I think this might be our best S-1 Club briefing ever. That's in no small part thanks to a new collaboration with Tegus, a qualitative research platform for investors. Tegus has one of the most impressive databases of investor-led expert interviews from companies worldwide, including Coupang.
In this report, you'll hear us mention information gleaned from Coupang SVPs, VPs, managers, and strategists. All of that came from Tegus transcripts. Without a doubt, it has added cutting-edge knowledge and intimate detail that we couldn't have found elsewhere. It's precisely the kind of collaboration I love to pull together: it's a product I know is special and one that makes this product more valuable. Win-win.
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Coupang in 1 minute
What would you get if you mixed Amazon, Instacart, and DoorDash with just a pinch of PayPal? You might end up with a business that looks a lot like Coupang. Best-known as a customer-obsessed e-commerce platform, Coupang is quickly outgrowing those roots, even as it improves its core business efficiencies. The company has compounded revenue at 60% a year from 2016 to 2020, reaching $12 billion, though it remains unprofitable.
Whether all of this adds up to a $50 billion business — Coupang's mooted valuation — is another question. Coupang's ability to grow from this juncture may depend on CEO Bom Kim's ability to build a true super-app, similar to Alibaba, WeChat, or Line. The company will also need to fend off advances from domestic rival, Naver.
Without a receipt, what could he do?
Sure, the customer said they'd bought the lawnmower from the store, but they couldn't prove it. And Walmart wasn't in the business of giving away its products for free, was it? The manager was sorry, but he couldn't help. No refund, no replacement.
It didn't take long — a few hours at most.
The customer had called Walmart HQ, complaining about his treatment. Now, Sam, Mr. Walton himself, was on the phone. As an employee at the time tells it, Walton made his perspective clear in no uncertain terms. The manager was to told to pick out the store's nicest lawnmower and drive it to the customer's house himself. Walton ended his instructions with a final request:
"[W]hile you're there, mow his lawn."
It's impossible to know whether the story is true; every great founder earns their mythology, riven with exaggerations, misrememberings, or conflations. But it has the ring of truth to it. More than any other executive, Sam Walton was defined by his obsession with customer satisfaction:
Exceed your customer's expectations. If you do, they'll come back over and over. Give them what they want — and a little more.
Perhaps more than any other chief executive — even Bezos himself — Bom Kim is Walton's successor, embodying his spirit. Throughout our investigation of Coupang, often referred to as the "Amazon of South Korea," one truth shone especially brightly: the customer is everything. From big decisions to small details, Coupang has been devised to please the consumer, exceed expectations, do "a little more."
A Coupang VP highlighted the extent of this obsession (emphasis ours, as with succeeding quotes):
[I] t's written on the Coupang manual how to knock on the door, meaning that it's clearly written and documented on a very thick document that you don't have to bang on the door, so you have a very precise, described, and documented way of addressing a customer.
Another manager emphasized the level of customer knowledge and care the company exercises on the front lines:
[T]he end-to-end value proposition sets them apart so much from anybody else. So it's the trust in the brand, the goodwill in the brand that when you order from Rocket Delivery [a Coupang service], there's going to be a Rocket Delivery truck that pulls up to your house and a Coupang man that delivers to your door and sends you a text message with a picture that says, "Here's your package."
If you have a kid, I'm not going to ring the doorbell because it's going to wake the baby. It's like that's a white-glove service in a country where all of the other e-commerce companies, they outsource their shipping...
In an increasingly competitive South Korean market, this attentiveness sets Coupang apart. It may also provide one of its challenges. Coupang has vertically integrated most of its logistics; that's allowed the company to offer best-in-class delivery with the nuances shown above and created a brand known for its thoughtfulness. But how does such a setup scale, particularly beyond the borders of South Korea?
Coupang does not necessarily need to expand beyond the East Asian country to grow its business — the company has expanded its product lines successfully and may make more such moves. But, notably, Coupang defines its mission statement in global terms in the S-1 filing:
"We are building the future of commerce."
In its breadth, that proclamation simultaneously aims at domestic competitors like Naver, regional upstarts like Shopee, and universal behemoths like Amazon. While the boldness of that statement may make bulls happy, it does pose a question: how scalable is Coupang's level of customer delight? Without deep investment into a geography, can the company hope to provide equivalently good service?
