← The Synopsis
The Synopsis
Interview. Former Coupang VP on Ecommerce Landscape, 1P vs 3p, and Expansion Plans
00:59:42
Loading summary
Transcript81 lines
- [00:00]
A
Foreign.
- [00:07]
B
Hello and welcome to the Synopsis, a podcast for professional investors. My name is Drew Cohen and today's podcast is really interesting because it is a recording of an expert call interview we had with Alpha Sense a few months back on a Coupang expert and in this conversation he gives in more detail some of the distinctions and and business rationale behind why a company would do 1p versus 3p different advertising, sort of take rates, all sorts of different insight into running the actual e commerce operation. So there's a lot of good tidbits that you can pull on that are broadly applicable, you know, if you're a Mercado Libre and Amazon a SEA investor. We do also speculate a good amount on Coupang's expansion out beyond Korea. Now this is again a few months old and I think the experts knowledge on the some of the competitive factors going on in Southeast Asia, particularly with sea was a little dated because I believe he, he said they don't have fulfillment, which they do. But beyond that little distinction, everything else in the interview does still hold up and it was really insightful. So we are excited to share it with you today. Now we're going to have actually another one of these expert interviews on Adobe and that'll be next week. And so there's going to be a link in the show Notes below where you could sign up for it, you could listen to it live or you could download the recording and listen to it on the Alpha Sense website. If you do this, you won't have to wait many, many, many months until we publish it on our podcast. Because this interview you're about to listen to, I believe we recorded it about five months ago. And so if you don't want to wait and you want to get that Adobe Expert Call interview where we're going to talk about all things AI, go ahead and find that link below in the show notes. And without further ado, let us begin. Hello and welcome to another AlphaSense webinar. I am really excited for this conversation. We with a former vice president of strategy and business at Coupang. Just before we get started though, my name is Drew Cohen for those that don't know and I run Speedwell Research which focuses on long term research for investors. This panel though is hosted by AlphaSense. And so if you haven't heard of AlphaSense, they are a market intelligence platform that brings together over half a billion documents including 200,000 expert call interview transcripts. And now an expert call interview is basically what we're doing right here. There's someone who's going to be asking questions and it's usually someone who's very informed on the space and you could get a lot of insights that are kind of hard to get otherwise through a lot of the other documentation out there. And so that's why I like the expert calls a lot. And I've also found myself using on AlphaSense a lot more often a lot of their AI features, particularly around asking questions. And then it's able to go through all of these different expert call transcripts and pull up the relevant ones. And sometimes there's stuff that's just not in the 10Ks that you are able to find on Alpha Sense. And so that's just a little bit of a plug before we get started started. But once again this is going to be a webinar focused all around Coupang and sort of the Asia E commerce landscape. And I'm joined here by Gong John Bhartia. And just before we get started though, I want to just say a couple words on what Coupang is. So they are kind of like the Amazon of South Korea. They are a dominant E commerce player and South Korea for those that don't know has about 50 million households and they have 25 million active customers and so they are really, really large. There's sorry, 22 million households. And so their e commerce business does about $34 billion in revenues a year. Gross profits are growing 22% plus EV to gross profit multiple is about four and a half times or 23 times trading on my mature margins earnings. And so that is enough of a background gun. John, welcome.
- [03:58]
A
Hey, thank you though. My pleasure to be here.
- [04:02]
B
And just while we get started, why don't you tell us a little bit about your role at Coupang as former vice president of Strateg in business.
- [04:10]
A
Yeah, so just a quick correction. So I was VP and head of E commerce finance and strategy. You know, so pretty much the similar kind of a role that you talked about. But yeah, I was there four years, joined them mid Covid pre ipo. The company was still into, you know, build out phase, helped scale out the company. You know, was part of the team that eventually made the company profitable. Grew into newer business verticals like the flc, the, the luxury vertical and, and Taiwan. So yeah, very, very fulfilling four years both professionally and personally. Our family enjoyed our stay in Korea. Very underrated country then. Now obviously Korea has a lot of soft power. People know about the country. But when I went people were like questioning as to why am I leaving a long standing career with GE to move to South Korea. But I'm glad I did and I met some great people and great business leaders there.
- [05:10]
B
Awesome. And maybe just to kind of level set, can you tell us a little bit about the South Korean e commerce landscape? I know we have Coupang, I know we have Naver. Are there any other players that are really vying for that top spot or how dominant is Coupang?
- [05:24]
A
So I'd say that there are many, many players that 10 plus players in the general e commerce space. But over the years, Coupang and Naver are the two platforms which have been trusted more by customers and they've been growing much faster. And because of that, what has happened is many other smaller players have either amalgamated into themselves or are on the way to kind of reduce their business size. So if you ask me today, there are two meaningful players in Korea. I never call anyone dominant. No one is dominant, but two very meaningful players in the e commerce space, which is Coupang, probably as the leader and neighborhood. Naver is predominantly a marketplace. They are trying to get into the services piece as well while providing logistics and warehousing support through Naver Store, but essentially remains as a 3Pmarketplace. Coupang has the 1P retail, they have the FLC which is the 2Pe business model, and they have the marketplace. So they have a full breadth of offerings for the customers on the e commerce side.
- [06:30]
B
Is there any other competitors though that you really see are worth talking about if you're thinking about South Korea e commerce landscape besides those two?
- [06:38]
A
Yeah. So you have SSG which was owned by Emart. You have 11th street in which I think Amazon invested some amount of money, $300 million couple of years ago, that didn't move much on that. You have AliExpress, Alibaba trying to enter and sell. Taemu has been trying to do some things in Korea. So I said there are many, many players, 10 plus players, but predominantly these two. And there's one other very interesting player which is Kakao, especially on the gifting side. Kakao is the messaging app like WhatsApp for Korea. Almost every Korean uses Kakao as the default messaging app. They've been very successful in gifting. So yeah, those would be the players that I think are meaningful.
