How Shopee’s Rise to Stardom Became its Double-Edged Sword

A cautionary tale of international expansion and a case study into Shopee’s successes and failures.

In 2022, we witnessed a Titanic. From Shopee’s rise as a South East Asia e-commerce juggernaut to a 90% stock price decline in its parent company, Sea Limited, we’ve all been left wondering — “What sunk Shopee’s international voyage?”

Was it overcompetition in target markets? Perhaps…unsustainable marketing promotions post-COVID? Unfortunately, these problems were just the tip of the iceberg…

The Context:

Shopee Pte. Ltd. (Shopee) is the e-commerce segment of Singapore-based company Sea Limited (Sea). In 2022, Shopee began experiencing significant setbacks. Its aggressive expansion into Asia, Europe, and South America began pausing with operation withdrawal from India and France. Now, as Shopee continues ending operations in Latin American countries like Chile, Colombia, and Mexico due to “elevated macro uncertainty” and European involvement with Spain, and Poland due to oversaturated competition, we are left with a difficult case. Sea Limited’s stock already saw a painful 90% drop from around $360 to about $40, and increasing investor worries about cash-burning unprofitability have left us at strategic crossroads.

SWOT Analysis

To first understand the underlying business model of Shopee, I find that a SWOT analysis or Porter’s 5 Forces Analysis does best. In this case, I chose a SWOT analysis to focus on the company itself. In cases where competition becomes more prevalent, I tend to use Porter’s 5 Forces.

Strengths:

• C2C marketplace and mobile-centric app: C2C, or consumer-to-consumer, was a strategy that Shopee used to displace Lazada, who used a business-to-consumer model (B2C). Due to SE Asia’s large amount of small businesses, this C2C model was effective in penetrating their core markets and improving customer stickiness.
• Late-movers advantage: By the time Shopee entered the market, the foundation of E-commerce education and infrastructure was already laid out by its competitors. Furthermore, due to internal strife in Lazada, disgruntled Lazada managers who pivoted to joining Shopee brought early-day expertise to Shopee’s novel C2C/B2C hybrid.
• Free Fire’s cross-promotion: On top of Shopee, Sea Limited also had a gaming branch: Garena. Garena’s most popular game, Free Fire, helped cross-promotion for Shopee. Brand recognition and consumer trust funneled millions of gamers to adopt Shopee.
• Hyper-localization: Unlike Lazada who had a unified app across the entirety of SE Asia, Shopee had a distinct app for each country! This allowed catered social media ads and local vendors’ brand deals. Coupled with regional non-equity strategic alliances with courier providers, Shopee was able to get familiar with the delivery situation in different countries. Data from Garena also aided this process.

Weaknesses

• Over-reliance on Garena synergies: While Garena did help Shopee acquire an unprecedented amount of early adopters, it ended up limiting its scope of market expansion after the end of COVID-19. With gamers going back to work or in-person school, Shopee lost its foothold in its strongest promotion strategy. This would end up catalyzing to weak brand promotion outside of regions that Garena had already penetrated, especially when expensive local celebrity promotions became ineffective (see France).
• Dependence on Local Partnerships: Despite short-term value, excessive strategic alliances lead to long-term limits for in-house supply chain infrastructure and logistics, especially during hasty expansions. This lack of ownership of core capital would bite Shopee back when even one region in its aggressive expansion strategy faltered.
• Association with Chinese goods: Shopee’s China Marketplace lead to worries of compromised product quality in floods and lowered consumer perception, exacerbating fundamental issues. This became prevalent in India, where high mobile fraud was plaguing the country.

Threats

• Winner-take-all dynamics of E-commerce: In the retail industry, the zero-sum game leads to competitive and intensive price wars, expensive innovation, R&D, and investments to prevent security breach worries.
• Geopolitical tensions: Recent conflicts such as the Galwan Valley and Sino-Indian boundary disputes contributed to India’s ban on 59 Chinese apps, hurting Tencent (a large stakeholder in Sea Limited), and ultimately Free Fire. It also worsened overall relations between India and Shopee.
• Post-pandemic demand slips: Shopee feed, Shopee’s advertising arms in live-streaming, alongside Garena, tanked in traffic with the end of the pandemic. As Brick-and-mortar shopping returns, Shopee’s limitation to only physical stores in Taiwan hurt its competitive moat in other areas where competitors have made their name.

