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Coupang Write Up + Q1 2021 Earnings Commentary

Expand Your Circle Of Competence!
Expand Your Circle Of Competence!
Disclosure: I do not have any positions in Coupang. This is not investment advice.

Coupang has been called “the Amazon of Korea”. It was founded by Bom Kim in 2010 after his magazine company “02138” failed to take off in 2009. Coupang has gone through two major business model pivots. In 2010, Coupang’s business was a daily discount coupon platform similar to Groupon. By 2013, Coupang looked more like an eBay style marketplace connecting sellers with buyers. By 2015 and another pivot, the business looks like what we see today, a vertical fulfillment center owning all the logistics down to the last-mile of delivery.
Business Breakdown
Coupang has three different businesses: retail, food delivery, and grocery delivery. (Coupang Pay, payment service platform, was spun-off before Coupang’s IPO in March 2021) In 2020, the majority of revenue is retail at 92%. Everything else— Coupang Eats and Rocket Fresh makes up the remaining 8%. 
Retail
Coupang is different from competitors because it controls the whole consumer experience. From the moment you order on the app— to the last mile delivery to the front door. Coupang controls it all. Control of the whole consumer experience is the main ingredient to build a long lasting connection with the customer.
Coupang only operates in South Korea, a small country about the size of Indiana. For readers who aren’t familiar with Indiana, the U.S. is about 99 times bigger than Korea. Coupang has invested billions of dollars in building 100 fulfillment and logistic centers in over 30 cities, totaling over 25 million square feet. Including buying custom delivery trucks to fulfill last mile delivery. Coupang plans to expand and increase their footprint by 50% or 12.5 million square feet in 2021 alone.
About 70% of South Korea’s population of 52 million lives within 7 miles from a Coupang logistic center. Seoul is the largest city in Korea with a population of a little less than 10 million. The population density of Seoul is 40,830 per sq. mile compared to New York with 27,547 per sq. mile. Everyday Coupang enters inside every apartment in Seoul to deliver packages.
If the unit economics of cross selling apartment services is highly profitable, management can definitely bolt on new services to Coupang. For example, Coupang enters every apartment building, a cross service like valet trash or cleaning service can bring extra value to customers. 
The cost efficiencies of delivering to a densely populated city compared to a suburb neighborhood should be noted. Korea, especially Seoul, has large high rise apartments where Coupang directly delivers to the door of the customer. This process can add more time because of having to use the elevator. Old apartments in Seoul usually have only one elevator to service the whole building. This is different than in the U.S. where Amazon can usually go to a central mailroom at an apartment and drop off all the packages quickly. Apartments in Korea do not have this central mailroom for dropping off packages yet— but newer apartments are starting to include a larger mailroom layout.
Seoul, Korea
Seoul, Korea
Coupang is really pushing for their customers to build a habit of ordering from Coupang. This can be shown from Coupang cohorts increasing spending every year compared to Year 1. As Coupang continues to build trust with customers, cohort spending will continue to increase.
In 2019, Coupang launched Rocket WOW membership for $2.60 (2900 won) a month. Benefits of Rocket WOW includes: before 7 am delivery if you order before midnight and free grocery delivery. Some additional ways Coupang is different than Amazon:
  • 75% of packaging does not use cardboard box and fresh foods use reusable bags for saving costs and pollution
  • Frictionless returns - just leave the item outside your door (no repackaging, no labels, no post office trips required).
  • Last-Mile Efficiency - owns the whole vertical system from distribution centers to customized vans making deliveries.
There are 16 million active customers. About 5 million or one-third are Rocket Wow members. There is plenty of growth left to upsell customers to become members. Just keep in mind that about 50% of young adults (18-29 yr olds) still live with their parents. This is very common in Korea. Families living in the same apartment will probably pay for only one membership and share accounts.
Online Retail Competition
Competition in e-commerce is fiercer in Korea than when Amazon was starting out in the US. Here is a breakdown of market share for the following largest Korean e-commerce company. A thing to watch out for is Coupang’s market share growth relative to competitors. Because there are so many online e-commerce choices in Korea, Coupang’s growth is a testament to Koreans favoring the product. 
Everything Other than Retail
Food Delivery
South Korea is ranked as the third largest market size for online food delivery. Transferring advertisement budget is a large part of the boom and success of delivery platforms in Korea. In the past, small restaurants would usually advertise by paying Korean grandmas or 할머니s to pass out restaurant flyers in high traffic areas. Now, restaurant owners are placing most of their budget into advertisements on the major food delivery platforms because of higher return on investments.
