In 2012 when Kinnevik AB and Rocket Internet took online fashion retailer, Zalora, live in six Southeast Asian markets along with Hong Kong and Taiwan – the sceptics were rife. Who in most of these countries would buy online, what about supply chains, Customs issues? The sceptics’ questions were manifold and yes, largely valid.
Fast forward to today, and while some sceptics remain – particularly given that the company, like many in the e-commerce space, has yet to turn a profit – the Zalora Group has clearly shown that in the incredible diversity that is Southeast Asia, there is also incredible opportunity if you can come to grips with the unique challenges of the region.
Clearly Zalora has gotten a grip on this, with business growing at a rapid pace and all-important investors continuing to back the enterprise.
In fact, the growth has led the company to expand its facilities, earlier this year inaugurating its new Regional e-Fulfillment Hub located in Selangor, Malaysia, just outside of Kuala Lumpur.
Covering a total area of 43,660 sqm – approximately the size of nine FIFA football fields – and split across five levels, the e-Fulfillment Hub serves as the sole fulfillment centre for Singapore, Malaysia, Brunei, Hong Kong, Macau and Taiwan and at the same time provides stock support for the Philippines and Indonesia markets.
“Zalora is gearing up for step-change in growth across its key markets including Malaysia over next three years with 40-60 per cent expected annual growth rate. Our fulfilment centre in Malaysia plays a significant role in enabling this leadership,” says Gunjan Soni, CEO of Zalora.
Just how confident ZALORA is of that growth can be seen by the fact it has an option on an adjoining warehouse space through its partnership with Singapore logistics company YCH Group, that would double the new hub’s space. All that is needed to expand, is a simple green light. And make no mistake, that green light is coming sooner, than later.
Other changes have also taken place along the way as well. Zalora is now part of the Global Fashion Group (GFG) – registered in Luxembourg, and headquartered in Singapore and London – from September 2014.
The GFG comprises fashion e-commerce platforms across 24 countries including Lamoda, Dafiti, Namshi, Jabong and of course Zalora. Through its five regional companies, GFG currently operates across 24 markets with over one billion population, serving a fashion market estimated to be worth over EUR 350 billion.
Overcoming SE Asian challenges
But when it comes to Asia, what Zalora has done, is proved the sceptics wrong on not just the potential of the region, but its own ability to overcome the shear number of challenges the region presents.
Let’s not forget, when Zalora first appeared on the scene, preceded by its e-commerce sibling Lazada – in which the Alibaba Group has since, in April 2016 bought a controlling interest – e-commerce, at least in this part of the world, was but a mere infant.
While every e-commerce market has its unique challenges, Southeast Asia must certainly rank amongst the most diverse and challenging. Even simple movement is complicated by geography. Two island nations for example – the Philippines and Indonesia – together comprise a staggering 24,600 islands many of which only have rudimentary transport connecting them.
The region is also marked by sharp cultural, linguistic and religious differences, not to mention varying levels of economic and social development. And then there is the vastly contrasting political cultures which give rise to unique Customs regulations and practices, including varying and often substantial levels of corruption in a number of the states.
But despite all the challenges, the e-commerce potential is clear. A population of more than 661.4 million whose average age is under 30, this is a young and rapidly growing region, not only in population, but economic prosperity too.
The e-commerce market in Southeast Asia was estimated to be worth USD 10.9 billion in 2017, a figure that will leap nearly eight times by 2025 when it will be worth USD 88.1 billion, according to a report from Google and Singapore’s state investment company, Temasek Holdings.
When it comes to demographics, things are pretty straight forward for Zalora. Its core customer profile tends towards the 25-35 age bracket with 70 per cent being female. Beyond that, things get more complicated. A Taiwanese or Singaporean customer, for instance, is more likely to gravitate towards Japanese or Korean fashion, but in Indonesia or Malaysia, the bulk of the customers are Muslim women, which means fashion tastes trend towards ‘modest wear’.
Inbound supply chain
One would think this would also mean a fairly diverse sourcing model and hence inbound supply chain. “From an upstream standpoint looking at the way Zalora is set up, we work with thousands of suppliers and we have quite an extensive network of brands that we work with – it’s huge,” Rostin Javadi, chief operations officer, Zalora Group tells AsiaCargoBuzz.com in Kuala Lumpur.
But despite the breadth of suppliers, Zalora’s geographic spread of suppliers is fairly concentrated. “China is of course a very big one where we have her own private label we also have some other brands that come from China.” In fact, nearly 20 per cent of Zalora’s merchandise falls under its own label, with another 20-30 per cent localised products, such as the ‘modest wear’ portion and the remainder are key international brands.