- [07:21]
B
I understand that they still are kind of there and they have some sort of market share. By my estimates they're all kind of mid, you know, single digits, something like that. No one too meaningful. So do you see that more as an opportunity for Coupang or Naver to kind of take that market share over time or are they offering something that is kind of unique, that's going to allow them to kind of still stand in the face of what are becoming these kind of two E commerce giants?
- [07:47]
A
That's a great question. So I think I would kind of want to. And you want to look at it from two perspectives, right. First is the E Commerce itself, which is a small subsect of the overall commerce market in Korea. I think most estimates talk about the commerce market to be in the 550, $600 billion kind of a range. And the E Commerce is about 150 billion kind of a range, GMV equivalent. Right. What customers pay. So E Commerce is still. The penetration of E commerce in Korea has a long way to go. My sense is it will exceed 50% in the long run. Just given the dynamics of the geography, dynamics of the concentration of people in around Seoul, smaller families, longer working hours, more single household families, you know, people not having time to go out and shop and the convenience, speed and price that you get all together online so you're not paying a premium for, for the convenience. And that's something which customers love. So E Commerce has a long way to go to gain share. And I believe E commerce will continue to grow much faster than the overall commerce. And within E Commerce, Coupang and Naver will gain share from the other players. Some will fold up. They will not be viable to exist. So they may not exist. Some may pull out, pull through, but they will, they'll probably stay as, as fringe players. So yes, I think it's going to be two very, very meaningful players and then several other small players that will continue.
- [09:25]
B
So I understand that you're saying E Commerce penetration could reach maybe over 50% of the total retail market. What do you think Coupang's market share of E commerce could be? I know in the U.S. amazon's over 50%.
- [09:40]
A
See, it's a, it's a crystal ball you're asking me to look at, right. But you know, if, if I, if I look at what Coupang does, right, you know, they are focused on the customer. They want the customers to have it all. Their, their tagline is customers saying how did I ever live without Coupang? And they're very, very, very confident that they are able to offer the best selection, best price and best service. So you give all to the customer and if you do that, it's very difficult for a customer to we in a way or go elsewhere. Right. Because even though you have a choice, you still want to not go elsewhere. And lose out on one of these aspects. Having said that, my sense is that Coupang should definitely have a good shot at exceeding 50% share of e Commerce in Korea and in the markets that they enter. So Taiwan is just starting for them. And I'm sure you're going to ask me about Taiwan, but whenever Taiwan business stabilizes, I will see a very, very similar kind of a share over the long run.
- [10:47]
B
Okay, and you touched on selection a little bit there, but I know Bombkin's kind of been mentioning that pretty often for the past several earnings calls. And one of kind of Speedwell Research's points has been that they simply have to increase their selection and they're going to continue to be able to get more of consumer wallet share. And so what are some of the biggest gaps in selection that they currently lack?
- [11:08]
A
Sure. So when we look at selection on Coupang from a customer lens, essentially it's the rocket selection which matters more than the 3P selection. Obviously 3P does a great job on selection. Any platform you look at globally, 3P has the biggest selection because you know, that's the way it's designed for taking care of detail selection. Building a large, very large selection on retail is tough and expensive. However, when whenever there's a talk of selection, it's essentially on one P because it helps protect customer interest. As I talked about as a company, you're able to offer the price that you want which is equal to the lowest in the market. In the 3Pmodel, you don't control the price, the sellers do and they many times decide to price it higher. So my experience has been that a marketplace pricing is always highest. Customers end up paying more when they're buying from a marketplace seller versus when they're buying from a retailer which is like Kuba. So in terms of selection gaps, I would think within one P fashion, especially high end luxury fashion is one gap which, which exists and it's also an opportunity. The second area is accessories. Again expensive. Korea is probably the fourth largest luxury goods market in the world by value. Despite it being very small as a country. Koreans love to spend money on good clothing, bags, belts, whatever, luggage and all of that and more so because now the younger generation feels that the housing prices become so expensive, the home equity they were saving for, now they're spending on travel and luxury items. So it's, it's growing very fast and, and that's a thing which people crave for. So luxury items. So whether it's clothing or accessories, bags, purses, whatever watches included, sports like golf is Big in Korea, the selection on Coupang, on golf, there are opportunities for them to do more. Then I would say other major categories would be. There are several global brands which are not present in Korea directly. There may be some importers who are getting some small quantity and selling. That's kind of a gap. Footwear within, within fashion, vertical. Again, there is, there is a gap in, in selection and then cosmetics. Now in cosmetics there is a problem of inventory and there is a problem of selection. So you may have the selection but if you don't have enough inventory, you want to customers want to buy 100 or you have 100 orders but you have 10 as supply, then I would still say it's a selection problem. So you have both the SKUs not being there because of channel strategies played by different manufacturers where they don't want a particular product line to be available everywhere. They kind of divide the channels for their own good. And then there is the supply where they ration as to how much quantity can be can be provided. So I would say these are the gaps. So shoes, fashion, luxury items, cosmetics and not the regular cosmetics. I'm talking about premium cosmetics. And then on the fresh food side, the super premium fruits which is typically used for festives, festivals and for gifting. There is probably an opportunity there as well.
