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Coupang: Korea’s Own Amazon

Often referred to as the “Korean” Amazon, South Korean e-commerce retailer Coupang saw its share price pop — peaking at $69 a share, up 84% — after originally listing at $35/share on the NYSE last Thursday. With its IPO, Coupang raised $4.6bn in an enlarged offering after raising its share price several times due to strong investor demand. Not since Uber’s IPO in 2019 has such figures been raised, and it has made Coupang CEO Bom Suk Kim an overnight billionaire — the fourth richest man in the US. It closed off its first trading day with a valuation of more than $84bn, one of the highest valuations for an international company listing in the US since Alibaba Group Holding Ltd.’s debuted for $25bn in 2014.

  • Sector: Consumer Discretionary
  • Industry: E-commerce Retail
  • Founded: 2010
  • CEO: Bom Kim
  • Revenue: 12bn USD (2020)

Pop goes the IPO

Having been founded at the turn of the last decade, Coupang started off as a company focused on a hybrid business model offering attractive discounts and deals while acting as a third-party marketplace similar to eBay, before exploding into the e-commerce space and establishing itself as a key player in a relatively short amount of time. Coupang was started by Bom Sum Kim, a Harvard Business School dropout entrepreneur, and he retains more than three-quarters of the company’s voting rights while also sitting as Chairman of the board. On the path to success, Bom has evidently won over the hearts, and more importantly, the deep pockets, of big institutional investors such as Blackrock, Sequoia, and SoftBank which owns a third of Coupang, a stake now worth $28bn. SoftBank first invested $1bn in Coupang in 2015, before doubling down and investing a further $2bn in the company through a deal struck in November 2018 which valued Coupang at $9bn.

In 2020, Coupang saw revenues just shy of $12bn, up 91% from the previous year. With 14.9m active customers, net revenues per active customer stand at around $256, up 60% from a year ago. The pandemic has acted as a catalyst for growth in the e-commerce sector globally, and Coupang has almost certainly leveraged that fact with aggressive spending and expansion. While still operating at a loss, revenue growth has exceeded 90% for the past four quarters and Coupang’s profit margin as measured by EBITDA improved from -8.8% to -2.1% last year, charting a swift path to profitability well before other loss-making heavyweights in the industry.

Coupang has approximately 50,000 employees with plans to double their workforce by 2025, and despite only accounting for 4% it is poised to beat out the competition. For one, its dollar retention rate — the amount of money a particular consumer cohort sends each year after the first use of a platform — has been on par and even exceeded that of Amazon, Alibaba, and Walmart as far back as 2016. This metric demonstrates that consumers are opting to use Coupang repeatedly and spending on their platform after first being introduced to it, indicating a loyal and growing customer base. Research from Goodwater Capital shows that Coupang is by far the most-used online shopping platform and it is the only big player making significant headway in broadening its market share.

Coupang appears to have established a value proposition that has captured the interest of a booming e-commerce market within South Korea, with plenty of room to grow into if it continues along its current trajectory. In 2019, Korea’s e-commerce sector was valued at $128bn and is projected to grow to $206bn by 2024 at a CAGR of 10%.

A Thriving Business Model

There is good reason behind Coupang’s spot as the most downloaded app in Google’s Korea Play store last year. It promises one-day delivery on almost its massive product selection and offers to deliver a big chunk of its orders in just a few hours. About 70% of the South Korean population live with seven miles of a Coupang logistics centre, allowing it to offer services such as free next-day delivery and its trademark Dawn Delivery (place an order by midnight to have your packages arrive by 7am). This was made possible through aggressive expansion of its delivery and logistics operations, building up the necessary infrastructure before taking more ambitious and innovative steps such as making deliveries without any packaging and a seamless return process.  

Part of Coupang’s success may be attributed to the unique advantages a country such as South Korea offers. In a country where Wi-Fi is ubiquitous and an internet penetration rate of 96%, the effective market is theoretically the entire 50 million population within its borders. On top of that, that same relatively wealthy population (with a high GDP per capita) are densely packed into urban areas barely twice the size of London. While it may make for a tight fit, for Coupang it is the ideal environment to benefit from the economies of scale and network effects of having a robust logistics network in place.

