Coupang: Part 1

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Hey there! Welcome to DJY Research. Every month, we produce an extensive research report on a global company. So far, we’ve covered companies like Tencent, Alibaba, Nintendo, and Grab, and will be releasing our 10th report shortly. We have decided to share a sample report for free, and will be releasing our Coupang report in 3 parts.

This is Part 1 of our Coupang research report. In this deep dive, we will cover Coupang’s background history, explain their business, give context on the market they operate in, and explore competitive dynamics.

Parts 2 and 3, which will be released in the coming weeks, will delve further into the Coupang Flywheel, Other Initiatives, our Revenue Build, Risks, and Conclusion. Please drop your email below to be updated when we release them.

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Background.

Bom Kim, the founder of what would become one of South Korea’s largest leading-edge tech companies, started his first venture with much more humble ambitions. While studying as an undergraduate at Harvard, he created Current Magazine, a “for students, written by students” publication that he later sold to Newsweek in 2001. After a short stint at the Boston Consulting Group, he wound up back in the media industry, raising $4mn for a Harvard alumni magazine dubbed 02138 (after Cambridge’s zip code). It folded in the midst of the 2009 financial crisis, but not before Bom sold it, protecting his investors from the worst of outcomes. Bom then headed back to Harvard to get his MBA and buy some time to come up with his next idea. Seoul-born but having lived in the U.S. since he was 7, he wondered whether there were U.S. businesses that could do well in Korea where entrepreneurial-spirit was often lacking, and he could marry his experience with start-ups to his knowledge of the native culture.

An issue of Bom Kim’s 02138 Harvard Alumni Magazine.

In 2010, just six months after starting his MBA at Harvard, Bom dropped out to create a Korean Groupon, becoming the 30th entrepreneur to mimic the very popular U.S.-based business that VCs were falling over themselves to fund. Groupon’s revenue growth was nearly parabolic (they 20x’ed the $30mn they generated in 2009 in 2010 and then matched their 2010 annual sales in the just first 3 months of 2011). After raising an initial $2mn from investors including fellow Harvard-alum Bill Ackman, Bom moved to Korea and started “Coupang”, a play on Coupon and the Korean onomatopoeia for “fun” or “surprise”. Incredibly, they generated $10mn in sales and had 3mn customers in just one year. However, this was largely the byproduct of ample Facebook ad spend during a period few thought to advertise there. Facebook’s advertiser density was so weak that CPMs were cheap enough for Coupang to show every Korean 72 Coupang ads a month. This is not to discredit them, as they did adopt a novel platform to advertise far before others recognized its power. Even more remarkably—despite their early success with “top line” numbers and prodigious growth—they realized something essential to the sustainability of Coupang’s future.

While they could easily acquire customers with very cheap customer acquisition costs (CAC), what they were offering was unsustainable: customers were solely interested in saving a few bucks, and merchants were only happy to play along until they figured out that the immense traffic the “groupon” brought them never translated to positive economics. Coupang (like other Groupon-type businesses) was quite successful in getting consumers onto their platforms—after all, who doesn’t like 50% off? The problem was that once a merchant realized the model’s poor economics, they left. This is in part the merchant’s fault too as the waves of customers stressed their capacity and staff, which resulted in poor consumer experience, dashing the possibility of customers returning. Coupang was then stuck trying to fervently sign up more merchants. This worked for a while, but eventually merchants came to understand that this was a flawed customer acquisition tool and they were no longer interested in participating, which meant the Groupon-like marketplaces had their deal selection dry up, which in turn lead to consumer churn. In the meantime though, Coupang did build a nice business for themselves as they had very high gross margins and attractive cash flow dynamics with low CACs and customer payment far in advance of merchant remittance. However, there were signs that this was not maintainable. (Since we couldn’t resist, full tangent on the flaws of the business model below.)

The basic Groupon business model is as follows: a merchant offers a steeply discounted deal contingent on a minimum number of customers participating. In the picture below, a merchant is offering a 50% discount contingent on getting 100 people to participate in the deal. As a consumer, you first sign up for the deal and put in your credit card info, but are only charged for the deal once the minimum number of customers join it. Since you only get the deal if you reach a critical point of participation, you are incentivized to share the deal with friends and on social media.

After the deal “tips”, meaning the minimum number of customers are reached, you are charged the discounted 50% off price, ₩24,700 in the photo below, and receive a coupon to redeem your deal in person. This discounted amount is then split between the merchant and Coupang (the split varies, but on average Groupon took ~40%. Coupang was lower at ~15%). Assuming a 15% Coupang take-rate, the merchant in this case is effectively getting 42.5 cents on the dollar of what they usually get for the steak meal.

Given the low gross margins of restaurants, this means that the merchant is most likely losing money on the deal and hopes for two things that could make this make sense: 1) they can upsell the customer other items that they can make money on and 2) the customer is going to come back even without a promotion. If it was indeed just a one-time discount to get reoccurring business, then a local merchant would run the deal and lose some money initially but then have a larger regular customer base that paid full price giving them a sustainable business: the lifetime value of the customer would more than payback its customer acquisition cost.