- [14:44]
B
And I'm curious because you did mention luxury and fashion and then they obviously bought Farfetch a little while back. I was curious. As much as they talk about it, they seem to talk about it as kind of a separate platform marketplace. But is there any thinking that there's kind of the selection and inventory there can help cross breed kind of selection and search on Coupang and there's some sort of synergy there?
- [15:08]
A
I would assume so. See, the Farfetch acquisition happened after I left, so I was not involved in that. But you know, as an outsider with a very keen interest in the industry, you know, absolutely. That is something that Coupang would definitely want to figure out. How to leverage the selection and the relationships of Farfetch'd to bring in the luxury selection into Coupang. Right. Including potentially importing or buying from Farfetch, getting into Korea and shipping it to customers in Korea so they can get the dawn or the next day delivery, which is very, very, very useful and loved by customers. Today Farfetch is, you know, it takes much longer if you order sitting in Seoul. If you want to order from Farfetch, it could take between three to seven days for your products to come in. Right. And when customers are used to same day or next day delivery. 7 days seems too long to wait. And today is the world of quick commerce. But yeah, the dawn delivery and this thing can only be possible if the inventory is stocked locally. So yes, you're probably thinking, right, and I think you and I are on the same process. Yeah.
- [16:16]
B
And kind of looping back to a little bit the 1p versus 3p discussion. So they've been emphasizing 3pmore in the past couple years. It sounds like that's mostly to kind of build out selection. I'm wondering though to what extent as they kind of build out that selection, as you were talking about, how 1P tends to be lower price, whether or not they're going to have to kind of go back and also build out 1P to kind of police the pricing on the 3P side or whether or not getting enough merchants on there can give you sufficient competition to bring the pricing down.
- [16:47]
A
So I think as a company, Coupang wants to grow all the verticals. 3P, 1P, 2P, all of them. And there are different business leaders driving with their own kras and deliverables. And it's not an excuse to say because 3P is growing, I can't grow 1P or vice versa. That's not acceptable. So each for their own. And it's a healthy competition by design. So the one piece also has a very stiff selection goal or target selection. Addition target. Right. So we got to ensure that we keep adding new selection so that, you know, as I said, the wallet share keeps increasing. We also make sure that the refreshes come in. Like if a product has an, you know, a new version of a product has been launched, we must have the new product come in and not have a gap in between where the old product is discontinued and either we are still selling the old product or there's a gap between the old product stopped and the new product coming online. The 3Pmarketplace would definitely lead the game on selection because as I said, it's self serve. Merchants can bring in selection from anywhere and add them at their convenience. So it's a distributed kind of a model anywhere in the world. 3p selection always will outlive or will be significantly more than the 1P selection. But I think Coupang has maybe 6 million SKUs on 1pm it's not small by any standards and they're not happy about it. They still want to do more.
- [18:15]
B
Okay, so we talked a bit about kind of growth in the core E commerce business in South Korea. The opportunity really there is just building out selection. It's A mix of getting more 3pmerchants on more 1p as well getting even more beyond that 6 million in SKUs that you're talking about. I want to touch a little bit on Taiwan now which is the first kind of time they've really gone out to an international market. Yes, they were in Japan for a little while. They did some experiments there, quick commerce but it never seemed to really scale up that much and they kind of left that country at least last they talked about it. I want to hear your thoughts on Taiwan, how it's going whether or not you think they can get the full rocket wow experience there.
- [18:56]
A
Sure. So Taiwan, you rightly said it was the first overseas expansion. This is, you know, based on the 1Pmodel. It's a full fledged business operations now. And you go by the last earnings call where the company talked about how they're planning to double down on Taiwan. That to my mind is the best statement that you know, anyone can hear from a management because that comes with a lot of, you know, thought and validation of the hypothesis they go in with and it comes with a lot of responsibility as a company they've been very, very focused on capital allocation. They've never been reckless about even though there's been a lot of money in the bank, they've never been reckless about spending but they take small steps and they keep challenging, validating and once they're super confident that this works then they double down. So they're doubling down on Taiwan. So I think Taiwan is just starting for coupon. Long way to go. They probably single digit market share right now within E Commerce. E Commerce penetration is lower in Taiwan than it's in Korea or any other developed economy primarily because Taiwan has been a marketplace model for most players. So there have been one or two hybrid players like Momo and PC Home but they're very small. Shopee, part of Sea Limited is the largest player, probably 60% kind of market share. If you look at the reports published it's probably the biggest market for Shopee as well. And it's a pure play marketplace again in a marketplace situation customers get the best selection. No doubt about it. The front end shopping experience is good because you know, you're able to search, find and buy. That experience is great but you know it's great. Only compare it with something else that you have. Right now you have Coupang which also has the same kind of an experience. Similar kind of an experience but they have much lower prices. Right. And they have much better delivery and they have free returns without any hassles for the wow customers. Now as a customer, if I see prices lower and better service, it's music to my ears. Why would I not take it? And there's no harm in trying it out because if we return helps in making that first call to buy and you buy a couple of times and you see consistent performance and this thing, then people decide to stick on and stay and move. So Coupon has been gaining share. They've been growing rapidly. I think they announced they're growing triple digits so basically doubling year over year. They should definitely be over a billion, billion and a half. Kind of a run rate now in terms of revenue in, in Taiwan, but still very small. It's, it's early days. I'm very confident that the demographics of Taiwan, the competitive landscape is similar to what was in Korea. The playbook that Coupang has tested and tried is working and is definitely going to work. So if you ask me, I will put my money on Coupang winning in, in Taiwan in a manner very similar to the way they won in Korea with a smaller investment than Korea as a percentage of the size of the business. Right. So Taiwan is a smaller country, lower number of people, you know, about half the size of Korea in terms of economy. So I think the opportunity is also about 50% of what Korea is. But the total investment of Coupang in Taiwan probably would be less than 50% of what they invested in Korea because they have the supplier relationships, they have the learnings. They don't have to face the COVID tailwinds in terms of costs that they faced in Korea. Hopefully not. So with all that, I think Coupang is very, very well placed in Taiwan and will gain share and just because the business model and the love of customers, they will get to a leadership position in the mid to long run.