Because of proximity, the China inbound is consolidated in the Pearl River Delta’s Guangzhou and shipped by sea freight direct to Malaysia’s Port Klang before moving to Zalora’s distribution centre on the outskirts Kuala Lumpur. This is handled end-to-end solely by APL Logistics.
“Then on the other side we have another big piece of the assortment that comes from Europe which is a combination of sea and air where the majority comes by air because we are in fashion and speed is definitely of the essence,” Javadi says.
A dip in lead time of more than a couple of weeks, is a dip in terms of potential sales, he adds. “So we need to be extremely efficient terms of speed from Europe,” adding that Zalora’s main European sourcing locations are Spain and to a lesser extent, the UK.
“We recently opened up from the States, so we’re also getting goods from North America, but that is definitely a smaller piece,” he adds.
In order for this all come together smoothly, Zalora partners with a handful of different freight forwarders, but at least for now, the company is not of a size or scale where it would be blocking its own capacity, especially in terms of ocean freight.
When it comes to air freight Javadi says there are a couple of routes under consideration in terms of booking capacity, but adds no decisions have been made on that as yet. The Group works with a network of 4-5 forwarding partners from APL logistics, to Panalpina, DHL Global Forwarding, etc, which gives it the flexibility it needs.
“We try to work in a way that is quite flexible, so if we need to open up new inbound routes it’s very easy for us to do that because we need to be quite flexible on the supply chain front. Things are changing very fast,” he adds, highlighting the example of Brexit. For that particular problem Javadi is comfortable with the contingencies in place amongst Zalora’s forwarding partners.
This inbound supply chain model is essentially repeated, albeit on a smaller scale for two of Zalora’s key markets: Indonesia and Philippines. Because of the two markets’ geographic complexity and size among other factors, the two markets each have their own fulfillment centres, smaller in scale than the Malaysian facility.
These are supplied locally through partnerships with local suppliers and internationally from China by sea and Europe and elsewhere by air.
Last mile fullfillment
Again the model the varies with the market. The Regional e-Fulfillment Hub in Malaysia supplies the Taiwan, Hong Kong, Macau and Brunei markets by air which is handled by Zalora’s logistics partners.
Malaysia is split between the Klang Valley (Greater Kuala Lumpur area) and the rest of the country. In the Klang Valley area most of the deliveries are done by Zalora’s own motorcycle couriers, while in Singapore its about 80 per cent Zalora.
Outside of the Klang Valley, the rest of Malaysia is through courier partners with an added air component depending where in the country the order is destined.
For Singapore, all orders are trucked, leaving the hub at around midnight and reaching Singapore for delivery the next morning. To manage this, Zalora has a 6pm cut-off time for next day delivery.
For an annual fee – for example SGD14.90 in Singapore – customers in Malaysia, Singapore, Hong Kong and Taiwan can enroll in ‘ZALORA Now’ and get free, guaranteed next-day delivery for one year, with no minimum order and a later cut-off time of 9pm, among other perks. It is in essence, a very similar concept to Amazon Prime.
In the case of Indonesia and the Philippines, final mile delivery is carried out by local courier partners that employ a mix of air, sea and land-based delivery.
In the event a customer from one of these two countries orders something not available from the domestic fulfillment centre, the item will be shipped by air from the Malaysian hub. Certain kinds of products – higher value products like RayBan sunglasses for instance, for which there is not a high demand in those two countries – are held in the Malaysian facility.
In the Philippines, where domestic conglomerate Ayala Corporation acquired a 43.4 per cent stake in Zalora Philippines in 2017, the group has recently announced the construction of a new 40,000 sqm New Fulfillment Center outside of Manila to accommodate growth.
“We’re experiencing really accelerating growth and tremendous, (especially) on super peak days. We really have had to build out a new facility,” Paulo Campos, Zalora Philippines co-founder and chief executive officer said end-March.
The build-to-suit facility will feature innovative conveyor technology and some forms of automation, which will increase the throughput, he said. The New Fulfillment Center will have a capacity of 7.2 million items, six times more than the capacity of 1.2 million items at its current facility. The new facility is scheduled to be completed by end of this year.
The Customs challenge
Certainly one of the key challenges facing Zalora in the region, is the shear regulatory variation. “It’s definitely a challenge, it keeps us on our toes,” says Javadi.