Opportunities

The opportunities that my team and I identified here are hints toward our solution. Here's a taste of what we thought of. Leave your ideas in the comments for what you think Shopee’s next plans could be.

• Social entertainment integrations: Shopee already deals with food and shopping. Its next steps could be ways to engage and be featured in parts of a consumer lifestyle even further, starting with community and live companionship to increase customer stickiness and provide a “one-stop-shop” for all entertainment, needs, and wants. A breakthrough in social commerce in particular could present a “scrolling, sharing, and shopping” business model.
• Collaborations with manufacturers, merchants, and government: Working hands-on with institutes like what Amazon and Flipkart did in idea could mitigate commerce regulation risk, reduce cash intensiveness, and open up Shopee to new addressable markets.
• Emerging market opportunities: Striking areas with growing digital E-commerce and payment adoption initiatives, especially those with strong supply chains and infrastructure (less time intensive). This would allow for Shopee’s commerce routes to already be established, and hinge on areas with growing digital literacy.

Issue Diagnostic

Circling back to the “iceberg” of problems, Shoppee’s main issues could best be spotted in the context of its pullout from France and India. While I touched on them slightly in the SWOT analysis, here are the main issues that I have identified.

Logistics and Scams

Entering India was almost a no-brainer for Shopee. Its market size was estimated to hit around $120 billion by 2025 and continue growing exponentially into 2030. Despite this, India’s first setback arose from another issue: an oversight of differing physical infrastructure and digital literacy environments.

Inadequately maintained roads and a low number of national highways created the breeding grounds for supply chain disruptions and inventory cost hikes. Coupled with India’s nearly 500% explosion in E-commerce fraud between 2016 and 2019, consumer skepticism was not unwarranted. Shopee’s lack of initiative to find anti-theft measures like Flipkart, or work with local institutes like Amazon had done, put it at an early disadvantage.

Geopolitical Troubles

Additionally, Shopee soon became entangled with a second pain point: an inability to implement its playbook per merchant and regulatory sentiment. With the Indian government believing large E-commerce corporations would threaten domestic vendor success, Shopee found itself in a maze of political scrutiny. For example, the Confederation of All India Traders advocated for the ban of Shopee to support local retailers recouping losses after COVID amidst an antitrust investigation on foreign E-commerce practices.

Business Model Falters

In France, we can spot what I believe was Shopee’s last main issue: a lack of synergy with Garena, Sea Limited’s gaming branch. Given Shopee’s mobile-centric approach, this failure was a main factor in losing to better-scaled and capitalized competitors like Amazon. Unlike its early success in Latin America, a combination of weak offline-online retail and second-hand E-commerce relative to Amazon and eBay left this European pilot project in a world of trouble. Added to the fact that French consumers were simply not as responsive to campaigns and shopping festivals, Shopee found itself juggling unprofitability and failed brand penetration, with no choice but to leave and restrategize.

Looking Forward:

In the most recent earnings call with Q3 2023 earnings call back in November 2023, Shoppers current plans is the reach immediate profitability and sustain its platform’s scale and market leadership in core regions. With news that Free Fire has reopened in India, it will be interesting to see how management will continue to take Shopee into the new year. Leave your questions or thoughts about how you think Shopee will continue to grow. For those with relatives abroad or knowledge about using Shopee in the US, how has your experience with it gone? I myself have many relatives in Southeast Asia, and I would love to hear your thoughts as well. Till next week!

I am not a financial analyst, adviser, or economic professor of any sort; my articles are strictly for educational purposes. This Case Study article was inspired by a competition I recently participated in, the 2023 Harvard Crimson Global Case Competition. The case study’s regional case was on the company Shopee and built around solving the issues revolving around its international strategy. The actual case has already been released here. Once the global round results come out in a few days, I will publish another piece on the context behind the 2nd case study brief.