- [23:00]
B
And so Taiwan doesn't have kind of a fully integrated e commerce provider and so Coupang is the first one to really offer that service in the space. And so I am a little curious though because I know Sea Limited and I don't know how much you've looked into them. I know they've tried to make some efforts into logistics. I'm not too familiar with exactly what but I, you know, Coupang's only been in Taiwan for like a little over a year. How is it in just a year they've already been able to surpass Sea Limited in terms of a delivery experience?
- [23:29]
A
So I think Coupang's been there for a little over two years now. But yeah, last one year is when you've Been hearing more about Taiwan because become meaningful now, right. If you're 100 million business you get lost somewhere, you know you don't even hear about them in the earnings calls and other ways. See getting to a full, full stack if you may. You know end to end provider of goods, services, logistics, warehousing, everything in E commerce is extremely tough. It's painful, it's time consuming, it requires a lot of investment and marketplace on the other hand is a light touch model wherein the investments required is basically initially getting the customers and the merchants in Once you have them the operating costs are fairly limited, the margin percentages are significantly higher and it's the cash machine now when you're already profitable and you're a cash machine it's very difficult for the management or the shareholders of the company to kind of pivot at that point in time to get into something which is going to drag on nrb, drag on the balance sheet and the PNL for the next several years. Right. So it's basically when you know it ain't broke, why fix it? Kind of a scenario, right. But obviously they must be feeling the heat and I'm sure they would be doing things some that we know of, some they will be trying at their end to pose a very very stiff challenge for coupang but unless they flip the business model into retail it's going to be a very tough one and I would say I don't think they're going to flip their business model to become a retailer or an end to end provider in Taiwan or other markets they have.
- [25:17]
B
Why do you think they won't be able to add 1p?
- [25:20]
A
Because it's incredibly tough. Right. And it's a long game. You're already a market leader, you're already making money, you're listed, you're reporting your numbers every quarter and all of that investors expect certain returns, certain EPS numbers out there. Now if you go back and say turn the business model on its head and well it will need five years of investment and losses and all of that and billions of dollars to be invested in. I'm not sure if the investors won't be happy about it or the management won't be even proposing something like that. We've seen this in Naver in Korea Naver had the similar story. They've been in and out of this thought process of trying to get into and copying the coupon model but they haven't done it really. So they've been trying to stitch up partnerships with logistics providers, with warehouse providers, with brand stores and Trying to put all of these together. It's not the same experience from a customer perspective because you know every player is still trying to make the most for themselves without having the customer at the core and center. It's about the DNA of a company as well. The DNA is very different. It's an asset light model which works well in many countries and it works extremely well till the time there is a challenger out there. Now if there's a strong challenger which succeeds then it disrupts the market. But if the challenger may not succeed that's very much possible that if Coupang fails to execute well then it's going to be a problem. It has to be a very lean, mean execution. That coupon has to deliver and continue to deliver in and out. So it's not like you get from point A to B and then you can say okay, I'm done. Right? You're on a treadmill doing that every single day because you know you're getting millions of orders every single day and you're delivering and you're giving value to customers. You cannot sleep one day and it's 365, seven days of you know,
- [27:17]
B
so I, I hear you and it makes sense that that would be kind of tough for them because they started in Southeast Asia. A lot of they're in tend to have lower income consumers. Maybe the unit economics in a lot of their Southeast Asian countries they don't really support a full logistics sort of service model because it is more expensive and a lot more capex kind of involved in it. So I get in those markets why they never did it and then you know, could they experiment with it in Taiwan? Yes, maybe. But now Coupang is already there so it's kind of a harder thing for them to even try to attempt to do.
- [27:48]
A
I agree. See I obviously I don't know what the management is thinking. Right. They may be thinking they may have already thought about it and taken a decision. So far they haven't done it. If, if I was to put my odds it's an extremely low probability that they would go that route now they would probably try and copy what Naver is doing or learn from that and kind of make some changes to what they think is right for their business in, in Taiwan and then kind of move forward. But yeah, I don't, I don't believe that they want to invest billions of dollars to write up a new business model in Taiwan.
- [28:26]
B
And I know Coupang has an office in Singapore. I don't believe they ever launched e commerce operations there. No okay, and what about the rest of Southeast Asia? Is there any opportunity there or does this model really only work when you have very high population density?
- [28:42]
A
Okay, so Coupon has not talked about any other country. So they've gone back to Japan for their food delivery business. That's, that was started earlier this year. So e commerce in Korea and Taiwan, food delivery in Korea and Japan, Taiwan, they haven't launched food delivery. So I'm sure food delivery will, will follow at some point in time in Taiwan as well. Now, outside these markets, if I were to think how Coupang operates, they would want to first enter markets where they don't have big retail players. So countries which have predominantly thrived on marketplace models because those are the easiest to disrupt if you have a very large, well placed, a good competitor in terms of a retailer, say an Amazon or an Alibaba or a Flipkart is already there. It would be a much tougher, longer gestation period for a company like Coupang to take them head on and fight because they'll also kind of protect their turf. And then the differentiation is much lower between the two retailers versus a retailer in a marketplace. So just thinking aloud, I would think that people from, from other markets perspective, they would go to other, other countries where predominantly retailers are missing and the marketplaces are thriving.
