This weekly newsletter chronicles top digital themes and trends playing out in SE Asia, especially Indonesia. We will decode policy and regulatory changes affecting digital economy sectors, crunch earnings data of top players, track developments related to gig economy workers and attempt to piece together ecosystem buildouts in some of the fastest-growing, venture-backed plays. You can access the previous editions of the Vantage Point weekly posts here.
Executive Summary
Scrutinising GoTo for more concrete measures of profitability
What will drive Indonesia’s consumer story in 2023?
GrabMaps begins to bear fruit
Scrutinising GoTo for more concrete measures of profitability
The announcement by Indonesian tech giant GoTo last week that it will achieve profitability, in terms of adjusted EBITDA and group contribution margin, earlier than expected came as a surprise given that the full-year 2022 and fourth quarter 2022 results are not due until March.
GoTo’s adjusted EBITDA is now expected to become positive in the fourth quarter of 2023, while the group contribution margin is set to become positive in the ongoing quarter (Q1 2023), which is a year ahead of schedule, GoTo announced during a town hall.
The announced time between adjusted EBITDA breakeven and contribution margin breakeven is relatively narrow, as it can generally take anything from 12-24 months. GoTo’s management also highlighted that this will bring it closer to positive operating cash flow, which would help to address concerns over future funding.
Yet, the IDX-listed company, whose share price has fallen around 67% since its IPO in April last year, needs to do more in terms of real-world measures of profitability to reassure retail investors.
One obvious area to watch is the company’s cash on hand and runway to when it may need to raise additional funds. The management has highlighted that its $2 billion in cash is sufficient to support it to become adjusted-EBITDA positive by Q4 2022.
Current market estimates suggest that the company has sufficient funding for around seven quarters but this could easily be extended if the current level of cash burn is sustained or even reduced coupled with longer-term cost savings. GoTo’s cash burn has reduced significantly to 60-65% of that seen in Q3 2022.
There also needs to be more clarity on the company’s headquarter costs, which are its fixed costs such as buildings etc., where GoTo has yet to break even, unlike its peers Grab and Sea Ltd. This will provide greater visibility on the company’s financial health.
A greater level of operational transparency would also be helpful in providing a greater degree of colour and visibility on the company’s progress.
GoTo maintains that its strategic path to profitability is based on revenue optimisation (increasing take rates), cost management (both one-off but more importantly ongoing), and ecosystem product growth.
The latest comments from the management are clearly focused on the company’s ongoing emphasis on prioritising an accelerated but sustainable profitability strategy versus building scale at any cost.
In achieving this aim, GoTo will have to strike a fine balance between applying the brakes too hard, which may mean losing customers and maintaining a sufficient level of promotional activity to grow its customer base. The use of its incentive programme under GoPay Coins should help the company to do this.
The company has started to see the impact of its plan to accelerate profitability, as the contribution margin in Q4 2022 exceeded the company’s guidance.
Meanwhile, GoTo’s Gross Transaction Value (GTV) in the December quarter also grew 18% on an annual basis to 162 trillion rupiah. For the full year 2022, GTV increased 33% to 613 trillion rupiah.
Yet, it remains to be seen what the impact of fewer promotions and higher delivery fees will be on GTV in the coming quarters.
GoTo’s management also provided details on the implementation of its strategy, which began in early FY2022. The revenue optimisation includes changes in commission structures for on-demand services and e-commerce, with the introduction of increased platform fees and commissions in exchange for other value-added services for merchants.
GoTo has also been pushing product-led innovations such as the introduction of GoPay Coins, supporting new user acquisitions at a lower cost, as well as incentivising those users to transact across the GoTo ecosystem as multi-service users.
The company has also introduced a subscription-based service under GoTo Plus, which includes free deliveries and other priority services. This service recorded more the 50,000 subscribers in a short period after launch but this number should be a lot higher by now.
GoTo also introduced GoPay Cicil, an instalment payment product, to 4 million whitelisted customers. It will be interesting to see how many customers the company has managed to convert to taking out loans over the last four months.
The management also highlighted advertising as a higher revenue-generating area of growth, with potentially very healthy margins. GoTo should be able to offer very focused advertising services using its significant pool of data.
GoTo has also introduced GoFood Hemat offering a more economical food delivery option for delivery below two kilometres targeting less affluent areas to gain new customers.
