ro uncertainty and the fierce competition in his e-commerce business in Southeast Asia, where Shopee has been operating for eight years: “Despite the macro volatility,” Li told investors, “Shopee’s business remained resilient. And we have made significant progress in deepening our competitive moat by strengthening our cost leadership and uplifting the user experience.” That moat will need to be not just deep but wide as well, built not to withstand catapults and maraudinginfantry but rather slowing regional economies and e-commerce upstarts like TikTok, which wants to increase the merchandise value of its sales to US$20 billion this year. If it were able to fulfil its ambition, and it certainly isn’t implausible, TikTok would be raking in 27 per cent of Shopee’s 2022 gross merchandise value (GMV), a bite out of Southeast Asia’s market large enough to focus the minds of incumbent players. TikTok’s initial focus on Southeast Asia for its growth would put the likes of Shopee, Lazada and GoTo’s Tokopedia unit right in its wheelhouse. TikTok’s ambition is politically fraught but not implausible given its ability to engage its Asian social media users and expand the user base. Longer term, TikTok probably has even bigger fish to fry, including a slice of Amazon’s market in the US. Given that the company is under the microscope for other than economic reasons, conquering the US may turn out to be problematic, but the dominant players will not be taking the threat lightly. Least of all Shopee, which has spent much of the past year veering from a full-on growth strategy to one that balances growth with the pressing need for profitability. After racking up losses amounting to $5.3 billion from 2020-22, the pivot was certainly due. Now profitable The company has been making good on its promises and in the first quarter of 2023 it turned a profit.Company revenue came in at $3 billion, an increase of 4.9 per cent year over year. Of this, e-commerceaccounted for $2.1 billion, up 37.3 per cent from last year. The marketplace component of revenue, whichconsists of commissions, advertising and logistics services, was $1.8 billion, a year-on-year increase of45.5 per cent. Net income for the first quarter was $87.3 million, an impressive turnaround from the loss of $580.1 ayear ago. While the top line grows, operating costs are down While the top line impressed, the operating cost line was even better: particularly eye-catching are e-commerce sales and marketing expenses, which decreased by 51.7 per cent. Marketing and staffing had been big cost centres and the company started making serious layoffsbeginning in the second half of last year, with reports suggesting it had lightened itself of around 7,000employees over a period of not much over six months. More layoffs have followed this year and the topmanagement at Sea Limited have made it clear that the goose is not afraid to follow the gander, if notcompletely out the door: executive pay, travel and other perks have come under the axe. Shopee hasalso toned down its marketing, which had included big spending on celebrities like K-pop band Black Pinkand footballer Cristiano Ronaldo. At the same time as costs have been cut though, some services have actually improved. For example, Li pointed to efficiencies in logistics that have enabled Shopee to reduce average delivery time by half aday. Upside for commissions Shopee’s ‘take-rate’, or percentage of GMV taken by the platform as revenue via commissions andadvertising fees, is relatively low. For example, Shopee’s commission for retail partners on Shopee Mallmax out at about 6 per cent, while for local marketplace sellers on its platform the commission was onlyrecently increased from about 2 per cent to 2.5-4 per cent, depending on the category. The fees are set at an attractive level to draw in new sellers and retain existing ones. The industry benchmark for take-rates isprobably Amazon, whose average commission is roughly 15 per cent, so although local markets in Southeast Asia (and Brazil where Shopee also operates) may have lower thresholds of tolerance, Shopee may nonetheless have material upside. Investors still sceptical The strategic pivot toward profitability and away from growth has done little to buoy sentiment amonginvestors. Sea Limited’s stock price continues to wallow, but this is also in part due to Sea’s gamingbusiness which has taken some hits and tarnished the shine on its e-commerce segment. The company’sshare price reached a year-to-date high of $88.07 on 15 May, but has since subsided by almost 30 per cent. From an e-commerce perspective, though, Shopee has another little problem, which is that muchof the upside for e-commerce in the region is in groceries, which have low penetration, probably stillunder 10 per cent. Unfortunately for Shopee, groceries and fresh food are not really its strong point. Itfocuses instead on fashion, health and beauty, and home goods, which tend to have higher margins.That’s ok, except that its competitors — TikTok among them — are starting to make inroads in the samecategories. This brings us back to the depth of the moat. Shopee is still clear market leader and, speakingmetaphorically, its castle is the Mont-Saint-Michel of Southeast Asia’s e-commerce industry. It has madedramatic strides to get there, considering it was behind or neck-and-neck with local competitors in everymarket except Vietnam not long before Covid. Ironically, its biggest challenge may not be on the outside, but rather the drag from its own gamingbusiness, the revenue from which has declined in every quarter for the past year and now sits at little more than half of what it was 12 months ago. As it deepens its moat and strengthens its fortifications,this is a company that needs, more than anything, to beware the enemy within.