Coupang (The Amazon of Korea) – Full Diligence Post From a Korean

by rareliquid

I’ve been living in Korea for the past ~2 years (and am Korean-American) and over the past few months have been using Coupang to order products and food. I was mainly using it as part of my due diligence for the upcoming IPO but now I’m a loyal customer. Here’s my DD on what’s known as the “Amazon of Korea” (which I think is a well-justified title).

All information + data is from the company’s latest S-1 filing + from my own experiences. Company is set to IPO this week (latest report I saw was Thursday, 3/11/21)

A Brief History of Coupang

• Coupang was founded in 2010 by Bom Kim, a Harvard business school dropout
• The company started off as a daily-deal Groupon type business but pivoted into an EBay-style third party marketplace that reached over $1 billion in sales within 3 years
• Coupang almost went public with that business model but decided to pull out of the IPO because Bom felt like Coupang was one that customers liked but not one they loved (pretty ballsy move imo)
• As a result, Coupang completely reinvented itself into an end-to-end eCommerce company and with the help of a $2 billion investment from Softbank in 2018, the company has now become a dominant force in Korea

What Does Coupang Do?

• Let me first set the stage by providing the 3 key values that drive everything that Coupang does: service, selection, and price. These values pervade all of Coupang’s business divisions, and I’ll be discussing the company within the framework of these 3 values.
• First off is in my opinion the most impressive, and that is the company’s service
  • What separates Coupang from its competitors in Korea is that the company has invested billions of dollars in both technology and infrastructure to own the entire customer experience from desktop to delivery
    • This is in contrast to some of the company’s competitors like GMarket and Naver which mainly offers a platform for merchants to sell items
    • Competitors are quickly adapting to Coupang’s business model but as of now, Coupang’s model combined with its scale is unique in Korea
  • The company owns the largest logistics footprint in the country with 70% of the population living with 7 miles of a Coupang logistics center
  • This allows the company to offer the fastest delivery service in the country through Rocket Delivery which offers the following services:
    • First, millions of items are available for either same day delivery if ordered in the morning or Dawn delivery, which delivers products to you by 7AM if you order by midnight
    • Second, nearly 100% of orders are delivered either by the next day or faster 365 days a year even before holidays like Christmas
    • Third, the company has been able to eliminate cardboard boxes in over 75% of its orders which saves the company both costs and in storage space
    • Fourth are frictionless returns. Instead of having to drop off your items, you simply leave them outside your door and initiate a return on the app which is super convenient
• The second value to discuss for Coupang is selection, which I’ve also found to be very impressive
  • Put simply, Coupang offers more items than any other Ecommerce player in Korea both for products and for groceries
    • I’ve personally ordered a range of items from Coupang like pens, strawberries, and tape but you can also buy things like TVs, clothes, and Apple products
• The third last but not least important value is price
  • First of all, Coupang offers all of the great services like Rocket Delivery and same day shipping through its Wow Membership (akin to Amazon Prime) for an insanely low rate of 2900 won a month which roughly equates to $2.50
  • Second, the company is constantly offering deals for products even for things like cell phones and Apple products
  • Coupang’s goal is to offer the lowest possible prices to customers and the scary thing is that as the company scales, its competitive advantage on this front will grow more and more
• Other business divisions
  • Coupang Eats is basically like UberEats and Doordash and it’s a separate app where you can order food
    • I get ads for Coupang all the time and from speaking with my Korean friends, it sounds like this is one area where Coupang has a lot of mindshare amongst customers but faces a lot of stiff competition compared to its dominance in eCommerce
    • As an investor, it’ll be important to see if this part of the business has a path to profitability and is gaining market share or is just bleeding money since margins are likely very slim
  • Merchant Services, which is similar to fulfillment by Amazon. Merchants can send their items to Coupang fulfillment centers so that they don’t need to handle inventory themselves
    • Merchants can also pay to advertise on Coupang which is another revenue driver for the company
  • Coupang Play is a streaming service
  • Coupang Travel which is like a Kayak or Expedia and offers travel deals
  • There’s even more the company is working on, but basically what you need to know is that Coupang has a lot of potential growth beyond just eCommerce

The Korean Market

• I wanted to provide some context about Korea itself from having lived here the past 2 years that is relevant to Coupang
  • First off, Korea is incredibly tech savvy
    • There’s free wifi everywhere even on buses and basically everyone in the country has a smartphone including my grandma
    • As a small example, Koreans were using their smartphones to pay many, many years before Apple Pay even existed
    • This is obviously important for Coupang because all orders come from online
  • Second, as a baseline, Koreans work incredibly hard
    • Korea was a 3rd world country after the Korean War in the 1950s and since then has become the 4th largest economy in Asia and 12th in the world
    • A lot of Korean students literally study from 8am to midnight from elementary school to high school and a lot of my friends who work in corporate work super long hours even without great pay
    • I bring this up to say that Coupang is constantly employing a workforce that from a general perspective has an incredibly high work ethic
  • The third is that because Korea’s land is so small, cities are incredibly dense
    • This is what allows for Coupang to operate so efficiently and probably much moreso than is possible in bigger countries like China and the US
• Addressable Market
  • As of 2019, Korea’s eCommerce market was $128 billion and that’s expected to grow to $206 billion by 2024, which represents a 10% annual growth rate
  • In addition to that, eCommerce spend on a per buyer basis is expected to grow from $2600 in 2019 to $4300 in 2024
  • These numbers are great, but what’s really astonishing is that even with Coupang’s massive scale, it currently only owns about a 4% market share, which means the company has a lot of room to grow