It also introduced GoTransit in partnership with Kereta Commuter Indonesia (KCI) to make it easier for commuters to purchase tickets through the Gojek app.
All of the above were highlighted during the Q3 2022 results and all are at relatively early stages of implementation, which makes tracking developments in these areas especially important, as they have to potential to move the needle on the road to more sustainable profitable growth.
More recently GoTo announced a collaboration with the Jakarta-Bandung High-Speed Train to allow customers to book tickets through the Gojek App. This reflects GoTo’s aim to support multi-modal transportation in Indonesia.
GoTo will also continue to look at divestment opportunities for non-core assets, which will help to extend its profitability runway, as seen by its recent sale of a stake in Alfamart.
In the town hall last week, GoTo also revealed selective operational highlights for Q4 2022.
Gross revenue for Q4 2022 came in at the higher end of the guidance range of 22.6 trillion rupiah and 23 trillion rupiah. The company also highlighted that the contribution margin as a percentage of GTV also exceeded the guidance provided during Q3 2022 of between -0.6% and -0.5% in Q4 2022.
For the full year 2022, management highlighted that GTV on a proforma basis increased by 33% YoY, meeting the annual guidance, while gross revenue for FY2022 came in at the upper end of the guidance range and contribution margin exceeded the guidance range.
Management is also focused on cost management through the optimisation of incentive spending through better targeting, common rewards through GoPay Coins, and more focused marketing.
It has also introduced a broad range of additional cost-saving measures including the development of shared technology infrastructure, optimisation of the cost of operations, and further assessment of organizational efficiency and effectiveness.
A greater level of operational transparency would be helpful in providing a greater degree of colour and visibility on the company’s progress rather than just purely articulating naked numbers.
Top consumption trends playing out in Indonesia in 2023
Indonesia announced its fastest increase in GDP growth since 2013 at 5.31% YoY in the midst of global economic uncertainties. The growth reflects the country’s commodity-driven advantage and, to some extent, the recovery in consumption, which makes up around 55% of GDP.
The only disappointment came from investment spending, with gross fixed capital formation increasing only 3.87% YoY in 2022 compared to the pre-pandemic levels of 4.45% YoY growth in 2019. In 2021, investment spending showed a 3.8% growth.
Gross fixed capital expenditure, which reflects spending on infrastructure, airports, industrial machinery and so on, may see momentum given the government’s push to develop downstream industries related to nickel, copper, and other metals and minerals.
One reason for the slower growth is a sluggish property market, especially the office market, which continues to see a glut in supply. The pandemic-induced remote working culture and hybrid working will continue to impact the office property space, which could, in turn, dampen demand for cement and construction materials.
The global growth uncertainty with rising rates and high inflation is also having an impact on sentiment toward increasing investment spending. Offsetting this is the Indonesian government’s push to increase investment spending ahead of the elections in 2024. However, overseas investment flow is likely to see an impact due to perceived political uncertainty until the election is over.
On the upside, Indonesia has benefited from high commodity prices, especially coal. Given the country is the largest exporter of coal, it has registered a trade surplus for the past 32 months. This has, in turn, boosted the country’s current account, helping to support a relatively stable currency.
But, domestic inflation has been creeping up, partly due to the impact of higher subsidized fuel and commodity prices although there has been some relief on both fronts in recent months. Headline inflation has declined from a peak of 5.95% last September and stood at 5.28% at the last reading.
Indonesia’s commodity dividend is offset by the fiscal pressure on account of Indonesia being a net importer of oil. This triggered the government to increase subsidized fuel prices by 30% in September last year, leading to a knock-on effect on both consumption and logistics costs, leading to some end-product price increases.
Consumers in Indonesia spend a significant portion of their monthly income on transportation at 20-30% of their monthly income. The impact on disposable incomes has had a spillover effect on a number of different areas, including e-commerce.
Consumers have become more watchful of their spending as they prioritise necessary expenditures on staples such as food, groceries, or basic daily needs over durable goods like household equipment and electronics.
The middle class, comprising formal workers, makes up the backbone of consumer spending, and the tempering of this group’s spending has resulted in a slowdown in overall spending.
Middle-class spending has, however, registered an uptick since early October. After a long period of stagnation, consumer spending began to rise again in December, with increases evenly distributed across all regions, including Bali and Nusa Tenggara. Spending on travel and tourism, electronics, fashion, restaurants and supermarkets increased significantly.
