South Korean e-commerce industry feeling the heat

Mounting losses in the South Korean e-commerce industry are calling local business models into question.

According to a new Yonhap News Agency report, competitive pricing and fast delivery capacities have made the industry an ascendant phenomenon in the territory, with the purchase of a whole spectrum of consumables now possible via mobile phone. The industry hit a record high of KRW111.8 trillion (US$98.4 billion) in transactions last year, putting the economy among the top five e-commerce markets worldwide.

But gigantic operational losses have emerged out of stiff competition on price and logistics set-up costs. Korea’s top e-commerce firm Coupang shattered its own records with KRW4.42 trillion ($3.8 billion) in sales last year, but made a staggering KRW1.1 trillion ($950 million) operational loss.

While Coupang’s deficits have been widening for nine years, CEO Kim Beom-seok stubbornly insists the losses are planned and says investment will continue.

“We have pushed for massive investment to impress our customers,” said Kim, “and will continue to aggressively invest in technology and infrastructure.”

The firm has single-handedly changed the outlook for South Korean retail and put brick-and-mortar operators on red alert – but has yet to prove profitable.

Rival operator Tmon faces a similar issue, with its KRW492 billion ($425 million) sales last year sad-tromboned by KRW125.5 billion (108.4 million) in operating losses that have been accumulating since the year 2000, now standing at KRW770 billion (665.5 million) in total. The firm’s latest nose dive was attributed to “investment in core technologies”.

“Customers frequently visited our app on expectations for new products and promotions changing every hour, which raised their royalty and created a virtuous cycle,” said Tmon CEO Lee Jae-hu. “We will continue efforts to strengthen the market position and seek ways to improve profitability this year.”

Market observers have suggested that online players are expected to find themselves stuck in a game of chicken in which few will survive the discount death spiral. Established retailers such as Shinsegae and Lotte may be in a better position to survive in the long run, with their already existing nationwide logistics and financial reserves.

“While Coupang is expected to take a lead position among e-commerce players for the time being, Shinsegae and Lotte will expand investment in the online market,” said Heungkuk Securities analyst Chang Ji-hye. “Offline retailers are considered to have a competitive edge in the long term as economies of scale help them reduce costs and lock in customers in their multichannel retailing.”


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