Gojek + Tokopedia: Princes of Indonesia Commerce
Burn cash, Build Market Share, Join forces, Sell. Repeat.
This is the first of a series of the Indonesia's e-commerce and Fintech players. In this post, we'll cover GoJek + Tokopedia and what a merger might mean for them and their closest competitor.
Tokopedia is the #2 shopping site there, behind Shopee. Gojek is arguably 1st or 2nd with Grab there, having 100 million users.
The way e-commerce and ride-hailing is ongoing, is to see a convergence - everything facet of daily life is an online transaction, done through platforms. That's why digital banks are a big thing, apart from games, groceries, shopping, and so on.
Along with this strategy, Gojek invested in Bank Jago to provide banking services to unbanked populations, specifically in Indonesia. We would have to see if their integration and especially UX passes the "customer test" - that is if they are readily accepted.
GoJek has also rebranded itself from its ride-hailing pure-play, into one that does "on-demand services and payments".
GoPay was introduced, which would help funnel users towards Jago for their bank accounts and form their financial ecosystem link with other services.
Build other services takes time - so why build, when you can buy or partner?
We want to look at synergy. Tokopedia first started out as a marketplace, then moving into fintech, payments, and logistics. Standard e-commerce approach.
Their logistics arm supports e-commerce. Penetration has reached 98% of Indonesian districts, so it would make sense that a GoJek-Tokopedia merger proceeds without cross-cutting concerns - operations for GoJek remain for ride-hailing and food delivery, while Tokopedia's logistics focuses on item deliveries.
There is Mitra Tokopedia, focused on letting small business owners to sell digital products. These are items such as data packages for phones, electricity tokens, and game vouchers. These can be easily integrated onto Gojek's App. Vice versa, ride-hailing services can go onto Tokopedia in this section of their app, or as another.
Fintech and Payments are where Tokopedia can integrate into anywhere that requires a transaction. GoJek already has payments and Bank Jago - there would be a need to streamline the payments flow into one, otherwise, there would be unnecessary transaction fees.
Tokopedia mainly has digital wallets rather than a payment service such as Gojek's, so this bodes well. Additionally, other financial products under Tokopedia could be distributed by GoJek or Bank Jago. These are their investment products, merchant loans, virtual credit cards and insurance products.
No investor just wants to sit on their investments without returns. Especially with private companies, where liquidity is concerned, it might be easier to cash out via the public markets.
A traditional IPO is one path, but this may take a year or so and significant costs/fees. Instead, why not go the SPAC route?
Specifically for Tokopedia, Peter Thiel's and Richard Li's fund, Bridge Town Holdings, has considering merging their SPAC with Tokopedia in December 2020 and eventually making it public. Softbank has its own SPAC, which may make more sense since it is its own portfolio company.
I'm keen to see where this leads should GoJek and Tokopedia merge instead.
What is a SPAC
Short for "Special Purpose Acquisition Companies", these are strictly created to acquire an existing company. A common use for these back in the 2000s were Chinese companies reverse-merging SPACs to list themselves onto NASDAQ or NYSE.
Not saying that all companies listing this way are frauds. However, it can be difficult to tell if the figures are correct or not, as compared to an IPO prospectus.
SPACs are also known to be called "Blank-cheque" companies because there are no formal business plans - only financial models to acquire and list!
SPACS have 2 years to complete an acquisition, or they must return capital to investors.
Based on these mechanisms, one could see why this is an attractive way to IPO, especially in today's volatile times.
What This Means For Grab
Cashflows and Projections
For ride-hailing, Grab will have a more difficult time sustaining their business in Indonesia. GoJek is a tough competitor in food delivery in Indonesia.
Additionally Grab is projected to keep making losses into 2023. There is also a risk that their "Outstanding convertible redeemable preference shares (CRPS) will become redeemable any time after June 29, 2023".
CRPS is made almost all of Grab's total debt, estimated at 5-6 of cash, according to DealStreetAsia.com. If Grab cannot list by then, the company will face unsurmountable tasks to refinance those shares, unless they are approved by the board for an extension.
i.e. Grab is looking to list by June 29, 2023. If they only list once they are profitable, it would mean a rush to break-even in ALL business lines. Additionally, there is a deadline to do so to avoid a large payout to Uber (Uber's 27.5% stake in Grab for its exit).
According to president Ming Maa, group revenues are "well over 100 percent" of pre-COVID levels, while" monthly EBITDA spend reduced by 80% in the last 12 months for ride-hailing across all eight markets, including Indonesia".
Food delivery net revenues nearly tripled y-o-y, and the number of new food merchants doubled to almost 600,000.
It may be more attractive if they do more tie-ups with Lazada or Bukalapak - it is very different for a partnership as compared to a merger.
We only see tie-ups with specific products. An example is Grab's partner Ovo and Lazada in Indonesia, or GrabFood in Lazada, cross-platform vouchers, and food review via Lazada Livestream - but only in Vietnam. This cross-pollination makes sense given that Grab and Lazada are both linked to Softbank.
To elaborate further, Softbank has a neat portfolio that has a lot of synergies when it comes to merging businesses where needed. In 2021, they may see 3 listings in Didi, Coupang, and of course Tokopedia. at current valuations of $60, $30 and $10 billion respectively. That's lots of cash raised for each company, lots of options for expansion, or for Softbank to use to mobilize other assets.
Additionally, Grab's plans for financial services / digital banks will affect overall profitability over the next 2-3 years. More investment is likely to tide them through their cash burn.
The scope of E-commerce and Fintech would start to blur.
1.5% mortgage over 20 years, with free $150 monthly coupons on rides and shopping anyone?
SuperApps costs money to maintain, and it is a winner-take-all game. Super companies need to either raise lots of cash to burn, or become profitable in one 'engine' to sustain their other service operations.
Chicken and egg problem for sure - the same for any platform company. The difference is that with one service profitable or having scaling advantages, this enables the whole business model to work (i.e. become break-even or profitable.).
These advantages can be leveraged for other services, with a reduced acquisition cost per user and possibly higher take-rate when combined with other offerings.
Competition is likely to increase - up till a point where one company, under pressure for investment returns or poor execution, decides to give in. The landscape might change then.