- [30:10]
B
Correct me if I'm wrong, but that's most of Southeast Asia because I believe it's just Sea Limited is kind of the biggest player there. And then there's a little bit kind of overlap with Gojek kind of having more of a commerce operation, a lot of those markets. But I don't believe there's any big one P focused e commerce player there.
- [30:26]
A
Right, you're right.
- [30:28]
B
Okay.
- [30:29]
A
The reason I was staying away from mentioning Southeast Asia is because then you'd ask me about which countries I don't know.
- [30:34]
B
Okay, got it.
- [30:36]
A
I was trying to keep myself very, very generic about, you know, more on the strategy and a process perspective versus what specifically.
- [30:45]
B
And that's fair. And I don't know if you've ever thought about this or not, but I know that Southeast Asia has a lot of kind of Islands. There's 700 different land masses in Southeast Asia. And I know it's a, you know, lower income sort of country with not the same sor of population density outside of some, you know, main cities. And so is there any thinking that this model, the unit economics just won't be as good if you do enter these markets because you're going to get lower basket size and you know, People are more spread out. So you don't have the shipping cost spread out across as many sort of deliveries.
- [31:17]
A
Okay, so think about this way, that the customers are still shopping online and there are fragmented players. So there is a seller, there is a shipping provider, there is a last mile guy, there is a warehouse provider. All of them coming together to serve the customer. So you know when you have. And for them the economics still work, right? Because the costs are lower. So your AOV is lower, your margins may be lower, but your costs are also lower. Right, if you stitch them together and do it efficiently. I think there is a, there is a good business to be made. India is a classic example. Amazon, Flipkart, Myntra, you know, and then several quick commerce players on the retail model. All of them are doing very well, growing fast, none of them making money yet. But you know, they're improving their unit economics and they all believe that they'll probably make money at some point in time. So India is a classic example where if you get scale, you can get to make money again. India, the ASPs and the AOVs are lower than many Southeast Asian countries that we talk about. So I don't think that just having a lower, you know, GDP or per capita income itself is going to be a detriment. It's about the right selection, right? So you may not have, I talk about luxury items in Korea that may not be the product to be sold in other, other markets like Southeast Asia or even South Asia. There's a very thin sliver of customers who probably buy that. But for majority it's going to be mid tier or the low value products that will kind of work. So having the right selection would be important. The convenience associated with E commerce is here to stay. That isn't going anywhere. Amazon has been around thriving for 25 plus years and only becoming stronger in the markets they operate. I don't think that business model is to be doubted anymore. It will work and it is working. It's just that it's fragmented and someone can come in and do it end to end and probably become more efficient and that's where the alpha will come in from.
- [33:32]
B
I just have to imagine though, if you pick out a customer from Seoul, that the unit economics for their deliveries are much higher than a customer in the outskirts of Korea. And so if some of these Southeast Asian countries, the demographics are more tilted towards everyone being like the customer that's on the outskirts of Korea, doesn't that just mean that the economics would be worse even? I hear you. There's a cost offset because the costs are lower. But I don't know that dynamic of population density and deliveries per delivery person versus okay, maybe you pay them a little bit less.
- [34:07]
A
You touched on a great point population density. So yes, Seoul metropolitan, high, high dense population. Most Southeast Asian countries are dense in population even though they're not. Per capita incomes may not be high. Population density is not a problem. And I'm not saying that they will have this model for let's say entire Indonesia or islands of Indonesia. They may do it for two or three or four islands of Indonesia which predominantly accounts for let's say 60, 70% of the economic value. And the rest of the models can be on a 3P or something. And they could also be a differential pricing strategy. Today what happens is depending on the address you put, your shipping fee could be different. Different. Your delivery timelines could be different. So I'm not saying that the same model that works in Korea would work exactly as is in other markets, but the E Commerce model works even today. There could be differential pricing. There could be delayed deliveries. Like you can say okay, if you're in Jakarta, you will get a next day delivery, but if you are in Bali, you'll get two day delivery or if you are in Jog Jakarta, it will be a three day delivery. I don't know if. Or there could be a premium, right? There could be a $1 extra for shipping fee. So those models will come in and it will evolve as companies kind of go and try that out. But it will require longer term thinking and horizon to build out a retail business is upwards of five years. It's not a game that you can win in 18 months and say okay, I've started becoming cash positive and I'm making, making money now. It's a five year build out for a retail player.
- [35:41]
B
Okay. And so in terms of growth opportunities, we talked about growing selection in South Korea, we talked about the Taiwan operations, we talked about, who knows, maybe something in, in Southeast Asia. What, what about Eats? Is the strategy with Eats, which is their food delivery service more about just tying customers to the rocket wow membership or is the hope that that could actually be a profit center in and of itself?
- [36:05]
A
So the Eats business I think is at break even right now and they give discounts and free deliveries to our members. So if you were to take that out, the EATS business is already profitable. So it is a separate business unit with its goals and metrics to become profitable. I think each can become profitable at a switch of a button like tomorrow coupang can decide to make it profitable. It can happen. The challenge is that that will slow down the growth. Right. So they're still kind of in a growth and build out phase. It's a great situation to be in where you're not losing money and you still be able to invest for growth. Right. So that's a great situation for any, any player to be in. So as far as Eats is concerned, I think there is tremendous opportunity left for Coupang to grow most of their customers. Most of the business I believe comes in and around Seoul. That's where they have a high recall. Obviously the WOW customers are their major customers today, but they will expand to other parts of the country and they will expand. So today if a customer who's not WOW wants to order Eats, yes they can order Eats. Just that they may not get a free delivery or they may not get the discount of wow. And it's very interesting. Just the dynamics are such that if you place maybe two orders of Eats in a month, you can recover your wall membership cost. Right. So it's a very, very compelling value proposition for any customer who is going to be on the platform shopping, buying, ordering food or wanting to watch play to sign up for a WOW membership. It's still like one and a half coffees a month. That's the cost of having a WOW membership.