It's this tension that may be most worth watching over the next few years as Coupang seeks to reconcile its desire to control the consumer experience door-to-door with the need to expand at speed.
Number of mentions in S-1
- Fulfillment: 115
- Bom Suk Kim: 100
- Rocket WOW: 35
- Integrated: 25
- Rocket Delivery: 19
- Packaging: 12
- Customer centricity: 5
- Amazon: 4*
- Clamato: 1
*Only in reference to AWS or key employee's prior work history.
From clone to colossus: Coupang's origin story is one many analysts seem to have forgotten. In many ways, it's a story of imitation, adaptation, and improvement.
The year is 2010, and there's one company on the tip of everyone's tongue: Groupon. At the time, Groupon was the fastest company to reach $1 billion in sales, and, as such, every founder and venture capitalist was looking to get in on the action.
Nearly 6,500 miles away in South Korea, an enterprising Harvard Business School dropout by the name of Bom Kim watched the stratospheric growth of the Chicago deals company. Before that point, Kim's entrepreneurial exploits had been in the media space. He'd founded "Current" a magazine for college readers, before raising $4 million for a second media company catchily called "02138." As Kim described it in a later interview, "We didn't make huge multiples for our investors, but they were solid hits."
Groupon was a different proposition. Kim wondered whether the model could be cloned in his country, particularly given his connections to US investors. Shouldn't Korea have a Groupon of its own?
Luckily for Kim, investors agreed; he raised a round in short order and got to work building a copycat, one of 29 others that had launched globally by that point. Thanks to his abilities and connections, Kim successfully outmaneuvered the competition, including Groupon's very own South Korean outfit. By 2011, Coupang boasted 3 million customers and $10 million in gross sales on its site. Groupon lagged in third place. Around this time, Kim brought on $18 million funding from Altos Ventures and others.
Unluckily for Kim, Coupang's Groupon impression was so faithful that it copied the latter's heavy spending. The company constantly increased the number of "daily" deals listed on site and invested aggressively in user acquisition and sales. At one point, Coupang was the largest Facebook advertiser in the country; on average, users in the region saw 72 Coupang ads a month.
Though Groupon tried to up the ante, offering Coupang employees double the money to jump ship, they failed to make a dent in the local market. According to our sources, Groupon briefly considered acquiring Coupang before passing. It would have represented an impressive IRR for Kim and Co.
Even though Coupang was "winning" the daily deals battle, Kim soon had a realization. This was one that many operators in the category eventually understood (including one of this briefing's analysts who ran such a business): it's a lousy business model. To earn $1 in revenue, companies had to spend more than that acquiring customers and merchants.
Kim recognized this quicker than most, pivoting the business to become an eBay-style marketplace in 2013. Coupang listed third-party inventory from local suppliers, offering fast delivery, low prices, and a "wow" customer experience. This shift insulated the company from the reckoning that would eventually visit the daily deals space. The following year, Sequoia led the company's $100 million round, followed in short order by a $300 million cash injection from Blackrock.
After copying Groupon and eBay, Coupang borrowed from the best for its third incarnation. The company cribbed from Amazon's famous flywheel to create a South Korean e-commerce colossus: lower prices attracted more customers, more customers drove more traffic, and more traffic encouraged sellers to list on the marketplace. In making this change, Kim picked a particular beachhead, South Korean mothers. One VP described it as follows (a note that many of the executives quoted may not speak English natively):
[T]he CEO has decided to aim at the mommies of South Korea. He decided to perform a service to those ladies with babies, and then they decided to be very aggressive on the diapers and then everything which was concerning the house.
Yet again, the company made a success of its new formulation. By 2015, two out of five Koreans were customers of Coupang.
The last six years have seen Coupang become something uniquely its own. Rather than mimicking the best practices of US e-tailers, the company has begun to pioneer a new model for e-commerce that leverages vertical integration to bring products to customers faster, at a lower cost, and with better service. It's also extended far beyond that maternal focus, offering a range of products from electronics to apparel to grocery. That model has attracted a further $3 billion in funding from gavage-capitalists, Softbank.