Of course, this is not what happened: the customers interested in groupons were very price conscious and seldom bought anything other than what was included in the deal. And rather than becoming a loyal customer, they moved on to participate in the next deal. The customer can’t totally be blamed, as it was also the merchant’s fault since the influx of traffic often swamped them to the point that they couldn’t offer proper customer service. To get the customers fed quicker, the over-worked staff would also often yell “Groupon customer!” when they entered to expediate the meal, but that made diners feel like 2nd class customers. Additionally, there were long waits to get fed, as the traffic pushed the capacity of the restaurant. In some sense, the groupons worked too well as a customer acquisition tool, bringing in globs of customers that congensted the restaurants. Once the merchants realized that these customers weren’t coming back, they either stopped listing groupons or rolled back their discounting. This led to worse deals and a smaller selection, which disappointed consumers and resulted in them leaving the platform. When users left, Coupang had to find new users to acquire so they could still provide merchants’ consumer demand.

Compounding the issues with the groupon business model is the fact that these are largely local deals, so there is a limited pool of merchants they can churn through before saturation. This means that no matter how fast they ran, they would eventually run out of track. When merchants rationalized their deals, the growth stopped. Today, the original creator of this business model, Groupon, seesaws between middling profit and loss on contracting revenues.

Their stock is down more than 95% from its peak.

Coupang’s landing page in 2011. 50% off deals were typical.

While they faced stiff competition from TicketMonster and Groupon Korea, Coupang was still #1 in the space and their business model was stronger than their overseas counterpart, with very cheap customer acquisition costs that led to a marketing expense that was a fraction of global competitors. This, coupled with the fact that they received money for the groupon far ahead of time, helped them become cash flow positive early on and were set to IPO in 2013. However, despite the business humming along nicely, Bom recognized the flaws of this business model: while it was a good business for them (at the time), it was a frustrating consumer experience and merchants were also often unhappy with the outcome. He believed that this would eventually catch up with them, and six months into their listing process, at the eleventh hour, Bom decided to indefinitely postpone their IPO.

Just one week before the prospectus would be printed—Bom pivoted the business. At the time, Bom noted that they had a service consumers liked, but not one they loved. He recalls, “if we really wanted to provide something that really mattered to customers—100 times better, exponentially better—we had to go through an enormous amount of change”. Since Coupang already had consumer awareness and some (non-restaurant) merchant relations, they opted for an eBay-like 3P marketplace model and started listing products on their website. But the 3P marketplace offered an inconsistent experience across a motley crew of sellers and very slow and limited logistics coverage nationally (half of their complaints were about shipping). This was hardly a “100x better experience”. Recognizing this—and having learned the importance of keeping customers happy so they stay on your platform, obviating the need for excessive CAC spend—Coupang shifted their focus to 1P, mimicking Amazon and building out their own logistics and fulfillment network. They raised $100mn from Sequoia in May of 2014 and then another $300mn from BlackRock a few months later to build out their logistics network and refine their mobile capabilities (mobile was ~80% of traffic). They first focused on diapers and other categories for moms, with the logic that this new period of change usually creates a window for new habits to form. Their delivery force was known for conscientious deliveries, with notes on when to ring the doorbell to not awaken a sleeping baby and leaving hand-written notes for new mothers. Despite the 180° business pivot, Coupang become Korea’s first Unicorn. Coupang’s continued execution with their ecommerce initiatives, including building out their own delivery network, dubbed Rocket Delivery, allowed them to raise $1bn from Softbank in 2015 (who is now their largest shareholder with a ~35% stake after several successive investments).

Bom gives an interview at one of Coupang’s fulfillment centers.

By 2018, 99% of deliveries were completed within 24 hours and Coupang launched the Rocket Wow membership for just ~$2.60 a month, which, like Amazon Prime, gave free delivery on all orders without minimums. After achieving 1-day delivery, they launched Dawn Delivery (if you order something before 12pm midnight, you get it by 7am) and same-day delivery (if you place an order before 10am, you get it that same day). Around this time, Coupang started to become a top ecommerce provider in Korea, and extended this position to the clear market leader in subsequent years. Later on, they would roll out Coupang Eats—their restaurant delivery platform, Coupang Play—their online streaming services, Fresh Eats—grocery fulfillment and delivery, and several other initiatives. In March 2021, they IPOed on the NYSE, raising $4.55bn, putting the company at a $60bn valuation and making Bom Kim one of Korea’s richest people with his 10.2% ownership.

Business.