- [37:51]
B
It's a good talking point there.
- [37:55]
A
Per capita coffee consumption is highest in Korea and the world.
- [37:59]
B
What about though, in terms of like market share for the Eats business, Do you think that they could be a dominant player there or do you think that they're kind of always going to be in like a second to third place?
- [38:12]
A
So it's not stated but I think Coupang will not go. Is not never going to be happy being number two in any business that they are in. Ge, where I used to work earlier, used to always say been number one or number two. That was Jack Welch's thing or, or sell or shut down. Right. I think Coupang is probably more aggressive to say be number one or get to number one. But you know, they're in a hurry. But it's not like you got to get there tomorrow. You got to build the business for the long run and they would not be happy anything short of number one. So yeah, I would say that they would be gunning to be the market leader.
- [38:47]
B
What is preventing them? Is it just selection and just more customer acquisition costs standing in their way?
- [38:53]
A
No, I think it's not about costs. It's. It's more about see till the time the Business was losing money or it was an investment phase. Yes, costs would matter, right? Because you don't want to be spending beyond what is budgeted as your investment or the quarter over the year. But now it's not about. So your economics is positive. So by selling more, you will actually make money. It's not going to lose money. It's more about the expansion, geographical expansion, or acquiring merchants or the restaurants outside the greater Seoul region. That's one. I think the company has done a great job on the Seoul region, but outside there's still kind of long way to go in terms of getting those merchants and then the customers. Right. So yes, as you said, the majority of the business comes from their current customers or WOW customers. But there is a larger population outside Devao customers who can be our EATS customers. And who knows, once they become EATS customers, they may even start buying the generic E Commerce products as well, the broader E Commerce.
- [40:04]
B
And can you maybe say a little bit more on Coupang Play? You know, for those that don't know, that's their video service, very similar to how Amazon prime has their own video service. And the idea is to attach people to the membership. And so I was wondering if you could say, because at least from what I've been able to research, it seems like the selection or the choices on the platform, it's not that much. There's a couple things people like, but there's still a lot of work to go. But my understanding is also that a lot of, you know, video streaming competitors that are bigger internationally don't really have much of a foothold in South Korea. And so they might be more willing to sell their content to Coupang Play. And so just. Any thoughts there?
- [40:44]
A
Yeah, so I think Netflix is the leader right now in Korea on streaming. Coupang Play is a free service if you're a WOW member. And that's the only way to watch is to become a WOW member. So it's a customer attraction and retention strategy. So Coupang thinks of it as an investment today. Obviously it will be monetized at some point in time. It could be ads selling the content that they're creating, the original that they're creating. They are franchising a lot of content from the West. You know that they're kind of bidding for sports rights more and more, getting into sports exclusive telecasts, which is helping them to increase their viewership. I believe they are now number two streaming service in Korea after Netflix. And yeah, I think the investment in Coupang Play will continue. It's turning because you Know if, if just the coupang wow membership additions and retention itself is good enough payback for coupang play. And then you have this whole content library that will be available for monetization at some point in time. It could be through ads, it could be through selling content, it could be through higher membership fees or you know, a differentiated membership. Right. For you all, you know that wow with play or wow without play could have two different pricing strategies. You know, just some thoughts. I don't know what the company will decide to do but yes, there will be many ways product placements, you know, the other, other, other other opportunities to monetize would, would come in
- [42:27]
B
and just as you kind of hit on advertising to kind of loop back a little bit because that is one of the big opportunities to increase margins and profitability is advertising in specific. You know, sponsored ads, the platform. And so if you have any thoughts into that how you know much Runway there is left to continue to kind of grow the pricing on the sponsored ads and just kind of what the reception with sellers have been.
- [42:53]
A
That's a great question. So if you, if you look at you know, let's say Amazon, which is probably talk about Amazon because you know that's the largest e commerce player in the world. Their ads ads share of the revenue is like double digit, 12, 13, 11% in that range Coupang is closer to 3%. There is no reason why this 3% can't double or triple in the long run. So there's a huge opportunity of that happening. A large part of that will come in because of higher pricing on ads. See these ad slots are auction or, or bid out and as you have more customers and you have more sellers, they will buy and they will bid out each other for those ad slots. And these biddings happen in real time so the realization per ad slot will go up. There is also opportunity to add ad slots. You have the whole coupang play which has very little or no ads today. You have newer apps like the coupang luxury app, you have the Eats app. Very little ads right now within the coupang main app there are many sites like the Fresh pages and others have much lower ads than what you see in the generic or the broader commerce side. So there are various opportunities to increase available ad inventory and also the pricing going up in a real time because of the bidding that happens for the ads. So yes, I think also from a merchant perspective as they grow on coupang and they make more money, they'll be more willing to spend and do you
- [44:31]
B
feel like the return on Ad spend sellers are currently getting on the site is still strong enough to suggest that there's going to be a lot more sort of adoption to that product.