This year’s consumer spending has normalized after increasing significantly at the end of 2022. The spending slowdown in Q3 2022 continued over early 2023, after the year-end seasonal spike, with inflation likely to have slowed spending growth, especially post the subsidized fuel hike. This is not surprising given the inflation rate this year at 5.28% is almost double the headline rate last year of 2.18%.
The main areas facing a spending drop cover household spending, medical and restaurants. McKinsey’s Consumer Pulse Survey in January 2023 shows that only 58% of Indonesian consumers are optimistic about economic recovery following COVID-19, which is lower than the survey results in March 2022 at 68% and August 2022 at 80%.
The normalization of spending has occurred in mobility-related sectors, such as travel and hotels, whilst spending on fashion goods fell sharply as a result of reduced promotions and discounts. Spending on durable goods such as electronics and mobile phones remained relatively stable, signalling consumer confidence going forward.
As consumers revert to pre-pandemic shopping behaviours, the omnichannel retail model will see greater traction as shoppers seek the retail touch-and-feel experience as well as the convenience of online purchases.
Direct-to-consumer brands such as Kopi Kenanagan provide some clues, given that during the pandemic, online sales accounted for 70-80% of sales. This situation has now reversed with 70-80% of sales coming from offline outlets. This has also made the company reduce its reliance on food delivery firms, which allowed it to become more profitable during the pandemic.
Offline retailers such as Mitra Adiperkasa continue to pursue an omnichannel approach and maintain around 10% of sales through both their own online channels as well as through third-party platforms. This number was at 2%-3% of sales pre-pandemic and although it will not sink back to those levels, it is most likely to remain stable or decline marginally over the coming quarters.
From an e-commerce perspective, a lot will also depend on the targeted demographic, with Shopee’s average order value at circa $8-9, less than half that of Tokopedia’s at $20-25, with BliBli aiming at an even more affluent demographic. Also, the success of TikTok in capturing market share is partly because of its low price points and younger target audience.
While lower and middle-income group consumers may be trading down to lower-priced items, there will be consumers, who are less sensitive to inflationary pressures, driving offtake of expensive goods.
Even though overall consumption looks relatively healthy in Indonesia, the upcoming Q4 2022 results of both offline retail and e-commerce players will provide further evidence of any longer-term changes to consumer behaviours.
GrabMaps begins to bear fruit
When GrabMaps, a location-based service for SE Asia and beyond, was launched in mid-2022, it was met with a fair degree of scepticism even though the tech major projected the service to be a $1-billion opportunity by 2025.
The new offering – an addition to Grab’s enterprise segment services – held the potential to generate new revenue streams, create substantial cost savings, and enable targeted advertising.
Grab, which had previously paid Google Maps $60 million over three years in Asia, was seen to generate substantial annual savings of up to $30 million through GrabMaps.
GrabMaps is proving itself internally with more accurate arrival times and route intelligence, better delivery cost optimisation, and powering over 800 billion API calls per month across all of Grab’s services.
The recent announcement that GrabMaps will become a data provider for Amazon Location Services can be seen as a validation of the platform’s abilities and the potential for deployment to third-party users.
GrabMaps will provide services to the location-based service of Amazon Web Services (AWS). The service is designed to help developers easily and securely add maps, points of interest, geocoding, routing, tracking, and geofencing to their applications.
By leveraging Amazon Location Service, AWS customers have access to regional mapping data that includes over 50 million addresses and points of interest (POIs) from GrabMaps spanning Singapore, Cambodia, Vietnam, Philippines, Indonesia, Malaysia, Myanmar, and Thailand.
Customers can also leverage Grab’s hyperlocal search and routing functionality tailored to the region’s unique attributes, from its small alleyways and to hard-to-find places.
Operational and cost efficiencies brought about by GrabMaps’ core functionalities have already started to help businesses using Amazon Location Service maximise their platform’s capabilities.
While the latest move may not move the needle for GrabMaps, it brings a considerable upside given the prominence of Amazon as a global brand despite the latter’s relatively smaller business presence in SE Asia.
Angus Mackintosh, a consulting editor with DealStreetAsia, is responsible for the publication’s Southeast Asia digital economy weekly newsletter and its monthly research reports. Angus is also the founder of CrossASEAN Research and publishes on Smartkarma.