Simply put, Coupang is an ecommerce company that owns their own logistics and lets 3rd party merchants sell on their platform alongside their own product offering. This is very similar to Amazon, but one key difference is Coupang actually employs their own delivery people, who number over 15,000, which allows them to control the full logistics loop from the warehouse to the consumer’s door. We will touch more on alternative logistics providers later, but in short, they did this because they had to to achieve 7-day-a-week delivery and squeeze out more delivery efficiencies. Consumers simply search for the item they want and frictionlessly buy it with their payment and address information preloaded. Coupang has the most SKUs of any Korean ecommerce player (in the millions) and the most products available with 1-day shipping. They are known to be very consumer friendly, with returns as easy as leaving the product outside your door. We will elaborate further on these points in the competition and flywheel sections, but below we talk about some of their specific core offerings. Below are some product walkthroughs for their core offerings, and we will touch on their other initiatives later.

Swipe through to get a sense of what it’s like to use Coupang’s app. These photos are screenshots of Coupang’s home page.

Below you’ll see a more granular selection of screenshots that show what it’s like to shop for apparel on the Coupang app.

Swipe through to see how Coupang lays out a specific category – this one is fashion. You can see a number of ads breaking up sections like the home page and the ability to further segment by item.

Rocket Delivery: This is the name of their delivery network, and items available on Rocket Delivery are usually delivered in under a day. Items are either dawn delivery or same-day delivery. As mentioned, dawn deliveries are orders placed before midnight and delivered by 7am the following day and same-day delivery is for orders placed before 10am. 3P merchants who give their inventory to Coupang are eligible for Rocket Delivery as well (even though the 3P fulfillment and shipping service is technically called Jet Delivery) and items show up with a rocket next to the listing, as shown below.

See the rocket logos boxed above which indicate to the consumer that 1 day shipping is available on the item.

Rocket Wow Club: This is their membership program that allows customers to order items with free delivery and no minimums. It also allows consumers to order Rocket Fresh. They are adding more benefits to this membership like Coupang Play (a video service). The monthly fee to join is $2.50.

The Rocket Wow Club allows free, one-day delivery on millions of items.

Swipe to see the Rocket Wow section of the app.

Rocket Fresh: This is their grocery delivery services whereby groceries ordered before 10am are delivered by 6pm and orders placed the night before arrive before 7am. There is a minimum spend for free grocery delivery, but it is low at just $12.75 per order. Their grocery delivery services utilize some different infrastructure from the rest of their ecommerce offers, such as mini fulfillment centers that are closer to the consumer.

The picture above is from Coupang’s promotional material when they launched Rocket Fresh. The quick same day delivery is appreciated by consumers who can order food for dinner in the morning or ensure they have breakfast items they may of only noticed they were missing late at night.

Swiping through these photos will simulate browsing the Coupang Fresh section of the app. You can start to see the similarity and guiding design principles of Coupang’s category pages. The last few photos dive deeper into what it’s like to shop for items like fruits and meats.

Coupang reports revenues in three segments:  1) Net Retail Sales, 2) Third-party Merchant Services, and 3) Other Revenues.

Net Retail Sales consists of sale of products from their 1P business. Revenues are recorded at the price of the product sale (see our Sea Limited report for a discussion on the nuances and accounting implications of 1P vs 3P). Coupang takes ownership of the inventory and houses it in their fulfillment centers, which allows for rapid delivery through their owned logistics system. Often, they are able to pay the supplier on a delayed basis (trade credit), which allows them to reduce their working capital invested in inventory, which we will touch on more later. While they don’t break out segment profitability, Bom Kim has noted that the core business is profitable.

Third-party merchant services includes Coupang’s seller fee for 3rd party merchant sales—which varies by category from 3-15%, but averages around 10%—and also includes advertising revenue and delivery fees. Similar to Amazon, Coupang allows 3rd party merchants to promote listings, so it shows up in preferred placement in a customer’s search engine result page for relevant product searches.

Other Revenue includes the Rocket Wow subscription, Coupang Eats, and their other new initiatives.

Net Retail sales increased at an incredible 65% CAGR since 2016, from $1.5bn to $14.1bn LTM. Their Merchant Services, which are only disclosed since 2018, grew ~5x over just a 2.5 year period to $1.3bn LTM. GMV per customer increased from $720 in 2018 to $1,481 LTM, a 33% CAGR. Gross profits (which are consolidated across all segments) grew at a 93% CAGR from just $131mn in 2016 at an 8% gross margin to $2.5bn at a 16% gross margin. This is understating their gross margins as it consolidates money-losing new initiatives, which we will explore later. Below we break out each segment.

Open in new tab for a clearer image.

Today, Coupang has a total of 17mn active customers, which is up +26% y/y and almost double the customer base they had in 2018.