Though this is not to say that Coupang is bound for success. There are various concerns surrounding its growing presence, most notably the controversy regarding poor workplace conditions leading to several fatalities of workers on the job. A concerning number of deaths and injuries amongst Coupang’s burgeoning workforce has drawn the attention of labour activists and government ministries alike, citing poor working conditions and an ever-growing workload on its numerous contract workers despite stagnating wages. Coupang has acknowledged this shortcoming in its IPO prospectus and its logistics head has publicly vowed to improve the labor environment for all workers. Such scenarios may seem familiar, bearing all the hallmarks of similar instances across the pond in Amazon warehouses.

It’s Enterprise-Value-to-Revenue multiple, a measure used to determine if a stock is priced fairly or not, currently sits upwards of 7.0 which is more than twice that of its similar competitors. Competition in the ultra-urban economy of South Korea is intensifying as other companies vie for a larger market share in the lucrative e-commerce sector. Amazon invested a 30% stake in Coupang competitor 11Street in November 2020, and we are seeing further consolidation as Naver and E-mart, both large retailers with their own platforms, joined a partnership. Lastly, sky-high valuations are particularly susceptible to volatile economic conditions as highlighted by the recent bond market turmoil and interest rate unease.

Nevertheless, the capital raised from the IPO will be of immediate benefit to Coupang in allowing it to make significant investments in its already impressive architecture. While investor enthusiasm appears to remain unhampered by such concerns, the question of whether Coupang’s labor-intensive approach to getting deliveries to customers’ doorsteps and its eye-watering valuation is sustainable in the long-term remains a pressing one.

Amazon in the East

There are often comparisons made between Coupang and Amazon, but upon closer scrutiny the parallels between the two giants diverge rather quickly. Amazon’s primary revenue source lies in its cloud-computing platform, AWS, and caters to an entirely different market than Coupang. Both Asian e-commerce giants, Alibaba and Coupang, have Softbank as their largest shareholder and are based in regions with a flourishing consumer base. Even so, their business models at the time of IPO also contrasted significantly. Operating margins for Alibaba were 31% when it first listed, while Coupang’s is -4%, highlighting the capital-heavy model of Coupang with extensive investment into its logistics and fulfilment infrastructure. Any number of comparisons can be made between Coupang and other e-commerce and technology success stories, but the bottom line is that it is an exemplary success story of a company that has taken what worked for others  — positive customer experience, most services, lower prices — and put it into practice.

The booming e-commerce industry and its respective giants across various markets around the world act as a lens of sorts, offering a unique insight into the rapidly evolving consumer habits and regional idiosyncrasies which companies such as Alibaba, Amazon, and Coupang have all ventured to overcome by making it easier for the consumer to buy from their platforms. The hurdles to capturing the market in China were almost certainly very different to the consumer friction points Amazon experienced while becoming a household name across the Western world, and so will Coupang’s foray into e-commerce in the Korean market, whether that is through world-class service and responsiveness or a cutting-edge consumer logistics network. Coupang’s ambitions are perhaps best captured by a quote from Kim himself during an interview with Bloomberg Television:

“Our mission is to create a world where customers wonder, ‘How did I ever live without Coupang?’.

Bom Kim – Coupang CEO.

Sources

https://www.sec.gov/Archives/edgar/data/1834584/000162828021001984/coupang-sx1.htm

SoftBank-Backed Coupang Gets Debut Gain in Top 2021 U.S. IPO – Bloomberg

Coupang IPO Cements Shift Away From Chaebols Among Korea’s Elite – Bloomberg

Coupang’s New York listing clouded by worker deaths | Financial Times (ft.com)

Coupang IPO Raises $4.55 Billion, Ready For Trading | Investor’s Business Daily

SoftBank-Backed Coupang Gets Debut Gain in Top 2021 U.S. IPO – Bloomberg

SoftBank-backed Coupang jumps in Wall Street debut after $3.5bn IPO | Financial Times

CPNG | Coupang Inc. Annual Income Statement – WSJ

E-Mart-Naver alliance to bring changes to e-commerce market (koreatimes.co.kr)

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