee reaches 600 million potential users with 340 million downloads.

Although mobile apps are generally feature-saturated, Shopee continues to differentiate itself from Lazada through features such as a platform-specific loyalty currency (Shopee coins) and comprehensive staff-hosted livestreaming schedules and gamification.

To the uninitiated, these features can seem passive and have low engagement rates. However, the fact that Shopee was able to use these capabilities to onboard retail partners such as CapitaLand to use its in-app games and Shopee coins as a basis for collaboration shows some indication that these features have traction. With quarterly gross merchandise volume in 2020 increasing at 19% in line with past five-year averages, Shopee’s growth is at no point of stopping yet.

While it is tough to maintain its user base in internet commerce, Shopee seems better able to engage users than competitors

The internet marketplace industry is generally less attractive because of its low barriers to entry, which means buyers and sellers are free to switch to competitors. In the best-case scenario, consumers are likely to “multi-home” to fulfill their shopping needs. This has led to ecommerce players waging an advertising war to become the customers’ main mobile wallet.

However, Shopee has organizational capabilities to respond to these challenges. Its minority shareholding from Tencent grants it access to a network of Chinese sellers and business resources. Shopee’s position as Sea’s business unit also ensures that the ecommerce app has deep coffers, where it is free to use cash flow from more profitable business units (or raise debt if need be from investors).

Shopee has also proven its capabilities to engage its users better than others. In Q4 2019, Shopee managed to displace Lazada as the most used ecommerce app and most visited website in Southeast Asia. This is important because beyond the hype of the new features it continually rolls out, there is consistency in how Shopee users continually choose to use the application more.