The GMV figures below are estimated with the following methodology: 3P merchant revenues include seller fees, advertising fees, and logistics and fulfillment fees. The latter is dubbed the “Fulfillment & Logistics by Coupang Program”, also referred to as FBC (Fulfillment by Coupang). Essentially, it is the same thing as FBA (Fulfillment by Amazon) whereby 3rd party merchants send inventory to Coupang’s warehouses for storage for the purpose of improving delivery speeds. We noted that seller fees range from 3-15% based on category, but our channel checks put that figure around 9-10% on average. There is no company info to inform our advertising and logistics as % of GMV assumptions, so we back into it by triangulating what we have heard from our industry contacts and 3rd party GMV estimates. We place advertising today <1% of GMV, with fulfillment and logistics slightly higher today. We know from talking to merchants that using Jet Delivery—Coupang’s 3rd party delivery services—that fulfillment services runs around ~30% of the item’s price. But we do not know how popular this service is among merchants. Our estimates imply that adoption is currently very low (only around ~3% of merchants), but it should be noted that these are still very new initiatives. As we will talk about later, this is a significant source of upside. Taking 3P Merchant Service revenues and our assumed total take-rate on that GMV gets us an estimated 3P GMV. Adding Retail Sales (which is all 1P and thus the equivalent to GMV) gets us to our GMV estimates. In the future, we expect total take-rate to go up significantly, driven by higher fulfillment adoption and continued advertising up-take. More on this later.  

As shown below, GMV growth is estimated to have almost quadrupled on the back of continued ecommerce penetration further fueled by the pandemic. We believe GMV grew ~80% in 2020, and if they keep up their LTM run-rate, that would imply ~70% full year GMV growth. We will loop back to GMV estimates later on and better contextualize the magnitude of this in the competition section.

LTM GMV is already +36% higher than 2020, which implies a ~70% growth run-rate without considering seasonality (we only have quarterly data for the first two quarters of the year).

Before we dive into competition, we will further explore their market and spend more time on the TAM than we typically do, because Coupang is the market leader and Korea’s ecommerce saturation is the highest in the world.

Market Background.

We usually aren’t too focused on the TAM for most companies so long as we can confidently say it will not be a constraining factor, but with Coupang it could possibly be. As we will show in the competition section below, Coupang is the clear market leader in ecommerce in South Korea and their share gains have been accelerating in recent years as their flywheel comes together. However, they don’t have any significant international presence yet, so their future is entirely dependent on how the Korean market develops until then. (This is distinct from Alibaba, who was entering many new markets and lines of business and didn’t “need” much or any core commerce growth to support the valuation. This also contrasts with Sea Limited, where S.E.A. ecommerce penetration was in very early innings and its economies were also less mature, so we were comfortable assuming the TAM wouldn’t be a limiting factor anytime soon). Since Coupang’s ecommerce business is the most material driver of value for them today and they currently only have a command of the Korean market, we will spend some time exploring to what degree the retail ecommerce industry will be a tailwind going forward.

With the caveat that TAM “analysis” tends to be wrong with estimates varying wildly, we will proceed cautiously. Most estimates of Korea’s ecommerce penetration put South Korea and China neck-to-neck with ~35% ecommerce penetration (portion of retail sales conducted online). This number is very high for many of the same reasons we noted in the Sea and Alibaba reports. In South Korea, there was never a developed retail market for “specialty” stores, and given the limited physical retail footprint from land being scarce (South Korea is 70%+ mountainous), stores are smaller and in-store selection has been historically limited. South Korea has internet and smartphone penetration close to 100%, which created a great combination to enable ecommerce providers to fill a gap in legacy retailers’ offerings. The retail environment used to be dominated by a few big department store chains—Lotte, Shinsegae, and Hyundai—and many small convenience stores. This makes it distinct from the US, since there were never many specialty retail concepts that owned a category (no Sports Authoritys, Best Buys, or Home Depots), so selection on verticals were limited to what the big department stores provided. Furthermore, given the limited consumer options, the large department stores got greedy and often provided mediocre service. Multiple contacts noted that they price-gouge, selling products for multiples of MSRPs (manufacturer’s suggested retail price). In fact, the big department stores actually lobbied to pass a law in the Fair-Trade Act that made it illegal to disclose the MSRP of electronic items, giving them the ability to mark-up items even more due to the price opacity. This recipe of poor consumer choice and high prices, combined with all of the other reasons people prefer ecommerce over physical retail, led to very rapid adoption of online purchasing.

South Korea’s topography is characterized by mountains that take up ~70% of the land. Limited flat land has lead to very dense city centers where most people live.

Understanding this backdrop is helpful to thinking about where ecommerce penetration could go. Estimated total Korean retail spend varies, but (including Grocery) it seems clustered around $400bn annually. Coupang estimates the TAM around $470bn for 2019 in their S1, but that includes travel and the ambiguously named “consumer foodservices” (is that including in-person restaurant spend?). The data they quote shows ecommerce penetration is ~27% penetrated in 2019 versus our estimate of ~35% today. But since we believe the retail TAM is smaller than what they quote, we get similar amounts of online spend at ~$140bn. As we have shown above in our GMV estimates, we believe Coupang’s LTM GMV is ~$26bn, which implies an 18% market share of ecommerce today. 