“There’s a few different angles that we take when it comes to how we approach dealing with different authorities and of course Customs is most important one when we’re talking about supply chain and logistics.”
In its three biggest markets – Malaysia, Philippines and Indonesia – Zalora works quite closely with Customs authorities. “These are the ones that are more complex from a regulatory standpoint,” he adds.
“Malaysia to a lesser extent, but Philippines and Indonesia we keep a very close eye on the regulations and very close ties with Customs. We have teams locally that are present and they work and are updated on the latest regulations when it comes to the development of new frameworks or changes in policy and we try to adopt our supply-chain to that,” he adds.
As an example, Indonesia recently initiated the use of digital declarations. “We will have a direct integration with Customs, we’re one of the early adopters when it comes to that Bto C declaration process, which is going to speed things up.” He adds that currently it takes around 1.5 to 2 days to get its packages into Indonesia and through customs. But in the future, that will be a matter of hours, Javadi adds.
“So we are very much indeed aware what’s changing and trying to be the forefront in actually leading some developments together with local authorities, so that at the end of the day, it’s a win-win for everybody, both for us and others in the industry,” he says.
With the vast differences in understanding and appreciation of the e-commerce phenomenon amongst regulators across the region, it’s important to have engagement with governments. For Zalora, it’s no coincidence it chose Malaysia for its hub.
“We’ve based our regional hub here for very good reasons. First, geographically speaking, second from a cost standpoint, but also the fact that Malaysian authorities have also been quite forward-looking in terms of the emerging e-commerce and trying to support e-commerce players, especially the pure play platform players like us.
“So overall I can say we have very good relations with the Malaysian government and we are also looking at solutions to also have direct integration with Customs. Zalora is one of the few e-commerce companies in Malaysia to hold the AEO status (Authorised Economic Operator).
The AEO status gives Zalora’s Regional e-Fulfillment Hub a form of ‘express lane’ at customs, making 24/7 cross-border movements seamless and helping Zalora provide an even faster delivery for its customers. “We continue to work very closely with them to make that even smoother in the future,” he adds.
It’s similar approach in some of the other countries Zalora operates in, “but maybe we’re not going direct, because strategically it’s bit different,” Javadi adds. Much obviously depends on the particular country. From a cross-border e-commerce standpoint, countries like Hong Kong or Singapore are very easy with little challenges to overcome.
ASEAN single market
Presumably this is where the Association of Southeast Asian Nations (ASEAN) single market initiative should help, with its aim of a free flow of goods, services, and investments, as well as freer flow of capital and skills.
“The biggest benefit for us is definitely when it comes to our China supply chain piece. So we benefit from having the certificate of origin when we import goods directly from China into countries like Indonesia and Philippines, by enjoying a much lower tax burden when it comes to importation of goods.
“I think that’s one of the biggest advantages, but there’s also other things that we’re hearing about the single Customs system and other things that are coming and I think that’s not materialised yet, but something we’re definitely playing paying close attention to.” The e-commerce company is also keeping tabs on the HS Code (Harmonised Commodity Description Code) synchronisation across the region. “Things are slowly moving,” on that front, he adds.
And given that the company is focusing on growing its local sourcing, these ASEAN initiatives will be further boosted at some point. “We’ve also started to source from some other ASEAN countries, Vietnam is one we’ve sourced from in the past and we’re opening again and Indonesia is actually becoming quite big for us, for our Muslim-wear portion.
“We actually see a large proportion of our Muslim-wear are actually being produced in Indonesia and then we import into Malaysia and sell it from here across a few markets,” he says. “We’ve a few big partners we work with, but ultimately it’s very Southeast Asia-based where we have our relationship directly with the customer,” he adds.
Tapping new markets
There are two obvious blank spots on Zalora’s map of Southeast Asia – Thailand and Vietnam. And these are both countries with surging e-commerce growth to boot. While these markets were part of Zalora’s portfolio in the beginning, the two were sold off to domestic enterprises in early 2016.
“Vietnam and Thailand for us at the time was quite a small piece of the overall pie and the fact that it was contributing to a regional complexity standpoint, adds a whole entire new dimension,” Javadi explains.
The company was also looking to consolidate its operations at the time, slimming down from six warehouses to three. “We were just trying to overall optimise the operations on the supply chain side, because we realised with such a fragmented approach it was very difficult to basically make our business work in a sustainable way.”
“Having said that, the focus for us is putting the investment into those markets that are already very big for us and already waiting in the market so we continue to expand and grow and grow through those markets.