Coupang's history is a fitting representation of the company's strengths today. As we'll explore in the rest of this briefing, the company is an impressively adaptable business, evolving its business model to fulfill its customers' and merchants' needs at blazingly fast speed. Like few others, Coupang has survived and thrived thanks to Kim's masterful sense of when to pivot.
The macro view: Urban, densely populated, and tech-savvy
The ideal e-commerce market looks like Korea. The country is small — about the size of Indiana — and mountainous. Population density is high in flat areas. About half of Korea's 52 million residents live in the Seoul metro area. Small area combined with high population density makes delivery relatively easy. Today, 70% of Korean's live within seven miles of a Coupang fulfillment center.
Korea is also tech-savvy. Smartphone penetration is the highest globally at 96%, and internet service is reliable, fast, and cheap. (It's worth noting how much this has changed since Coupang started; in a 2011 interview, Kim stated mobile penetration was just 20%). Consumers are open to adopting new technologies. For example, about 40% have ordered groceries online. Additionally, about half of the population has downloaded Coupang's app.
The macroeconomic picture is rosy as well. Korea is the world's 12th largest economy, with GDP per capita over $31,000, about half that of the United States. Armed with smartphones, Korean consumers have money to spend.
Coupang sizes the Korean retail market at $470 billion in 2019, based on Euromonitor estimates. This includes retail, grocery, consumer foodservice, and travel. The Korean retail market is expected to grow about 3% per year for the next five years. Euromonitor also forecasts that the Korean e-commerce market will grow to $206 billion in 2024 from $128 billion in 2019, a 10% CAGR.
As mentioned above, in 2010, the Korean e-commerce market was dominated by Groupon clones. It has since expanded into various C2C and B2C marketplaces, detailed in "Competition." As of 2020, Coupang's market share was under 10% in e-commerce and roughly 2% in retail. It will need to continue capturing market share to sustain growth. The company's ability to do so will be determined in part by its ability to penetrate nascent markets like food delivery and online grocery.
Defining TAM is more art than science. Coupang takes some creative license with their calculation by including travel. All other markets used to calculate TAM tie out to products described in the S-1 filing: retail to e-commerce, grocery to the company's "Rocket Fresh" service, and consumer foodservice to "Coupang Eats." The only mention of travel as a product is in the risk section, saying there's a nascent offering that might not pan out. A former Coupang VP confirmed the company is working on a travel play, though they didn't offer further information. With that in mind, it's hard not to read Coupang's current definition of TAM as generous.
While the "Risks" section of the S-1 notes Coupang might attack new geographies, it limits TAM calculations to South Korea. That suggests international expansion is not a priority at the moment. That might prove a limiting factor, particularly for investors interested in buying in at the mooted $50 billion valuation as part of this listing. When asked whether Coupang could become a $100 billion company within the next few years, one SVP said:
[T]here's a cap to what they can achieve. The whole [e-commerce] market right now is 100 billion. The population of Korea is relatively flat. Many census data would say that we'll start seeing a declining population as well. So I don't see the market dramatically expanding. Now, you'll continue to have more shift from offline to online. But I have a hard time seeing 100 billion, personally. That's my personal opinion.
While the last year of financing activity has broken conventional truths around company valuations' upper limits, it is still telling that a former senior executive felt geographical expansion was necessary to reach a $100 billion figure.
Potential TAM expansion
The counterargument is that great management teams find ways to expand TAM. Coupang has a relatively immature finance product that could provide a pathway to a significant additional market. We'll discuss this in detail later. When asked whether there was a real opportunity in payments, a former manager replied:
[P]ayments, yes... They have a lot of talented people on the Fintech team.
In particular, the manager noted the open space in consumer-to-business payments, compared to consumer-to-consumer payments in which Coupang would compete with players like Kakao.
Additionally, it's not clear whether Coupang includes brand advertising as part of its e-commerce market calculus. As one VP remarked, brand advertising and analytics have been great ancillary sources of revenue for companies like Amazon:
The other sort of dark horse in this whole thing [Coupang's potential profitability] is around advertising, so I think at Amazon the advertising program is several billion dollars and they collect a lot of money from brands in terms of both advertising, as well as retail analytics.