The Bull Case

• First, let’s talk about the company’s scale
  • In the entire country, Coupang is the largest e-commerce player, has the fastest delivery service, owns the largest logistics footprint with over 100 centers across 30 cities, provides the largest selection of products, and largest fleet of drivers with over 15,000 employed
  • Coupang was able to grow to its scale today after raising $3.4 billion, 3 of which came from Softbank, which has the largest fund in the world and it’s going to be hard for another competitor to come in with that kind of funding (though it is possible)
• Second is Coupang’s tech because at the end of the day, Coupang is actually a technology and logistics company
  • All that money from Softbank didn’t go only into capital expenditures but also a really sophisticated tech infrastructure that predicts and assigns the fastest and most efficient path for every order
  • Each order shifts through 100s of millions of options for inventory, processing, and delivery options all within seconds
• Third is an extremely loyal and growing customer base
  • Some tech companies provide something called cohort math which is where you see how the same group of people have increased or decreased their spending of a company’s products over time
  • If you take a look at this table, 2016 customers took 5 years to triple their spending, while it took 2017 customers 4 years, and 2018 customers only 3 years
    • From using Coupang myself, I can totally see why this is the case. I went from ordering from multiple sites to pretty much only using Coupang now because it’s so convenient
• Fourth is the company’s management team
  • Bom Kim (CEO) – The company is founder-led, which I think is usually a good thing because they know the ins and outs of the business
  • Thuan Pham (CTO) – Former CTO of Uber (really great hire since Coupang is a logistics company)
  • Gaurav Anand (CFO) – Lots of finance experience from Flipkart and Amazon

The Bear Case

• First off, the company is unprofitable and may continue to invest in new businesses that could cause severe losses just as when Uber tried to enter China
  • The company points out as a risk factor in its S-1 that it may expand into other countries and I would pay really close attention to this since this could take away the company’s focus and cause losses
• Second is the lack of shareholder voting rights
  • Coupang’s CEO Bom Kim owns about 77% of the company’s voting rights and also acts as Chairman of the board, so this guy has a ton of influence over the company
  • If Bom Kim starts underperforming for whatever reason or there’s some kind of scandal (abnormally frequent in Korea where there’s a lot of bribery and fraud), this could be something to watch out for
• Third is Coupang’s valuation
  • As with most IPOs, there will likely be a frenzy and the company’s valuation could get stretched very quickly, so this is just something to watch out for
  • At the top end of its range of $34 per share, the company’s valuation will be at about $58BN
    • With LTM sales of ~$12BN, the company’s EV / LTM Sales multiple will by 4.8x (which actually would be a good price in my opinion)
  • BUT, there will likely be a pop and I wouldn’t be surprised if shares reach $100, giving the company a ~$100BN valuation and that’s where valuation will be a bit stretched (though long term, still may be okay)
    • Will be posting more about Coupang’s valuation after its IPO
• Fourth, is competition which is a potential issue even for Coupang
  • In November 2020, Amazon invested a 30% stake in competitor 11Street, which is majority owned by SK Telecom which is one of the largest companies in Korea
  • The industry Coupang competes in is very lucrative market so there will always be some stiff competition with deep pockets
  • I do plan to make another post in the future about Coupang after interviewing my Korean friends some more and will include a competitive landscape analysis when I do

Financial Overview

• Revenue
  • From 2019 to 2020, Coupang’s revenue grew from $6.3BN to $12BN, nearly a 100% increase (COVID did have a factor in this so can’t expect a similar growth rate moving forward)
    • Coupang has been able to grow its quarterly revenue from $0.8 billion in Quarter 1 of 2018 to $3.8 billion in Q4 2020
    • This was driven by a 27% annual increase in number of customers from 9.2 million to 14.8 million from 2018 to 2020
    • There was also a 42% annual increase in spend per active customer from $127 to $256 from 2018 to 2020
• Margins
  • As the company has scaled, it has been able to improve its gross margins from 4.7% to 16.6% from 2018 to 2020
  • Coupang also increased its EBITDA margin from negative 24% to negative 2% from 2018 to 2020
    • Due to the increase in the company’s scale, the company is spending less on operating expenses as a percentage of revenue and what’s most fascinating to me is that Coupang only spent 1% of its revenue on marketing in 2020
• Cash Flow Statement
  • Company actually posted positive operating cash flow of $300 million (not much) but still, means the company’s core business is not losing money
  • With negative $484 million in capital expenditures, the company has negative free cash flow of ~$180 million but that’s essentially breakeven for a $11 billion revenue business
• Balance Sheet
  • Won’t go into this much because balance sheet will look very different after IPO
  • But, the company has $1.2BN in cash and around $1.1BN in debt. Company is raising around $4BN in cash from the IPO so balance sheet is healthy

TLDR: Coupang is the Amazon of Korea. Growing like crazy and at the right valuation, a great way to get exposure to the South Korean eCommerce market which has a lot of tailwinds. Personally from using the service myself over the past few months, I don’t see the need to use basically any other eCommerce platform for products or groceries. IPO reported to be this week on Thursday so good one to watch for.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.