“And later, down the line, who knows how things will evolve in the future. But the current view I think we’re quite happy with how things are progressing in the core markets,” Javadi adds.
“For now we are really focused on winning the markets that we are in,” he says citing the example of the huge markets of Indonesia and Philippines where low single-digit e-commerce penetration is the key characteristic. “And if you talk about certain price bands and aspirational global brands, it’s even lower.”
So, for a fashion e-commerce player, Zalora is really looking at the “lower side of single-digit” for e-commerce penetration.
“There’s just so much potential to unlocking our core markets where we’ve made big investments and where, actually if you look at a variety of different data sources, we’re top of mind amongst customers and definitely have the best brand awareness in these markets, so that is where we want to continue to invest and continue to grow the fastest.
“But having said that, opportunistically we are also looking at and considering other potential geographic expansions in the future,” Javadi confirms.
And aside from market penetration there are other areas to unearth growth, such as category expansion, he says. “We’re looking at going back into kids for example which is probably where we’re going to go before we consider geographical expansion.
“We are just trying to increase the order frequency of our current database, offering a better assortment. So that would be the first step and then geographical expansion could be in the pipeline in the future,” Javadi says.
Then of course, there is the elephant in the room – China. “It’s funny, that’s one that comes up from time to time,” he says with a laugh when asked about potential interest in that market.
“China is of course a very competitive market when it comes to fashion e-commerce, so we are very cautious about expansion into that territory.” And as he pointed out earlier, there is a lot of untapped potential in the region which Zalora would tap before considering such a move.
India would be another question, particularly given the fact that ZALORA’s new CEO (from early 2019), joins from India-based fashion e-commerce company Myntra, where she was CMO and head of the Jabong business. But the answer is the same… not yet.
The tech issue
One thing that is striking about Zalora’s new Regional e-Fulfillment Hub is its seeming dearth of technology. People power is very much in evidence at the facility, something that is understandable given the competitive wage structure in Malaysia.
In reality, the core of Zalora’s tech infrastructure is low key, yet vitally important. The backbone of its entire operation and indeed, its success so far, lies in large part due to its logistics and operations systems, all developed in-house with significant investment.
One example is Mobile Picking, a customised solution that transmits picking information of customer orders through mobile devices, allowing greater scalability and on-time fulfilment. Since its introduction, picking productivity increased significantly and accuracy is now at 100 per cent, due to the real-time item verification.
To process all orders in real-time, an in-house Order Management System (OMS) was developed for the Zalora Operations team to track movements of inventory into and out of its distribution centres, process orders, manage customer returns and refunds and manage Zalora’s own delivery fleets.
By leveraging innovative and cutting edge technologies, Zalora’s average lead-time from item ordered to delivered is now as low as two days for customers in the region.
But with talk of robotics and artificial intelligence for warehouses being all the rage, it does lead one to wonder what Zalora is planning down the road.
“The first up for us is around optimising the processes from a software standpoint and basically taking the efficiency level to the maximum potential. And then automation is the next natural step of course. Again we would look at that area by area, depending on where the volumes are justifying it. We are looking at some potential automation in the future,” Javadi says.
This includes looking at the use of AGVs (automated guided vehicles) for certain areas where some of the transport can be automated, and of course parcel sortation which is common in the industry.
“These are investments that we’re looking at, definitely with a view of the long term. Up until now, if you look at the total investment in the warehouse, we’ve put in about USD 4.0 million which in terms of the total infrastructure, already this warehouse in terms of others here in Malaysia, this is already advanced.”
The ‘P’ word
Profitability is something most e-commerce companies struggle with for a whole host of reasons. For the Zalora Group, it expects to achieve profitability within the next five years, according to its COO, Giulio Xiloyannis in a recent interview.
Xiloyannis notes the company has been doubling in business every year from its founding in 2012 until a slowdown in 2015, due to heavy capital injection needed to fuel the Southeast Asian fashion e-tailer’s expansion. Again, this speaks of the challenges of operating this kind of business in this region.
“Profitability is of course a very, very important factor for us, but of course also we’re investing in the market that is at the early, early days when it comes to e-commerce potential,” explains Javadi.
“Our focus and commitment to investors is more along the lines of a focus on winning market share in the region. We have a very, very strong focus on sustainability and the bottom line of course.
“So we do this balance between investment and marketing spend and other overall discounting other activities to work at the bottom line. And we’re constantly improving on that every year, showing a pretty steady track record, and improvements year-on-year in terms of the bottom line,” he adds.