Finally, expanding third-party logistics could open up new opportunities, too, though it's unclear how profitable such operations would be.
To understand Coupang's product, you first have to get a grip on its logistics.
In short, Coupang is a logistical marvel that has raised the bar in terms of speed and sustainability. The company delivers millions of SKUs packaged in reusable, eco-friendly bags, powered by a massive network of employee drivers.
Compare that for a moment to Amazon: while the US monster may have Coupang beat on SKU count, Bezos's beast is notoriously wasteful with packaging and relies on an often disgruntled army of contractors.
Of course, it's important to remember the unique geographic and demographic characteristics of the Korean market. As noted above, Korea's population is mostly centered around Seoul, allowing Coupang to service the bulk of its customers relatively efficiently in one metropolitan region. The company's reach does extend beyond city bounds; Coupang had over 100 fulfillment and logistics centers in over 30 cities by the end of 2020.
Its deep vertical integration sets Coupang apart from rivals. Coupang's 15,000 drivers are the largest directly employed fleet in Korea. Over 40,000 workers process and fulfill orders every day in over 25 million square feet of Coupang warehousing infrastructure. Coupang optimizes upstream processes to decrease inefficiencies downstream, such as bundling packages in pre-sorted containers to make truck loading more efficient. To expand fulfillment and delivery, Coupang uses Flex partners: independent delivery agents who sign up to deliver packages on days and times they choose. An ex-VP noted that local labor dynamics partially aid the viability of Flex:
[A]s I was leaving, they introduced something called Coupang Flex, which is very similar to what Amazon does with Amazon Flex. I do think that they get a benefit out of that because there is a high degree of unemployment among the young people just because it's a hyper-competitive environment and there's very few jobs available.
In addition to the extensive investment in physical logistics infrastructure and manpower, Coupang built proprietary software that optimizes delivery routing and enables them to deliver packages to the same neighborhood multiple times per day. Their logistics management system predicts and assigns the most efficient route for each order by combining hundreds of millions of potential combinations of inventory, processing, route, and truck options as orders are placed. It's essentially an extremely sophisticated response to the "traveling salesman problem," played out ad infinitum.
Many of these features may seem familiar to the US reader who recognizes Coupang's supply chain visibility software, pre-sorting services, flexible fleets, and optimized routing systems as fully integrated versions of the many point solutions that have emerged in our domestic logistics market. Nationally scaled delivery and logistics companies like UPS and FedEx existed before e-commerce and did not face the same consumer pressure to optimize each step in the logistics chain.
But Coupang did not have the luxury of leveraging a UPS or FedEx locally; no similar domestic service existed. Building that infrastructure from the ground up was a Herculean feat that allowed them to solve challenges in-house rather than relying on third parties. It is a formidable moat borne out of necessity rather than choice.
Considering how big of a force this logistics network is, it is no surprise that Coupang has plans to make these logistics services available to third parties—including other e-commerce players. In January 2021, it registered Coupang Logistics Services, a subsidiary that aims to achieve total logistics domination in the country. There is a zero-sumness to fulfillment networks; there cannot be infinite distribution centers. Coupang wants its competitors to accept its natural monopoly as the logistical backbone of the country's commerce.
If this play sounds familiar, that's because it is reminiscent of Amazon's playbook of "being their own first-and-best customer." From Ben Thompson's Amazon's New Customer:
Amazon is building out a delivery network with itself as the first-and-best customer; in the long run, it seems obvious said logistics services will be exposed as a platform.
Though Coupang differs from Amazon in critical ways when it comes to logistics, there's an apparent similarity in this respect.
Juggernaut: Amazon + Instacart + DoorDash
Imagine if Amazon's e-commerce division, Instacart, and DoorDash — each the market leaders in e-commerce, grocery deliveries, and food delivery in the US — were one company. Aside from giving the anti-monopoly heads in DC a conniption, a juggernaut like that would have a level of dominance that few companies around the world enjoy. But that's almost the position Coupang enjoys in South Korea. (It is not the market leader in food delivery. Yet.)
We'll unpack each of these business lines below, in addition to talking through some of Coupang's less mature products. First, it's worth understanding the unified experience that Coupang can create with this unique suite.