Coupang Eats is ranked the third largest food delivery platform in Korea. It is a restaurant delivery service, similiar to Uber Eats in America. Regardless of the geography, delivery platforms attract workers by offering flexible work hours and turning it into a game. Food Delivery platforms gamify the industry by giving bonuses when it rains, long distance delivery, and special missions. This food delivery model can be applied all throughout the world.
Scooters are the preferred method of travel because of the small winding roads and ease of parking in Korea. It is common in Korea for food delivery men on scooters to run red lights for quicker deliveries.
The business model for a food delivery platform is to charge fees to restaurants and customers. The restaurant fee is in the form of a recurring fee for accepting online orders, commission fee, and/or flat fee per order. That’s a lot of fees.
Baedal Minjok charges a flat monthly fee of $73. In 2020, Baedal Minjok tried to introduce a fixed-rate commission fee 5.8% per order but was met with backlash from restaurant owners. The founders apologized and reverted back to the flat monthly fee. 
For customers, there are fluctuating delivery fees depending on all kinds of scenarios—weather, demand, distance. The most expensive delivery fees occur when “surge pricing” during peak demand causes delivery fees to skyrocket due to the lacking number of drivers. Surge pricing is based on algorithms of price increases to find a balance between high demand and low supply.  
In my opinion, the food delivery business is not the best type of business. The ugly business model of reinvesting profits to improve efficiency only to be given away to drivers, restaurants, and customers.
Sure— there are some incredibly powerful moats in place. Network effect of the market place attracting drivers and restaurants to join the growing platform. Economies of scale to cover recurring expenses. Even with these powerful moats, I believe the food industry will go through tough years before reaching profitability.
Profits being eaten away.
Profits being eaten away.
Food Delivery Competition
The food delivery business has become a hot industry with rich valuations. In Korea, there are three large food delivery platforms— Baedal Minjok is the largest with 66% of the market, Yogiyo is the second with 17.9%, and Coupang Eats with 13.6%.
In Dec. 2019, Baedal Minjok was agreed to be bought by Delivery Hero SE, a German food delivery company, for $4.3 billion dollars. In 2019 and 2020, Baedal Minjok had revenues of $476 million and $971 million respectively (increase of 94% from previous year). The high price tag of $4.3 billion to buy Baedel Minjok and become the number one food delivery platform in Korea seemed expensive at the time of announcment. That was 9 times 2019 revenue. The deal is more palatable now with 2020 revenue increasing 94% from 2019.
Delivery Hero also owns Yogiyo and will be forced to sell to a buyer in order for the Baedal Minjok transaction to go through. Estimated price for Yogiyo is around $1.8 billion. Yogiyo’s 2020 revenue was $311 million with EBITDA of $42 million. Delivery Hero is seeking a price of six times revenue, but buyers are hesitant to pay a premium due to the seller’s urgency to divest the platform in order to meet FTC requirements.  
Competitors: Baedal Minjok (Baemin), Yogiyo
Grocery Delivery
Coupang’s third largest business is grocery delivery. Rocket WOW members can order groceries before 10 a.m. and have it delivered by 6 p.m on the same day. As well as ordering before midnight and having it delivered before 7 a.m. The minimum order requirement is 15,000 won equivalent to about $13.58 USD, lowest in the industry. 
Coupang’s investment in logistics and infrastructure for retail can share synergies with the grocery delivery business. All grocery delivery platforms in Korea are not profitable yet. The industry is still fairly young, but I believe Coupang will be the first one to be profitable due to infrastructure build out.
Competitor: Market Curly, Shinsegae, Naver (Jangbogi)
Financials
Coupang’s markup for items in retail or gross margin cannot be precisely calculated. Costs of sales include logistics, shipping, and depreciation and amortization expenses which makes it harder to determine markup on items. The retail business should see better margins going forward as Coupang plans to sell more apparel, beauty, and consumer electronics.
Other key important metrics to watch for in the future will be inventory turnover, active customers, and revenue spend per active customer.
Future of Coupang
All eyes are on Coupang’s ability to keep growing. In multiple interviews with founder Bom Kim, he is really focused on continuing to grow Coupang’s businesses rather than becoming free cash flow positive. The first priority is to continue to take domestic market share for retail and food & grocery delivery. The second is to bring Coupang’s high density urban business model to other competitive asian countries. Singapore will be the first international expansion. The success or failure of Singapore will be a gauge to see if Coupang can be replicated throughout high density Asia cities.    