In the estimates above, we try our best to not be overly conservative nor exuberant, but of course our projections are almost assured to be wrong. Nevertheless, we need some sense of magnitude to size up Coupang’s ecommerce opportunity, and ~$300bn of total online sales in a decade is our best (not high confidence) judgement. We believe somewhere around 40% market share is attainable for Coupang, which is only slightly lower than what some estimates put Amazon at. This is also informed by looking at Coupang’s share of incremental ecommerce sales in the last year, which was also estimated to be around ~40%. This implies around ~$120bn in GMV in a decade, or about a 17% growth CAGR. (Amazon grew at a ~30% CAGR when they were a similar size, but the comparison isn’t appropriate because they operated in many international markets and ecommerce penetration started from a much lower point). Just as a check, we layered in population and household figures to the same estimates above to see how spend per capita would increase. Total ecommerce spend per person is only increasing ~8% versus Coupang’s growth rate that is almost double that, demonstrating that a lot of Coupang’s growth will come from taking share from others. Next, we will go through competition to see why we believe Coupang will be a share-gainer.  

Competition.

Coupang has three main types of competitors that we lay out below: 1) Department stores/Big Box Retailers, 2) Ecommerce platforms, and 3) Internet Companies.

The Korean ecommerce market is more fragmented than other developed markets like China or the US. Coupang was actually a rather late entrant into the ecommerce market, entering in 2013, whereas other players like eBay Korea started in 2000. And 11Street, TMON, and WeMakePrice all started before Coupang moved to a commerce model. The result of this was that many players have a relatively sizeable share, but their inconsistent consumer experience has meant that they hit growth plateaus as customers left. eBay Korea was the dominant ecommerce player for a while, only to be surpassed by Naver, the “Google” of Korea, who started their commerce efforts around the time that Coupang did. Coupang only usurped Naver as the largest ecommerce provider in South Korea last year, propelled by Covid tailwinds. With slight hesitation to show GMV estimates as many of these are informed from 3rd party data and not company disclosures, the graphic below shows competitors’ GMV estimates and the implied market share (based off of our online TAM of $140bn noted above). There is a slight distortion because we are using 2020 estimated GMV figures but an online spend figure ending in 1H21, but the competitors are not growing at the rapid rates Coupang is, so it shouldn’t make much of a difference. Nevertheless, this shows the relative competitive environment and that Coupang is emerging from fairly stiff competition to claim the lead.

The development of the Korean online market is an interesting situation because the leading player, and who we will argue has the strongest competitive advantage, came relatively recently. The same way eBay was reluctant to take on logistics and fulfillment in the US, all of Korea’s 3P players (including eBay Korea) do not want to invest in a full closed loop from warehouse to doorstep as it is very capital intensive and margin destructive. Coupang opted for that playbook, and as a result they not only took the lead commerce spot, but seem to be growing the ecommerce market. Since ordering on Coupang is so frictionless with no trust issues, their growing selection means more purchases are done on their platform. Before we go through what Coupang does well though, lets touch more on each competitor.

eBay Korea. eBay launched their Korea operations in 2000 and acquired Auction in 2001 to build a foothold. In 2009, they acquired Gmarket, the leading marketplace at the time with $2.6bn GMV, cementing their leading ecommerce position until they were surpassed in 2015 by Naver. (Gmarket focused on fashion, while Auction focused on electronics and sports goods). Similar to the US version, they ran a 3P marketplace and never got involved in logistics. Buyers were encouraged to look at the sellers’ profiles and ratings to get a sense of trustworthiness, which made buying items higher friction as customers were never sure if the seller was legitimate. It also meant they had to act as a detective before each purchase, making most consumers feel it was easier to buy something the next time they were near a store instead. In June 2021, Shinsegae bought an 80% stake in eBay Korea for $3bn to build out their ecommerce offerings.

Shinsegae (SSG). SSG.com is a dedicated ecommerce platform launched by one of the largest physical retailers, Shinsegae. Similar to the Walmart/Jet dynamic, they felt they needed to retrench in order serve the online market. In 2019, they launched a Dawn Delivery service and a few months later they had three dedicated online fulfillment centers. In March 2021, SSG.com completed a $221mn share swap with Naver, and they are exploring different omni-channel strategies to work together. As noted, their parent company bought an 80% stake in eBay and they are looking to IPO the combined company with a rumored $10-15bn valuation. Most consumers like that SSG has physical inventory where you can try on items before purchasing them, but these customers often opt to complete the purchase online, often through another provider (whoever offers cheaper prices and free delivery). Coupling their physical footprint with online offerings could create a good shopping experience, but they are fighting against a reputation of decades of customer price gouging.

Desktop homepage of SSG.com

Market Kurly. Market Kurley aimed to be a category killer in the grocery vertical, being the first to launch a dawn delivery option (even before Coupang). Their cold chain supply chain set them apart from any competitor when they launched, but Coupang was fast to follow. Kurly tries to position itself as higher quality that is sourced locally. They do have a more limited coverage area than Coupang now, but are working to address that with CJ Logistics’ help. Management has reported remaining laser focused on curation of food and consumers have reported higher quality groceries available through Kurly. While the perception of Kurly being fresher than Coupang Fresh is still largely there, some of the users we spoke with noted that gap has been drastically shrinking. Grocery is an important verical because it is high frequency and spend is high. Additionally, once you can build a grocery habit with a consumer, the opportunity is ripe to cross-sell them on other products. This is why this has become an increasingly important initiative for Coupang, as they want to make sure no competitor wins this and can eventually displace their consumer relations.

