Warung as The Next Frontier of Indonesian Startups

In the past years, there is a rising trends of startups and companies which aim to digitize traditional retail merchants a.k.a Warung. Kudo pioneered this back in 2014. They then acquired by Grab in 2017, and recently rebranded into GrabKios. Next is E-commerce unicorn Bukalapak who dove in in this space big time by launching Mitra Bukalapak in 2017. Mitra Bukalapak is estimated to have 3 millions registered user which makes them market leader in digital warung. Tokopedia followed on by launching Mitra Tokopedia in 2018. There are also smaller players such as East Venture backed, Warung Pintar, KiosOn and Payfazz.

This warung trend apparently not only happening in Indonesia. Amazon last week just announced their move to partner with thousands of kirana store, Indian version of warung, to be used as delivery hub. Jeff Bezos himself came down to India to launch this. There is also Mastercard which enabling multiple initiatives to digitize mom-pop store in Latin America.

In this article, i dive into the reason why the trend is happening and which direction will warung digital going to go in the near future. Lets go!.

Why Warung ?

I believe there are three things that makes digitizing Warung become sexy business :

  1. Number of Warung in Indonesia is massive
  2. For many Indonesians especially in rural areas, Warung its their first choice to buy stuff
  3. Lots of inefficiencies and problems hence huge potential of solutions

Warung is part of 67 millions micro small business in Indonesia. I cant find any numbers of total warung in indonesia however conservative number from my discussion with digital warung players is around 4 Millions. Jakarta province has 50 thousand warung while bigger province like East Java has 400k. If we average these numbers and extrapolate to 34 province, its more or less 4 to 7 millions warung nationwide. Assuming average revenue of 500k thousand per day, nationwide transaction value of Warung business is around IDR 2 trillion / USD 150 billion daily.

Warung is also the first choice to buy stuff especially in rural areas. One can assume that modern retail like Alfamaret and Indomaret as number 1 retail of choice. However total number of Indomaret and Alfamaret branches nationwide combined is around 30 thousand while number of warung in Jakarta alone is almost double of that. Warung is ubiquitous, reachable on walking distance by almost everyone in this country. As an aggregate, Warung is the biggest retail channel in Indonesia. They contribute 70% of total retail transaction in Indonesia.

However as most micro-business do, Warung has a lot of issues. Smaller Warung owners buy their stocks from bigger Warung because FMCG agents are beyond their reach. This makes their margin very small because they get retail price. Most warung owners dont separate their business money with their household money. Hence when they are big financial needs like paying school tuition, they use Warung money restock for some time. Most warung owners dont have proper accounting or even transaction records hence getting loans for cash flow issue or to enlarge their business is a problem.

Solving multiple issues for business who have massive big of a size both in terms of user and potential revenue is a lucrative business opportunities. Hence the rise of digital warung play. So where will it go from here ? i believe there are three directions where digital warung players most likely gonna go.

Converting Warung Cash-based Commerce

Money revolving around Warung is big. All of them cash transactions. Digital business such as e-commerce or e-wallet relies on cash-less transaction be it bank transfer, credit card or e-wallet. The next path of growth for Indonesia digital business is to tap in existing cashless transaction in traditional business. Targeting Warung is a strategy to onboard offline users to move their transaction to online platform (O2O).

Mitra Bukalapak and Mitra Tokopedia, both provide cheaper FMCG items for warung restock needs. By doing this, they capture transaction between Warung and their supplier which usually happen offline and in cash. On the other hand, Mitra Bukalapak enable their Mitras to accept payment via QRIS. This is also an attempt to capture commerce activities from Warung owners and their buyers. E-wallet players stands to benefit from tapping this kind warung transaction. Currently only Gopay who put significant effort in tapping the lower segment. Ovo, Dana and LinkAja still focused on acquiring users in modern channel. For both e-commerce and e-wallet companies, converting offline commerce in warung could extend addressable market share by a huge mile.

Solving Warung Financial Needs

Next problem to solve in Warung is financial services. Warung has fast turnover but they often have cashflow problem especially in times where people have big spending like school term days or after Lebaran. No cash means no restock, hence warung revenue could decrease or stop for a while. For this kind of problem, they need small amount of loans to restock and kick start their cash flow again.

I wrote about designing loan products for various micro-segment including warung. Read it here.

For medium to big size warung with direct access to FMCG distributors, they usually get payment terms facilities which they can buy stock now and pay in the next 1 or 2 weeks. Latin America’s fintech startup Tienda Pago provide this services, short term financing for Tiendas (Spanish for warung) to restock their goods. This is similar to Paylater feature which currently on a hype amongst millenials and geared toward consumptive purchase. I believe short term 1 or 2 weeks Paylater model can be beneficial for Warung especially for restock.

So far, only Mitra Bukalapak offer financing feature in their app. Akulaku, Ant-financial backed lending startups, have Akugrosir similar warung app like e-commerce mitras which still under the radar. Big chance they might also offer financing features to warung.

Capturing Warung Transaction Records

Continuing from last point, what if owners wants to apply for bigger loans to expand their warung ? Main problem is most warung owners dont have financial history (because all transaction is cash) and no accounting records.

This is an opportunity to provide solution to digitize warung records. Warung has high frequency, small amount transactions. Recording it one by one is quite an effort. The challenge is not only make the process friendly for warung owners but also give them immediate carrots to use it regularly.

Last October, P2P lending Modalku invest in Paper.id, invoicing software for SME. Modalku aim to give financing features for Paper.id users. Modalku as lending platform can get business data from Paper.id users to asses and offer them loans. On the other hand, users get more incentive to use and record their business activities in Paper.id more often. Because they can get bigger loans.

I believe similar model could work on business app targeting warung . Tie the record directly with loan facilities hence users have immediate benefits to record more often.

Another alternative approach came from India. OkCredit and KhataBook are two Indian startups who digitize Udhar Katha or loan book. Its common for warung in India to provide their customer with informal credit. To track this, owner write each customer and their outstanding loan in an Udhar Katha. Both startups aim to help warung track their loan and help them collect from their customers. Using these approach, Warung owners gets immediate benefits from recording transaction as they can collect loans easier.

Thank you for reading. There are also good write-up on new-retail concept which includes digital warung in DailySocial. Go check it out as well.

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