Rise of the Korean Amazon?

Who are Coupang?

Coupang is a South Korean company founded in 2010 and represent the largest e-commerce group in South Korea. Their reputation as the “Korean Amazon” stems from their Rocket Delivery network providing both same-day and next-day delivery for over 5 million unique items. The company was founded by Bom Suk Kim, a Harvard drop out, and since then the company has received $2 billion in funding from SoftBank’s Vision Fund, with major asset managers such as BlackRock and Fidelity also holding a commanding stake.[1]

What is the story?

The company started as an online site offering deals to group buyers. Through aggressive marketing and cheap deals, Coupang were able to expand their logistics network to over 100 fulfilment centres across 30 cities. Their March 11th SoftBank-backed IPO turned out to be the biggest public listing of 2021 and the largest US public offering by a foreign company since Alibaba in 2014.[2] This follows the positive trend of the large US technology giants such as Amazon who have seen shares reach unprecedented levels following the pandemic as consumers begin to turn away from traditional high-street retail shops. Left with little option over the past year, this trend was already set in place earlier with the liquidation of large chains such as Debenhams, suggesting that the market for the likes of Coupang is incredibly strong and promising with the Covid-19 crisis simply accelerating the process. With the acquisition of Singaporean streaming service, HOOQ which was used to form the foundation of Coupang Play, it is clear that the ambitious CEO is taking great inspiration from Amazon by reinvesting into expansion across a range of industries to make Coupang a global household name.

Coupang recently revealed it had almost quadrupled its revenues since 2018 whilst narrowing its losses. The online retailer saw its net revenue rise 91% in 2020, to $12 billion and booked a $527 million operating loss, which is up from the previous years. South Korea is home to one of the world’s biggest e-commerce markets yet profitability remains elusive due to the overcrowded sector. While Coupang is a dominant player, it faces fierce competition from the likes of Naver, eBay’s Gmarket subsidiary, messaging app Kakao and Baemin, the country’s most popular food delivery app, which has recently been bought by Delivery Hero. Coupang is certainly moving in the right trajectory as seen through their extraordinary growth figures and analysts predict that their EPS (earnings per share) should become positive by 2024. Furthermore, analysts predict that the annual earnings growth of Coupang will exceed that of the industry and market, giving investors plenty of reason to take note of the company. In a letter to potential investors, Bom Suk Kim stated that his mission is to create a world where customers wonder, ‘how did I ever live without Coupang?’

What does the future hold?

Despite the recent IPO success, Coupang has also had its fair share of controversies.[3] Like Amazon, the treatment of its workers is a serious problem with numerous human rights violations and deaths directly linked to the business model of Coupang. This clearly poses a heightening threat for all stakeholders involved as a recent 6% fall in the stock price is attributed to these concerns which might be an early indicator of an unstable future. Addressing these issues early on will allow greater longevity and prevent the firm from dissipating into the abyss following an extremely promising IPO.  

Hailed as the Korean response to Amazon by Wall Street, Coupang were able to secure a valuation of $80 billion but to what extent does this truly make them comparable to Amazon? Although the e-commerce giant has got off to a promising start, there is still considerable daylight before reaching the trillion-dollar valuation of its American counterpart. Despite their similarities ranging from human rights issues to their desire to expand into areas beyond online retailing, their differences are just as stark. For example, when it comes to funding Amazon was able to use internal and organic cash flows to fund early expansions by the eighth year of its creation.[4] Compare this to Coupang who are still heavily reliant on external investment to fund daily operations, despite being over a decade old. This has created a situation of negative shareholder equity and where the company’s fundamental financials are extremely vulnerable to external shocks. Last year, a negative cash flow of $182.5 million was reported and although losses are narrowing this figure, it is still concerning considering the age of the company. The negative shareholder equity refers to the fact that the company’s liabilities outweigh its assets, adding to the unsustainability of its aggressive debt financing model.

Their position is further jeopardised by the highly competitive e-commerce sector in Korea as in the post-pandemic world, Counpang’s market share stands at 25% compared to an almost 50% share of the US market commanded by Amazon. Therefore, the comparison between Coupang and Amazon become questionable once one digs deeper into both the business model and financial health of the companies suggesting that although Coupang is off to a bang, there is still a long way for them to go to reach the heights of Amazon.

Another interesting factor to note is the huge difference in the degree of automation across both Amazon and Coupang which, coupled with the company’s negative cash flows, sow the seeds for future uncertainty. Due to the gap in R&D investment between the two companies, Coupang is significantly more reliant on physical labour to support their obsession with efficiency and productivity. This puts Coupang in a vulnerable position where they may be forced to invest in machinery and increase short-term costs or risk being swallowed up by their domestic competitors.

Despite utilising cruel methods such as public shaming to create a high-pressured environment focused on performance, humans can never be as efficient as automated machinery. The lack of a commanding stake compared to Amazon means that Coupang will be forced to react whenever competitors venture into new territories or make new investments. Combining this with their current finances will mean that further debt must be taken on board to provide the capital needed to keep in line with the progression of competitors. Funding expansions organically would take years, through which Coupang would find themselves far behind other competitors. Consequently, further over-leveraging in the short term will be likely. This presents a two-folded issue whereby Coupang may find it difficult to pay off higher future interest payments as well as potentially having an impact on the stock performance as, once again, the question of sustainability is raised. Furthermore, the ambitious expansions into Singapore diversify Coupang’s market reach but decrease the available capital for each individual venture, again raising questions as to whether the move is impatient and perhaps a more pragmatic approach would be more appropriate.[5]

Coupang’s vulnerability is further exposed when exploring the loopholes they have utilised thus far to build their empire.[6] To avoid the 52-hour weekly caps placed on labour workers in Korea, Coupang has created an employment model where 90% of all warehouse workers fall into part-time and temporary-contract employees, which decreases pay per worker and increases exploitation potential. This is highly concerning as shifts in regulation will see Coupang face significantly higher wage payments and short-term costs once again which leads to the question, how long can they keep this up for?