Market Kurly’s landing page

Coupang’s Fresh service utilizes fulfillment centers that are closer to the consumer that ensure fresh food and quick delivery, but they are able to use their other commerce logistics infrastructure across their Fresh offerings too. This means that Coupang has a formidable advantage in logistics, which was one of the original domains Market Kurly tried to compete in. Now admittedly, Coupang Fresh is still behind Market Kurly in terms of food quality, but that is because their competence in product procurement did not extend to grocery since it is a different supply chain, often relying on cold chain technologies, with a sensitive product. However, these are all solvable problems, and we noted that customers have already seen a noticeable improvement. We think Coupang will continue to get better over time and close the quality gap, and Kurly is likely to face their own growing pains as they try to expand their service out of select metropolitan areas.

Coupang Fresh has become an important initiative because it is high frequency and all consumers could utilize it.

Lotte. Lotte On is the online platform operated by Lotte, one of Korea’s largest retailers. It was launched in 2019 (the same year as Shinsegae’s SSG.com) to give consumers seamless access to all 7 of Lotte’s retail offerings. They also launched a membership service called LOTTE ONers, which 125,000 people had joined by the end of 2019, but limited info since then suggests that it has not had the success they wanted. They are heavily investing in next-gen tech like an AI voice commerce platform, “Moving AR,” 3D virtual spaces, “Molive TV,” and more. Despite all of the buzzwords, none of the consumers we spoke with reported using Lotte On, although they do visit the physical retail stores to browse (often purchasing elsewhere). This is evident in their 7% growth during a period which Coupang grew ~70% and SSG.com grew 35%+.

Lotte On’s home page

11Street. 11Street is an ecommerce platform that was launched as a subsidiary of SK Telecom in 2008 and spun off in 2018. They expanded internationally with N11.com in Turkey and later entered Indonesia in 2014, Malaysia in 2015, and Thailand in 2017. In April 2021, they announced a partnership with Amazon to allow Korean consumers to search Amazon for goods in Korea and pay in Korean Won through SK Pay and other credit cards (this is Amazon’s first shopping service partnership). In 2021 they also launched a subscription brand called T Universe which gives subscribers discounts on partners like Amazon, Starbucks, E-mart, Baemin, and more. We were not able to speak with any users who used 11Street before, although several had heard of it.

Interestingly, 11Street was one of the only platforms that had an English language option.

WeMakePrice. WeMakePrice was founded in May 2010 as a mobile-first, social commerce platform. They focus on offering customers the cheapest prices anywhere and are currently known for their “Hot Deal” marketing tactic, which offers heavy discounts for certain products. WeMakePrice recently standardized the commission fee charged to open market sellers at 2.9% in a bid to onboard more sellers onto their platform (they currently have 100,000). In 2019, they launched WeMakePriceO, a pickup/delivery service that works with over 20,000 stores nationwide. In April 2020, they partnered with GS Fresh to provide same-day fresh food service. No one we spoke with was a regular user of their service.  

WeMakePrice’s home page.

TMON. TMON, short for Ticket Monster, is an ecommerce platform initially founded in 2010 as a Groupon clone and currently is majority-owned by KKR and Anchor Equity partners. Once one of the leading ecommerce players, TMON had a failed IPO attempt in 2017. As of 2020, 30% of their revenue came from concert tickets and traveling. They also abandoned their fresh food sales and turned their focus to “Time Commerce” – selling certain items at clearance prices for short windows of time. This pivot allowed them to turn profitable for the first time in 10 years. They currently have 11mn users and are looking to IPO again. We do not view them as a direct competitor to what Coupang’s core value prop is and no one we spoke with was a user of their service.

TMON’s home page highlighting deals on deals on deals.

Naver. Naver was started as an inhouse endeavor inside of Samsung, but was spun out in 1999 (Samsung sold the last of its shares in 2004). The first product they launched was a search engine and they later expanded into other areas like Q&A (think Quora or Yahoo Answers), WebToons (online comics), Naver Café (similar to Reddit), Naver TV (their YouTube but not as popular), Naver Financial (Naver Pay is the most popular eWallet in Korea by payment volume), and several other products. Today, similar to Google, most of their revenue comes from advertising via keyword bidding in search and display ads across their properties. In 2014 though, they launched Naver Window, which was designed to make offline brick and mortar stores’ inventory shoppable online. This 3P initiative eventually turned into Naver’s full shopping experience, which includes their Smart Stores (mini stores that host inventory for merchants without websites).

This is the Naver Shopping landing page. It aggregates deals and inventory from different retailers, including other platforms.

