The long, bumpy road to profit

By Sherilyn Goh

While often touted as one of Malaysia’s Internet pioneers, little has been written about the difficult early days of Lelong, which saw the business posting seven consecutive years of losses at one point. The startup was also born during the dotcom crash. Richard Tan tells KINIBIZ where the staying power came from, and how the business is set to be in for the long run.

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Lelong has had its fair share of headwinds since the late 1990s. While widely recognised today as one of Malaysia’s Internet pioneers, very few recall that as the business entered its second year in 2000, the dotcom crash arrived before the e-commerce startup had time to get on its feet.

The homegrown e-commerce giant also posted seven years of continued losses before finally turning around in the year 2005. Here, the 54-year-old dotcom entrepreneur and co-founder of Lelong shed light on where the staying power in the early, difficult days came from.

“During the first five to six years, everything was free. We did not charge anything but sustained ourselves and Lelong by providing hosting (services), doing e-commerce projects, developing content management software, and selling them to companies.

“All that you see now from payment systems to marketplace, we have built ourselves, which, in a way, also provides us with the flexibility of working with the different needs of retailers.

“That was our bread and butter,” he recalled.

According to Tan, Lelong has only come to earn a small portion from transaction fees since about four years ago, while it has yet to monetise fully many of its other store features.

Commenting on the dotcom crash and its impact on the business, he said: “I don’t think we actually had an Internet boom in Malaysia. Before we saw it coming, it was already crashing.”

“But I think the way forward is to focus on long-term growth. We have been here this long because we are very focused and believe that there is a place for e-commerce in our society and ecosystem,” he said.

On the dotcom bubble, he added: “People should not look at it as a dotcom boom kind of thing. People should look at it as the Internet enabling more aspects of your supply chain, of how technology can enable your business, and what your business stands to gain from the Internet.”

Lelong as an ‘enabler’ for business

Choosing to keep his feet on the ground, the humble entrepreneur is still very much involved in the day-to-day operations and management of the company.

The way Tan puts it, the company prides itself in being an “enabler” for aspiring business owners.

For under RM500, an individual can set up a store on Lelong, which Tan dubbed a complete “ecosystem” readily boasting a traffic of seven million unique visitors per month, a community of 7,000 active sellers and over 750,000 recurrent buyers.

“Lelong already has the traffic of a physical mall. We allow sellers to have an online presence by targeting the seven million users who come to the site.

“But if you say you want to get that number of users through setting up your own site, it’s not that easy. You need time and you need a lot of money to reach that level,” he explained.

Tan sees Lelong’s stakeholders as both the buyer and the seller community, maintaining that it is Lelong’s duty to serve the interests of both parties in order to keep its “ecosystem” working and sustainable.

“If we get a situation where a seller is forced to sell everything below cost or at a subsidised rate, the model will not last.

“In business, you must have certain margins. It is our duty to ensure they can differentiate the product and sell it with some kind of margin to ensure that the business survives in the long term,” he said.

On the buyer’s end, Lelong also counts itself as among the few online stores which provide a buyer protection programme. In Lelong’s case, buyers are protected for up to RM1,000 when they purchase their items via the payment gateway Netpay, in order to inspire consumer confidence.

Brick-and-mortar here to stay

When asked about the growth prospects of the e-commerce market domestically, here’s what Tan had to say: “In terms of Internet banking, online ticketing and payment, we are regarded as a sizable market, with considerable advancement in the region.”

“But when it comes to physical products, we are still lagging behind some of the more developed countries. The proportion of product-based e-commerce to total consumer spending in the US is around 8% to 9%, South Korea has about 15%, while China around 7% to 8%.

“In Malaysia, we have merely 1%, which leaves us with many opportunities and room for growth,” he asserted.

According to Tan, e-commerce in this climate should not be seen as a substitute to brick-and-mortar businesses, but rather a complement or, in his own words, an “enabler”.

“We would like to be seen as an enabler for all retailers, for both people selling online and offline, rather than as a competitor. We have to understand that, even in mature e-commerce markets, 90% of business transactions are still conducted offline,” he said.

While the dotcom entrepreneur hopes to see e-commerce taking a bigger slice of the consumer spending pie, he is of the view that the offline market will not entirely disappear, but merely merge with e-commerce in search of a new synergy.

“We are not competing with offline businesses, but we would like to provide them with the ecosystem to come on board very easily through the setting up of an online store, even when they have a physical presence.

“That’s what I tell businesses: being visible augments your chance of selling your product. A lot of people may not buy online, but they search online,” he said.

Tan’s views on intense competition

2012 was a game-changer for the local and regional e-commerce scene. The year saw the entry of Rocket Internet’s Zalora and Lazada, among others.

Rocket Internet, for one, employs a modus operandi of building startups from scratch, and on an industrial scale and speed, with a standardised procedure of recruiting local entrepreneurs and parachuting in professional managers, and a ferocious aspiration to become “the world’s largest Internet platform outside the US and China”.

When it comes to the fierce competition in the e-commerce and online shopping market today, which he says resembles the “war for eyeballs” in the early 2000s, Tan has his own views.

“Every competitor is formidable, we do not underestimate anyone. But it is also about growing the pie. If we have 1% growing into 3%, then the pie increases. However, if one single player is to grow the pie on its own, it becomes a very expensive exercise.

“With more players in the market, we have more people educating consumers, so the market of people willing to buy online also increases.

“It is good for the business and the ecosystem, but of course, how to benefit from the now-enlarged pool is another story on its own,” he said.

Outlook for e-commerce sector

Given the meek prospects for the retail sector in the second half of 2015, which saw the Malaysian Retailers Association revising its projected sales growth for the third time to 4% earlier in July, Tan, when asked on the outlook for e-commerce sector, said: “Whether online or offline, when the implementation of the goods and services tax impacts on consumer confidence and sales volume, it impacts across the board.”

“If I say that it hasn’t affected transaction volumes, it would be a blatant lie. With our exchange rate now and the depreciating ringgit, some of the offline businesses may not even be surviving with a now-reduced margin,” he said.

As with how Lelong has, time and again, proven to be constantly thriving in the face of adversity, Tan noted that the changing business environment may just be an opportune timing to provide the e-commerce sector with a paradigm shift by expanding the trading community online.

“When the purchasing power is less and when the cost of doing business with a physical presence is increased, it may well accelerate the shift to online buying, and for offline sellers to go online – that is if we are able to significantly reduce the cost of doing business online,” added Tan.

In for the long haul

At a time when other dotcom entrepreneurs like Mark Chang of Jobstreet have already cashed out of their ventures, Tan doesn’t seem to be slowing down with Lelong poised for growth despite facing a more challenging business environment ahead.

Commenting on his reception towards mergers and acquisitions, or even a buyout by Rocket Internet, here is what Tan has to say: “If it makes sense for the business and everyone else, then yes. We are all entrepreneurs with a lifespan.”

“When it is going to happen is an unknown, but we have self-funded the business for a long time and it is operated by a group of people who understand the business. No business just happens overnight,” he added.

Asked on future plans for Lelong and the possibility for an initial public offering, Tan remained coy while not dismissing such an eventuality.

“I will let you know when I’m in the process of pursuing it,” he chuckled.

Yesterday: Lelong bids its way to the top