By and  on April 30, 2013

SINGAPORE Zalora's headquarters in downtown Singapore are more than 8,000 miles away from Silicon Valley, but everything from the foosball table to the open-plan office setup screams startup culture.
 
The only idiosyncrasy may be the clothing racks and piles of shoes in one corner, for the company is perhaps the largest in an increasing number of fashion and beauty e-commerce ventures to have set up shop in Southeast Asia to target the region's fast-growing economies.
 
They range from the likes of Zalora, which is majority-owned by Rocket Internet, the German technology incubator behind the European e-retailer Zalando, to more obscure firms like Bellabox, which sends trial beauty products to subscribers every month.
 
Many are being courted by venture capitalists from outside Southeast Asia who are eager to own a slice of firms enjoying double-digit month-on-month growth. Statistics provided by Zalora's management indicate that the company is growing at between 10 percent to 20 percent each month across the six Southeast Asian economies in which it operates. According to Bellabox co-founder Emily Hamilton, sales at her start-up have grown 10-fold since late 2011.
 
Industry-wide statistics tell a similar story. According to figures from research consultancy Euromonitor, customers in Singapore, the Philippines, Malaysia, Thailand and Indonesia spent a cumulative $355.7 million online on apparel and beauty products in 2012, up 35 percent from $263.6 million in 2010. (Though also part of Southeast Asia, Brunei, Burma, Cambodia, Laos, Vietnam and East Timor are often excluded from such reports due to the small size of their consumer markets)
 
Until recently however, fashion and beauty e-commerce in the region was dominated by Western retailers like Asos, which provided for wealthy customers willing to pay hefty sums for shipping, or grey market entrepreneurs who operated through loosely regulated online forums and "blog shops".
 
"The grey market was an especially big problem for the beauty industry because there can be harm from wearing a fake product," said Alexis Horowitz-Burdick, who founded Luxola, a Singapore-based cosmetics e-retailer that operates in six other regional territories. "The big brands were looking for partners who play by the rules."

Financing from Singapore's government, eager to boost the city-state's fledgling creative industries, has helped legitimize these firms. Luxola and Inverted Edge, a website that exclusively retails designers from the Asia-Pacific region, received early funding from incubators backed by the state. Last month, the Japanese venture capital firm Gree put $2 million into Luxola and in the past year, JP Morgan and Tengelmann, the department store operator, have taken stakes in Zalora reported to be in the double digit millions.
 
Many of these firms say that the infusion of capital will be used on expanding product selection and marketing, with entry into larger markets elsewhere not a near-term priority.
 
Horowitz-Burdick cited the lack of first mover advantage in China as one reason why the Middle Kingdom is not of immediate interest. "In China, the grey market is dominant and when it comes to legit e-commerce, you already have sites that are run directly by Estée Lauder and Sephora," she said.
 
Both Horowitz-Burdick and Harry Markl, Zalora's managing director, cited Chinese protectionism in the form of onerous import duties as another barrier to entry.
 
Inverted Edge is approaching its business from the standpoint of helping small but growing brands reach international consumers, both within the region and elsewhere, such as in Europe, North America and the Middle East.
 
"You've got this kind of global citizen designer, very entrenched in Asia and the Pacific, but with such a worldly approach to design," said Debra Langley, founder and chief executive operation of Inverted Edge. "And I suddenly thought, why isn't anything going that way [from Asia to the West]?"
 
Langley said that she and her team are careful to only choose those designers whose products are suitable for a global consumer, but also notes that the appetite among Western consumers for something new and different is definitely growing.
 
After several Asian designers, including Richard Chai, Alexander Wang and Thakoon Panichgul, "made it OK to be Asian and successful," Langely believes more and more people will start to look to Asia for unique, creative pieces. And while many young designers may be interested and have an appetite for cross-border sales and marketing, they simply don't have the resources or know-how, which is where Langley's team steps in.
 
Despite the recent growth in regional e-commerce, there are numerous challenges facing online-only stores in Southeast Asia, with logistics being particularly problematic.
 
While many sites offer next-day delivery services, "local logistics firms weren't reliable or they were too expensive", said Zalora's Markl. In Vietnam for instance, his company invested in a fleet of 20 motorcycles to ensure smooth last-mile delivery.
 
Despite growing middle class incomes in emerging nations like Indonesia, Southeast Asian consumers can be suspicious of spending large sums on goods they have not tried on.
 
This affects the product selection on offer, meaning that midmarket items tend to sell best. "You can get the $30 dress anywhere in Asia whereas at the really high end, Western labels dominate," said Langley of Inverted Edge, where many items are priced in the low three digits.
 
While Luxola carries over 1,000 different products from 60 brands, the most popular items are cheaper products like brushes and nail polish. "If you really hate the color of your nail polish, it's not the end of the world," said Horowitz-Burdick.
 
Collecting payment is also an issue. Unlike China's UnionPay, there is no single dominant credit card provider in the region and even in Singapore, the region's financial center, some retailers still prefer payment in cash.

 

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