- [44:42]
A
Yes, absolutely. You know, all the advertisers have a dashboard where they can see the ROIs real time. There are business managers who are available to kind of strategize with them as to how to increase their ROIs, what strategies can be done. And none of these advertisers go out. It's not like a one time thing for them. So they come in and keep advertising again and again because they see more roi. In fact, what I've seen is that there is a shift from traditional media, which is newspapers, TV and billboards, to more online spending on ads, both for customer acquisition and for making their products visible. Now what happens is as the selection, which we talked about earlier, increases. Right. It also clutters. It becomes more difficult for your product to get surfaced unless you've sold a lot and you have a lot of reviews and all of that, then it comes up higher in the search. But if it's a new product, you have a cold start problem. And one of the easiest and the best ways to solve your cold start is to advertise. And then the bigger players want to grow and they've seen that when they're growing at 5, 7% or 10% overall, but their online commerce is growing at 30%, they know their offline is declining and that's why they need to concentrate and spend or shift some of the ad budgets to online. So that is already happening and will probably continue to happen.
- [46:08]
B
Okay. And one of the other sort of services we don't hear too much about is coupang pay. And I know it's a very popular way for people to pay on the platform. I don't believe it gets too much use though off of the platform. I don't know if you have any thoughts on their, their broader ambitions in finance and maybe also if there's just kind of an aim to give provide sellers more financing options or something like that. And so just kind of what is their plan with financing to the extent you, you can talk about it.
- [46:39]
A
So that's a, that's a big growth lever for the future. The overall fintech. So there's a fintech team run by a very, very seasoned leader who's brought in from the US from the industry and he's doing a phenomenal job in kind of building out, but it's in the developing offering, so it's a very small piece of the business. And that's not where the biggest focus for the company is. But they've been trying and testing lending. They've tried buy now, pay later. They have a co branded card now with KB which I was part of for the, there is the, the wallet which is a closed wallet to be used only on, on coupang There is payment gateways. So there are a lot of opportunities on the lending side and on the payment gateway side in the fintech and then the whole credit card, you know, if you can have a P and L sharing kind of an arrangement on the credit card that can again be a very, very meaningful business. So yes, fintech is a big opportunity which hasn't been unleashed at all. I don't think the company has really talked about it much but they've been experimenting with different things at different times, keeping things ready and I won't be surprised if they launch it tomorrow or next quarter or next year or two years later. So it could be any time. But yes, they are working on it and they're preparing to go big on fintech.
- [48:05]
B
Do you feel like there's a market need for it though? Because in comparison to let's say Sea Limited when they rolled out shopping money everything was still pretty offline. It was a lot of cash, most people didn't have credit cards and so just the ability to pay digitally was you know, a big win. Whereas my understanding of South Korea is it, it's pretty developed in that respect. So what is the real value add kind of of these fintech products?
- [48:28]
A
So the biggest value add is that you have the customers and you can cross sell, right? If you have a co branded card and the customers shop on coupang several times a day, they use that card because they get some additional benefits or whatever, it becomes a matter of habit. So they would spend that people borrow both customers and merchants. Now you have the buying pattern, you have more data and insights about the sellers and the customers. You are able to take more risk or more calculated risk than say other fintech players or banks who don't have access to that kind of data or sophisticated lending models. So we'll be able to kind of provide lending to those segments which are not served today or provide better pricing to the segments who have an option but the costs are more. So there would be opportunities because you're basically saying that my delinquency is likely to be lower because I know more about this customer. Instead of a 20% probability, if the probability of default is let's say 5%, you would offer a different Pricing, which could be a differentiator from a customer perspective. So that I think is the differentiator. I don't think there is necessarily a need in the market because yes, every Korean has more than one credit card
- [49:53]
B
so it'll be a little bit more of a battle. But they could layer in rewards, leverage their position with 25 million plus customers to get some sort of share there. I am, I am curious and I've never been able to get a great answer on this which is that if we go back to the core e commerce business and I understand that counting of 1p versus 3p is different, that's not what I'm talking about. The actual unit economics or the unit profitability, is it higher or lower on 1p versus 3p? Because I know in some sense, you know, for 3p you could layer in more services like advertising, maybe logistics you're taking a margin on. But in one p you're making that markup of buying the item cheaper too. And so I was wondering if you had any thoughts on that.
- [50:38]
A
So on a fully built out efficient model, 1P is significantly more profitable than 3P.
- [50:45]
B
Significantly more profitable, including advertising.
- [50:48]
A
Everything 1P also has advertising though not as much. But the product margins that you can get on one P you have something called rebate which is volumes, volume based discounts which is not there in a 3Pmodel. Plus you're taking inventory risk and you are able to buy in bulk, you are able to negotiate prices, the selling prices are similar and you get volumes so the operating leverage kicks in on a fully built basis. Retail will always make significantly more money than 3P. But it's a long game. It's a long wait before you start seeing the cash coming in or the margins come in. 3B is pretty much a very stable business for anyone where the take rates don't change often. Sometimes you see take rates being same. The commissions that the marketplaces charge could be same for three, four, five years as well. And their margin profiles will remain very, very similar. And the profitability increase comes in from the increase in revenue. So your percentage margins remain similar. Like if you look at Coupang's case, right, you've been seeing over the last four years consistent increase in gross margin percentages. You won't see that in SEA Limited or other marketplaces. You will see the EPS going up or you will see the net profit going up, but that's because of the top line growing, but the percentage of profit will not increase.
- [52:20]
B
Okay, and just thinking of, let's say like a dollar of GMV of 1p versus a dollar of GMV of 3p. Could you break down kind of the, the pieces of how that looks? Just an illustration. So is it like, you know, we're getting a 5% or 8% margin and then maybe it's 1 to 2% on ads for 1P versus if you go to 3P, you get a little bit of, you know, you get maybe another 5 cents from the take rate. And then at the same time you're layering on more advertising. But then maybe you also have a margin on logistics. Is there some sort of rough math we could do there?
