Money-losing E-commerce Operators Face Critical Test in S. Korea | Be Korea-savvy

Money-losing E-commerce Operators Face Critical Test in S. Korea

A delivery man for Coupang Inc., South Korea's leading e-commerce operator, loads a parcel delivery truck in Seoul on Aug. 8, 2018. (Yonhap)

A delivery man for Coupang Inc., South Korea’s leading e-commerce operator, loads a parcel delivery truck in Seoul on Aug. 8, 2018. (Yonhap)

SEOUL, Apr. 22 (Korea Bizwire)E-commerce is thriving in South Korea on the back of fast delivery and competitive pricing, but mounting losses by major operators are raising questions whether their business models are sustainable in the face of increasingly toughening competition, industry insiders said Monday.

The e-commerce industry has seen explosive growth in Asia’s fourth-largest economy in recent years as more people buy all kinds of things via mobile phones, ranging from household items to breakfast menus, which arrive the next day or even within hours.

The nation’s online shopping transactions reached a record high of 111.8 trillion won (US$98.4 billion) last year, which puts South Korea on the list of the world’s top five, with mobile purchases accounting for 61.5 percent of the total, according to Statistics Korea.

But despite a dramatic surge in sales in terms of transactional values, leading e-commerce players have logged huge operating losses amid the cut-throat price competition and aggressive marketing, coupled with big investment in the logistics and delivery system.

Coupang Inc., the nation’s No. 1 e-commerce company, posted an all-time high of 4.42 trillion won in sales last year, but it logged 1.1 trillion won of operating losses, its financial reports said.

Its operating deficit has continued to widen from 547 billion won in 2015 to 638.8 billion won in 2017, which amounted to around 3 trillion won over the past five years.

Coupang was able to expand its presence in the online channels thanks to its Rocket Delivery launched in 2014. It started Dawn Delivery in October last year that allows orders to be placed as late as midnight for arrival by 7 a.m. and offers delivery service for fresh foods that arrive within hours of their purchase.

Unlike other online market places relying on brokerage fees from registered sellers, Coupang has established its own logistics network and employed the Rocket Men couriers to provide differentiated delivery services.

While years of deficits must ring the alarm for the 9-year-old company, its CEO Kim Beom-seok has repeatedly said they are “planned losses,” vowing to keep investing to strengthen its leading position.

“We have pushed for massive investment to impress our customers and will continue to aggressively invest in technology and infrastructure,” Kim said in a release.

Coupang is not a public company, and its business relies on funding from outside investors, including Japan’s SoftBank Group, known for strong appetites for innovative startups.

SoftBank Group channeled $1 billion into the firm in 2015 and $2 billion more in November through its investment arm, Vision Fund.

Though Coupang has changed the landscape in the nation’s retail industry and threatened brick-and-mortar shops, the firm isn’t actually making any real money yet, and it is unclear when and whether it will turn to profits

The situation also doesn’t look good for its smaller rivals, which have followed suit of Coupang to offer fast delivery and promotional coupons.

Models promote TMON Inc.'s time-specific discounts during an event held in Seoul on Dec. 9, 2018. (Yonhap)

Models promote TMON Inc.’s time-specific discounts during an event held in Seoul on Dec. 9, 2018. (Yonhap)

TMON Inc., formerly known as Ticket Monster, posted 492 billion won in sales in 2018, up 40 percent year-over-year but booked 125.5 billion won in operating losses, its financial statement showed. Its accumulated losses since 2000 are expected to have reached 770 billion won.

The company recently attracted additional funding of $50 million from its major foreign shareholders, Kohlberg Kravis Roberts (KKR) and Anchor Equity Partners, which own a combined 80 percent stake in the retailer through previous investments.

The company attributed the operating losses to huge investment in core technologies, including a new broadcasting studio for its own commerce live show and time-specific sales events, which offer discounts on various items for a limited time.

“Customers frequently visited our app on expectations for new products and promotions changing every hour, which raised their royalty and created a virtuous cycle,” TMON CEO Lee Jae-hu said in a press release.

“We will continue efforts to strengthen the market position and seek ways to improve profitability this year.”

Market watchers say the fledgling e-commerce players are also positioned to face an uphill battle with traditional retail giants, which are jacking up investment to expand their online channels to win back customers.

“The toughening price competition driven by easy price comparison sites and strong influence by offline retailers pose challenges to online-only operators,” Kim Myung-joo, an analyst at Mirae Asset Daewoo, said.

“Coupang should acquire a considerable market share in the online market to create profits due to its high rate of fixed costs.”

If the price competition continues with aggressive promotions and advertisements, companies are expected to find themselves stuck in a “chicken game,” in which only a few will survive after the discount death spiral.

In that case, some observers expect retail giants, such as Shinsegae and Lotte, may be better positioned to survive in the long run, with their already existing nationwide logistics and financial ability.

“While Coupang is expected to take a lead position among e-commerce players for the time being, Shinsegae and Lotte will expand investment in the online market,” said Chang Ji-hye, an analyst at Heungkuk Securities.

“Offline retailers are considered to have a competitive edge in the long term as economies of scale help them reduce costs and lock in customers in their multichannel retailing.”


Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>