It took Amazon seven years to turn a profit, so the unexpected foray of its Korean look-alike, Coupang, into the black just 18 months after it became a public company came as a pleasant surprise to investors: the company’s stock price immediately rose by more than 10 per cent. On 18 November, it still languished about 60 per cent below its closing price on its first day of trading, the quarterly profit is a major milestone, particularly as Coupang first began operations as a marketplace as lon
g ago as 2010. In the technology sector, twelve years is a long time.
During its long developmental period, Coupang initially ramped up its first-party selling capability, meaning that an increasing share of its revenues were shifted from being a platform and toll-gate for other sellers to buying, storing and distributing its own merchandise. Now, the emphasis is shifting back toward the third-party business.
Thanks to the company’s concerted infrastructure investment strategy over the years, there are no longer too many South Koreans more than 10 kilometres from one of Coupang’s one hundred or so distribution centres, or unable to take advantage of its next-day delivery capability. The company boasts one in three Koreans as active customers and almost 40 per cent of the adult population. But as good as it sounds, there is a flipside to this achievement: growing saturation and a dire struggle for the remaining potential customers. Korean retail — particularly the e-commerce sector — is known sinisterly as a ‘red ocean’ industry, highly fragmented and with intense competition for customers.
It’s easy to see why. The company’s demographics, from the standpoint of retailers, are pretty dire. Korea has a population of just over 50 million but is ageing fast because hardly anyone wants to have babies: the fertility rate is estimated to be somewhere around 0.81 per woman over the course of her lifetime, making it one of the lowest in the world. So the demand side is shrinking so much that at the current trajectory the UN expects Korea’s population to about halve by the end of the century. There isn’t much upside to be had by higher internet and mobile phone adoption because Korea is already one of the most connected countries on the planet, with two-phone ownership common.
The supply side, meanwhile, is a cut-throat business. Coupang goes head to head against a number of serious competitors and a phalanx of smaller ones, in fashion, general merchandise, health and beauty, and groceries. Coupang itself, despite being considered the dominant player, is probably pushing only about 20 per cent of the total e-commerce market.
Coupang is attempting to counter the saturation threat by overseas expansion, so far into Japan, Taiwan and Singapore, but this is a really tough task considering that these and other countries in the region have their own established players with loyal followings. Incumbents are not at all inclined to welcome new players by surrendering their hard-won turf. So efforts to acquire more customers at home in Korea are still critical and it’s here that things look like they are slowing: the company now has 17.992 million active customers, up from 16.823 million the year before but barely 100,000 more than in the second quarter. ‘Active’ customer is defined as anyone who has ordered at least once from the app or website during the quarter.
Top line slows, bottom line fattens
Top-line growth has been slowing in 2022 and this reflects the depreciation of the Korean Won and the aforementioned issues with saturation. Still, it’s been ok. Net revenue for the third quarter, released on 9 November, was US$5.1 billion, up 10 per cent year over year and 27 per cent on a constant currency basis.
Coupang breaks out its e-commerce revenues separately from its other, smaller, businesses. The e-commerce part is what Coupang refers to as its ‘product commerce’ division, which accounts for all but a few per cent of its revenues. It also includes Rocket Wow, its membership program that is the company’s answer to Amazon Prime. Revenues from product commerce accounted for $4.9 billion in the third quarter, up 10 per cent year on year and 28 per cent on an exchange-neutral basis. This was, according to the company, an impressive four times the growth rate of the Korean e-commerce sector.
The remaining revenues outside product commerce are accounted for by relative small fry: Coupang Eats (the food delivery business that has slowed since the end of Covid restrictions now that people are dining out again), video streaming (Coupang Play), fintech and advertising.
As the top line flattens out though, the bottom line is looking far better. The company’s net loss, which was US$324 million in the third quarter of 2021, became net income of $91 million. For the first nine months of the year, Coupang’s net loss has shrunk to $194 million, compared with a loss of $1.1 billion in the January-September period of 2021. Gross profits have been fattened by the recent upward repricing of Rocket Wow to KRW 4,990 (approximately $5.40), and a stronger contribution from the third-party marketplace business, which carries higher margins.
Coupang is that revenue per customer is up 3 per cent, to $284, compared with the third quarter last year. In constant currency terms, growth in that metric was 19 per cent.
A change in the growth story
The third quarter seems to have marked an inflection point in the company’s growth story, which until this year had been one of customer acquisition and top-line growth driven by continuing heavy investment in infrastructure, logistics, and technology, harnessed to arguably the sharpest pricing and broadest product range of the Korean e-commerce sector. It also rode a strong tailwind of Covid restrictions on eating out and shopping in physical stores.
With the shift to profitability a corner has been turned. Gross profits are up, operating costs are coming down. The Amazon of Korea hasn’t made the market wait as long as expected to go into the black. Now, it just needs to stay there.