- [52:54]
A
Sure. So see, if you look at 1p. Okay, typical gross margin now in coupon's case should be in that 30% range. Right. So for every hundred dollars that the customer pays, coupang makes 30. And then there are costs associated after that when they come to the EBITDA level. In a marketplace, typically 8, 9, 10% is your take rate. That's what's the courier market today. Most players are similar take rates. So it's not like one has very different from others. And then you have your payment gateway and other charges. So if you look at percentage, what happens in the 3P? $100 recognizes revenue. Oh, sorry. In 1P, 100 recognizes revenue, you make 30. So 30% gross margin in, in a 3Pmodel you say, let's say for just rounding off, let's say you get 10%. So 10 is your take rate, which is your revenue. So revenue is 10.
- [53:48]
B
Can we use GMV instead of revenue just to make it happen?
- [53:52]
A
All in revenue. Because everything reported is on revenue. So your revenue is only 10 and your margin is 7, which is like 70%. Right. So when you talk to a 3P player, they will say they are a 70 gross margin business. But what they're not talking about is as a, if you were to really put GMV as the leveler, which is the common what the customer base, then they're making 10% or 8% versus 30% that a retailer is making.
- [54:21]
B
So if it was a dollar of GMV on 1P, it would be about 30 cents of gross profit is what you're saying for 1P. And then if it was a dollar of 3P, it'll be 10 cents or so of gross profit. Just what the take rate is.
- [54:37]
A
Yeah, so 8 to 8% or something.
- [54:40]
B
Okay, but is there more advertising plus a margin on logistics for the 3P side that maybe offsets some of that?
- [54:49]
A
Yes. So on a marketplace, typically we see more advertising, almost double of what you see in a retail. So let's say retail. If it's 2% advertising, 3P would be like 4.5%. But you still talk about 250, 300 basis points Delta. Even if you add that, it doesn't move from a comparison perspective, you will still make more money on the 1Pmodel than you would make on 3P. 2P or the FLC model is a great hybrid because you, you control the larger piece of the value chain while not taking the inventory risk there. The margin profile is somewhere in between. And as that scales up, the operating leverage will help bring the costs down and the net margins will increase. Now we talk about the gross margin. Now from gross margin to net margin. In case of a 3P, there are not too many line items. So the, it's not like the 7% becomes like 2%. Right. But the 30% will become, you know, double digit low teens or whatever. Right. Because of your other costs associated with the whole 1P business model. But at any point in time, if you have a fully built out business model with the same mix product mix or category mix, 1P will be more pro.
- [56:20]
B
Okay, so just to kind of wrap up that last thing you're saying is as you move, be low gross profits. What you're looking at is logistics, which for 3P logistics could actually be a little bit of a profit center. They could upcharge a little bit on the logistics. Whereas for 1P, it's going to actually be kind of a loss for that. And so that's going to be one of the kind of bigger line items reducing the profits. But then if you're looking at it as EBIT as a percent of GMV on 1P, I think you said, you know, mid teens or something versus you know, maybe 8 to 10 cents or something like that. 8 to 10% on 3P. Does that sound roughly right?
- [56:58]
A
So 3P will be lower. Lower, not 8 to 10. You know, 10 is the gross take rate. You'll have your payment gateway, other charges and then other costs coming to you.
- [57:07]
B
But plus advertising. Bringing it up a little bit.
- [57:09]
A
Yeah. Okay. Including advertising. Yes.
- [57:11]
B
Yeah. Okay, so then maybe 10 versus 15 rough Walt bar park numbers.
- [57:17]
A
Right.
- [57:18]
B
Okay, that's really interesting because it's been a really hard. I've had that question for a while and it's been very hard to get it answered. I've actually talked to the CFO of Meli in the past and he was kind of of the opinion. They were like, for like kind of similar in terms of unit economics. But Meli also has a much larger 3Pmarketplace and they're very small in one piece. So I don't know if they were getting the same sort of of rebates at that point that maybe it was like for, like for them. And so you, you're firm though in your belief that one piece should be more profitable on a unit economic basis?
- [57:47]
A
Absolutely. Once you built it out at scale. Yeah, without scale, 1P will lose money. Forget about making money. Lose money. Yeah, you got to have scale to make, make one P work.
- [57:57]
B
Okay, great. I. That was, that was really interesting. I don't know, just as we wrap it up, do you have any sort of last thoughts on like risks facing coupang? Anything that maybe isn't talked about so much that. But it's kind of maybe not if an existential risk, just something that could weigh on growth.
- [58:14]
A
So, you know, obviously risk exists for most businesses. We had the recent data, data leak issue which has been all over the press. Something completely unexpected, you know, that could have some impact. A big major player entering Korea or Taiwan could have, you know, with a very serious checkbook could have a potential risk problem. But if you ask me, the real risk is if coupang stops the operating efficiency or reduces the operating efficiency or lets go or takes it easy on that. That's where the decline would start. So that's the real risk. Everything else is like a moonshot. Some very unlikely that will happen. But if the operating efficiencies start to erode, then this can just stumble. So that's the real risk. Great.
- [59:07]
B
Well, thank you so much. I really enjoyed this conversation. Again, this is basically what an Alpha Sense expert call interview is like. And again, on the platform, there's 200,000 of these. And so if you want to learn more about them, there's actually a link here in the webinar you could go to. It's just alpha-sense.com Speedwell. You'll get a free trial. You could read a lot more about coupons, a lot more earnings call transcripts. And thank you, Gunjan for joining us. Really enjoyed this.
- [59:33]
A
Thank you, Drew. Appreciate it. Take care. Bye.