Coupang is experimenting with myStore, similar to Shopify, where merchants can set up their own store to grow their brand on Coupang’s platform. If you can’t tell by now, Coupang’s DNA is to move fast and try to create a business case for new products. It will be up to management to take appropriate small bets and scale up if it works and retreat if it doesn’t. It is applaudable when management knows when to quit and move on. Everything Coupang is trying to do will not be successful, but it will be up to management to apply the lessons learned from failures to create even better products.
Insider Ownership
Founder and CEO Bom Suk owns about 10.2% of Coupang through super-majority shares giving him 76% voting control.
SoftBank owns about 35% of Coupang. I believe SoftBank will be looking to unload shares to lock-in profits which will move the market downward.
Potential Red Flags
  • Employs family members with high salaries. Bom Kim’s brother and sister-in-law make $279,000 - $475,000 and $202,000 - $247,000 respectively. That is a really high salary in Korea.
  • Total Addressable Market of $534 billion in 2024 is highly inflated because it includes “travel spend”. Unless Coupang is making some sort of travel app I don’t know of— including travel spend deceives investors.
  • More overworked employees deaths in the future can be a PR issue and lead to a boycott of Coupang. 
Competitive Advantages
I could list all the moats that are common in online retail: network effect, economies of scale, scale economies shared, and intellectual property. However, because Korea has no dominant leader in market share— the competitive advantages could be argued for everyone.
Instead, Coupang’s moat is very simple. The ability to continue providing value to the customer. Today, the value proposition is next day dawn delivery, low prices, no hassle returns, and large selection of products. Tomorrow it will be quicker shipping, lower prices, and even wider selection of products. Providing the most value to the customer will protect future profits and lead the customer to say…
“How did we ever live without Coupang?”
Valuation
The way I valued Coupang was valuing retail separately from the rest of the business. For the retail business, I compared the financial metrics to 2007 Amazon. Although not a perfect comparison, it does bring some insights. Amazon’s revenue in 2007 was $14.8 billion and free cash flow of $1.2 billion. Amazon spent $224m in capital expenditure which includes fixed assets, internal-use software, and website development. Inventory turnover was 9.5 on total assets of $6.5 billion (includes $2.5 billion in cash). The market cap for Amazon ending in 2007 was $38 billion.
Comparing 2007 Amazon to Coupang— Amazon seems to be the better business. Amazon has a higher TAM and in the U.S. GDP per capita is almost double of Korea ($65,000 vs $32,000). A positive note for Coupang is higher revenue growth of 90%, 50%, and 70% for 2020, 2019, and 2018 respectively. I expect revenue growth to fall as 2020 sales were boosted due to COVID. 
Coupang Eats and Rocket Fresh are currently money losers and do not contribute significantly to the top line. I would value both businesses combined to be in the $3-4 billion range. (The final Yogiyo sale transaction can help determine a more accurate estimate of Coupang Eats value.)
Coupang is trying to become the super app of Korea by taking the best of Silicon Valley— Door Dash, Instacart, Amazon, Shopify all into one. It makes me wonder if management is spreading itself too thin and becoming a master of none. There is an abundance of optimism and growth baked into the $60 billion dollar market cap today ($50 billion the day I am posting). To justify the $60 billion market cap, retail revenue will need to grow to over $25 billion with tighter control of operating expenses. Coupang can definitely grow into its market cap today, but I am conservative on how long the runway of growth will be.
Q1 2021 Commentary
The Good: Revenue for first quarter increased 74% to $4.2 bil on a tough 2020 comp. Korea was starting to see COVID cases in January 2020 which fueled online ecommerce and benefited Coupang. I will be watching out for how 2nd qtr 2021 revenue compares to 2020. I will be amazed if revenue growth remains above 50% year-over-year in the second quarter.
  • Retail revenue increased 70% year-over-year to $3.8 billion.
  • Non-retail revenue increased 226% year-over-year to $400 million. (Mostly due to Coupang Eats)
  • Coupang Eats was the most downloaded app in Korea during Q1 2021
The Bad: Net loss increased 180% to $295 million even with the growth of retail revenue. Operating expenses increased to 23.8% of revenue. In part, due to equity based compensation of $87 million.
Coupang's First Quarter Results
Coupang's First Quarter Results
Founder, Bom Kim laid out the story of Coupang’s bright future in the conference call. He is very charismatic and passionate but that is to be expected of a founder. Now we just have to wait and see if he can execute.
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