Naver is interesting because they have captive users from their search business with 28mn daily unique visitors and virtually every Korean uses at least one of their products. They can leverage this traffic to their shopping portal when relevant. Going to their shopping tab allows users to search for merchandise across the entire web and gives consumers multiple different retail options which either directs users to the retailer’s webpage or Naver’s on-platform Smart Store, which allows SMB’s to list products without building out a full website. This strategy allows Naver to “have” more searchable inventory than anyone, since even Coupang’s inventory is searchable. However, the traffic is often ported to other platforms, where the transaction is completed, meaning Naver only serves as a top of funnel discovery function. Naver is trying to be more critical to the transaction and create a more connected system with payment and logistics common across merchants. With Naver Pay accepted across many retailers (both online and off) and in Smart Stores, they are giving consumers a more homogeneous experience with lower friction to transact.

This is a product page after searching in Naver Shopping. Note they call out Naver Pay options and display prices across all platforms. This is why Naver is popular for price comparison.

However, it seems like all of their efforts are trying to solve for “how do you create the best consumer experience if you’re an internet company with a dominant search engine”, rather than just “how do you create the best consumer experience”. The latter of which Coupang is undoubtedly solving for. And if you recall, Bom Kim’s original impetus to pivot the business to 1P with fully integrated logistics was precisely because of the inconsistent consumer experience hobbling together an ecosystem of disparate sellers creates. Naver isn’t going to build out their own warehouses or logistics, so they are partnering with CJ Logistics to try to build a 3PL (3rd party logistics) provider that is capable of competing against Coupang. Naver and CJ Logistics swapped ~$530mn of stock and forged a partnership aimed at creating faster delivery. While this is an important step in making 3P transactions a better experience (recall Bom Kim said half of complaints were originally around shipping), they will likely never be able to match Coupang on speed of delivery until they have inventory that is unpacked and sorted in their warehouses, ready to ship as soon as the customer buys it. Naver recognized this and rolled out the Naver Fulfillment Alliance, which allows Smart Store operators to store their inventory at warehouses owned by one of seven different logistics companies that each plug into Naver’s data platform (this sounds similar to Alibaba’s Cainaio, with some difference we will note below). This allows inventory to be ready to ship as soon as a customer orders it. But having the capability to do so is different than having the competence to do so.

The issue Naver faces with getting merchants to send their inventory over is that they do not have the consumer demand for a merchant to justify sending it to them. Coupang is able to turn over inventory in an average of ~3 weeks, which means that as a merchant you are fairly confident that if you send your items to a Coupang fulfillment center, they will be sold pretty quickly and you will not be stuck with inventory that is exclusive to the Coupang Platform yet can’t be sold on the Coupang Platform. So, Naver has a bit of a chicken and egg problem: Getting more merchants to send more inventory is contingent on getting more consumer demand, getting more consumer demand is predicated on having quicker delivery, getting quicker delivery is centered on having more inventory presorted in warehouses. Further complicating the issue is the fact that Coupang already does all of this!

Coupang already has 17mn customers and ~5mn subscribed to the Rocket Wow membership. If Naver wanted to go in the direction of Coupang, they would likely lose since it requires significant demand and density to build the consumer experience Coupang has. Mimicking Coupang’s playbook would require winning over users that are already very satisfied for an experience which will likely be worse than what Coupang currently offers (since a lot of the shipping improvements are slow process innovations that Naver would be behind on). Naver relying on partners like CJ Logistics can help get them started since CJ Logistics already has volume, but their logistics network can never be as optimized as Coupang’s is for delivery (we defend this stance a little more later).

Shopping on Naver.

The other issue that Naver faces, and perhaps the most important, is that they have to balance the interests of SMBs and merchants far more than Coupang does, or will ever have to. The best thing to increase conversion would be to simply keep the transactions all on Naver’s platform. But they can never do this, of course, because the whole reason a retailer was using them in the first place was for traffic that would get the consumer onto the retailer’s property, allowing them to cross sell products and ultimately keep the consumer relationship. This is why fulfillment is only offered to Smart Store owners today, because bigger retailers are unwilling to make their inventory exclusive to a platform where they would lose the ability to run inventory through their other channels (physical stores) and, more critically, lose their “uniqueness”. Think of Shopify in the US, which supports more than a million businesses, each with fully catalogued and shoppable inventory. Shopify could easily add a search bar to the Shopify app and let consumers search across all stores for products, but they are adamant they would never do that, because it would instantaneously make all of their stores more substitutable and less distinctive. If you think about the vectors that Amazon ranks products on their SERP (search engine results page), it is on factors like price, shipping speed, purchases, reviews, ratings, etc. Sellers move to Shopify in the first place because they want to be able to tell a story about their products that is beyond a few sterile statistics and implementing search would subject them to precisely that. That is why one of the worse experiences of Naver Shopping, being forked to a bunch of different sites and creating a bunch of extra steps to complete a purchase, cannot be solved for simply. Naver is trying to provide products like Naver Pay and hope they are adopted to help this problem, but they can’t force it. And merchants usually want to keep payment information so they have a direct relationship with the consumer that is not at the whims of a 3rd party who may change their terms and provides more limited payment data to the merchant.

