Last week, Coupang (CPNG) – which is the largest e-commerce operator in South Korea – pulled off the largest IPO of the year in the U.S. equities markets. The company raised a hefty $4.6 billion and the price surged 41% on the first day of trading, with the market cap hitting $89 billion. The underwriters included Goldman Sachs, Allen & Company, J.P. Morgan, Citi and HSBC.
The CEO and founder, Bom Kim, started the company in 2010. He actually dropped out of the Harvard MBA program to do so, realizing that the opportunity in South Korea was too big to ignore.
But interestingly enough, Coupang went through several changes in its business focus. At first, the platform catered to daily deals, which was the hot thing at the time. This was when Groupon (GRPN) was growing at a brisk pace.
However, when the market started to get saturated, Coupang would then transform itself into an e-commerce marketplace be similar to Alibaba (BABA).
This business did see strong growth, yet Kim was not satisfied. He believed he needed control over the distribution, with this including warehouses and the logistics.
And yes, this proved to be the right approach. It’s what has been essential for the torrid growth of Coupang. Since 2018, the quarterly revenues have surged from $900 million to $3.8 billion.
The Competitive Advantages
The market opportunity in South Korea is enormous. The country’s economy ranks No. 4 in Asia and No. 12 globally, with the gross domestic production landing at $1.6 trillion, or $31,847.15 per capita.
The country also has a high penetration rate for smartphones and access to high-speed Internet. As a result, the e-commerce segment has been particularly strong. The spending per buyer is forecasted to go from $2,600 in 2019 to $4,300 in 2024.
Although the market is intensely competitive, Coupang has been investing aggressively in innovating its platform. And at the heart of this is a sophisticated delivery infrastructure, which is called the Rocket Delivery service. Orders are received as late as midnight and before 7 am. In fact, about 70% of South Korea’s population is within seven miles of a Coupang logistics center.
Consider that over 75% of parcels are boxless. Additionally, the returns are frictionless. You do not have to pack a box or print a label. Instead, you just tap a button on the app and leave the item outside your home or business.
Coupang also leverages AI (Artificial Intelligence) to anticipate changes in demand and optimize inventory for quick delivery. What's more, there are roughly 15,000 drivers in South Korea.
According to the S-1 filing, “To realize such a differentiated customer experience, we built a completely integrated e-commerce and logistics system that controls every facet of the customer experience from the purchase on the app to the delivery and photo confirmation of the order at the door.”
Coupang continues to lose substantial amounts of money. Last year, the net loss came in at $567.6 million. It should be noted, though, that this was down from $770.2 million in 2019.
However, Wall Street is more focused on the revenues – and the prospects look encouraging. Coupang was the only major e-commerce player in South Korea to notch market share gains in 2020, with the figure moving from 18.1% to 24.6% on a year-over-year basis.
This is critical as the company will benefit from economies of scale. Coupang will also likely become a top-of-mind brand in South Korea. As seen with Amazon (AMZN) in the U.S., this can be valuable – and lead to a premium valuation.
It’s true that there will be volatility, but this is normal for any hot IPO. Then again, for those investors looking for an interesting long-term play on e-commerce outside of the U.S., Coupang does look like a pretty good choice.
Disclosure: Tom Taulli owns shares in CPNG.
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