Lastly, as long as anyone can sell through Naver and without Naver taking full responsibility for transactions that don’t go well, they will always lack trust. Coupang earned consumers’ trust by always standing by their products and willingly refunding or replacing products without any hassle. For a company like Naver, which simply aggregates listings, it seems impossible that they would be able to do this as they would have to basically “guarantee” all commerce. They are trying to authenticate Smart Stores, but it still places issue resolution on the consumer. So as long as every issue is dealt with by a different merchant, consumers will inevitably have a poor experience with a merchant who is not on board with the “satisfy the consumer at all costs” tenet. Some of this is just inherent in the trade-offs—it’s hard to offer both a unique experience and be consistent.

Naver Smart Store.

To be sure though, merchants vastly prefer to sell through Naver than Coupang because of the lower take-rates, direct consumer relationship, and more data they get to keep (Coupang only provides limited data to merchants and charges for a slightly more comprehensive full data feed). However, the question isn’t where merchants want to sell but rather where they can sell. Coupang, with its 17mn customers, generates far too much demand for most merchants to give up, and Coupang knows this.

Nevertheless, Naver is likely to be Coupang’s largest competitor. While we talked a lot about the difference in commerce approach, there are still things Naver can do and is in the process of doing that will make the Naver Shopping experience immensely better. Their partnership with CJ Logistics is a good start, but if they fully copy Alibaba’s Cainiao playbook, they may be able to close the gap enough that delivery speed is no longer a big differentiator in purchasing. In some sense, Naver is in the position Taobao was—they both have a diverse group of distinct merchants and are trying to make the transaction more consistent. Alibaba had an advantage as all of their merchants onboarded through them, so they could standardize the check-out process with Alipay and later implement a shipping solution that could be instantly available to all of their merchants. Alibaba could also have product search without forking the consumer off-platform as the stores are hosted on Alibaba’s sites. Naver’s game plan will be to try to push Naver Pay and their shipping solution to as many merchants as possible, but the merchant’s objectives will often conflict with Naver’s, hampering adoption. Naver will have to convince every merchant why something is good for them whereas Alibaba could just unilaterally impose it. Given the degree of cooperation required, it is hard to see Naver and CJ Logistics becoming the connective tissue for logistics that Alibaba made Cainaio.

Some benefits Naver has though, beyond a suite of popular, high frequency apps, is Naver Reviews. Consumers tend to often still go to Naver to search for product reviews as they believe they are more agnostic than what they could get on Coupang. (There also are some reports of Coupang sellers trying to game the system with reviews—similar to Amazon.) This is all to say that Naver does serve a niche, namely with demand generation for merchants through their metasearch, but also with reviews and solutions like Naver Pay and logistics.

Naver reviews are very popular, with consumers reporting that reading reviews were a must before buying, but also just as a form of entertainment.

It is worth mentioning that the “holy grail” for Naver would be to be able to offer a “Universal Shopping Cart”. This used to be a rumor with Google as well, but it doesn’t look too likely to happen anytime soon. A universal shopping cart would allow a user to add anything to their cart across the entire internet and check out with one provider, basically making the entire internet a single ecommerce platform’s inventory. This could be coupled with a Cainiao-like platform (inventory management software that serves numerous 3PLs) that plugs into various delivery options and even directly with retailers. This would allow Naver to become the connective tissue between a robust logistics system and hundreds of thousands of sellers. A retailer could potentially even run the same platform software for their in-store inventory management, allowing back-of-store fulfillment for online orders without it being exclusive to a secluded warehouse. This would still be slightly slower than a fully integrated logistics system, but it could probably get close enough over time that the speed differential is inconsequential for most orders. Lastly, they could add something like Alibaba’s Xiaoers (team of thousands of customer service reps) to mediate disputes and instill more consumer trust. Getting something like this done is nothing short of herculean though, and seems implausible given the immense amount of cooperation it entails. Nevertheless, it is interesting to think about.

Conclusion.

We hope you enjoyed Part 1 of our Coupang piece!

If you want to get access to the full report now, along with research reports (and downloadable excel worksheets) on Tencent, Alibaba, JD, Nintendo, and Grab, among many others, and access to our private members-only Discord, subscribe now!

Parts 2 and 3, which will be released for free in the coming weeks, will delve further into the Coupang Flywheel, Other Initiatives, our Revenue Build, Risks, and Conclusion. Please drop your email below to be updated when we release them.

*Disclaimer: People who have helped craft this analysis may individually (or through funds they work at) have a position in the company. Absolutely nothing in this report is investment advice nor should it be construed as such. We make no claims to the veracity of all facts and figures presented in this report. Certain figures could be stated erroneously and certain analysis could be incorrect. Please see the full disclaimer linked above.

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