From the S-1, a vision that would make Bezos (and Walton) equal parts proud and jealous:
It's nighttime, and our friend Suzy, unwinding after another busy day, realizes she needs a pair of headphones, a tutu before her daughter's ballet practice, and cereal, milk, and fresh strawberries for tomorrow's breakfast. Through our single app, Suzy can find all those items and millions more at low prices and have them delivered to her doorstep before 7 AM via Dawn Delivery… for free. She places her order in seconds, and heads off to sleep. When she opens her eyes, it's like Christmas morning: her order is waiting at her front door. Suzy places the tutu in her daughter's backpack, prepares breakfast with the family, and enjoys the new headphones on her early-morning commute.
Delivering a tutu, a box of Cap'n Crunch (#sponsoredbyquakeroatsco), a carton of skim milk, and a punnet of strawberries, all within a matter of hours, is an impressive feat. It's also an example of the exceptional service Coupang can provide that others can't. As a brief aside, overnight ordering is a prevalent habit in Asian countries. A Coupang SVP elaborated on this fact:
[Y]ou sit at home, and you place your cucumber, tomato, meat and whatever else you need, it comes to you. Most customers place their orders within 9:00 and midnight. It's an Asian shopping trend in Japan and China. You get your order before 7:00 AM, most of that time in-between your sleeping, so it's as powerful as the Amazon Prime one-hour delivery effectively...
Beyond this level of convenience and the usefulness of having so many SKUs available within a single app, an obvious question emerges: does having these separate business lines of e-commerce, groceries, and food delivery give Coupang operating synergies?
Over the next few years, we might see Coupang leverage its homespun fulfillment network to improve operating efficiency. Typically, e-commerce, grocery, and food delivery operate on different time scales. You get your e-commerce product in two days, your grocery in a few hours, and your piping hot pizza in 30 minutes. Because of the different time expectations, these three business lines typically require separate logistics networks.
Coupang has an opportunity to flip the script to realize meaningful gains. Specifically, you can imagine the company retrofitting e-commerce delivery vans with cooling systems to hold groceries or adding capacity to its grocery delivery network to handle ordered food. Such a multifaceted system would reduce the cost of delivery and improve service.
Coupang's core product is an e-commerce platform.
The company is the largest player in Korea, with over 200,000 merchants on its marketplace. Coupang serves the merchants on the platform in various powerful ways that match and, in some ways, exceed the offerings of US counterparts like Shopify and Amazon. Coupang provides a full-stack solution for merchants looking to start and run their business, from store setup to final delivery. Three key features:
- MyStorefront. This service allows merchants to set up digital stores without investing in the brand and infrastructure necessary to reach customers in multiple locations.
- Marketing. Coupang's marketing solutions support optimized advertising and channel recommendations. Once merchants connect with their target customer, the "customer-to-product" matching technology creates a product knowledge graph that exposes customers to the more relevant content and products. This increases conversion for merchants and improves the overall customer experience for buyers.
- Logistics. Merchants can leverage Coupang's logistics network to offer customers same-day or next-day delivery without building any logistics expertise.
In addition to offering strong merchant support, Coupang's platform is also a strong sell for consumers. The company provides millions of SKUs, searchable via a convenient interface. Critically, in addition to selling third-party products, Coupang has made inroads into creating and promoting in-house brands, similar to Amazon. A company VP noted that this was, in their view, a key initiative to improve profitability, a topic discussed in greater detail under "Financial highlights."
Rocket Fresh and Eats
Grocery and food delivery are relatively recent additions to the Coupang business.
Both were launched in 2019, and they comprise less than 8% of total revenues in 2020, even when bundled with other small business units. While Rocket Fresh leverages Coupang's logistics network, the company strayed from its usual modus operandi with Eats. Like other ridesharing and food delivery companies, Coupang subcontracted out delivery to third-parties. While this allowed them to kickstart a new business line without significant upfront labor costs, it represents a deviation from its "end-to-end integrated logistics" model. It will be interesting to see whether, over time, the rest of Coupang's business lines begin to operate more like Eats — relying on logistics partners — or if Eats is brought into the company's internal network.
As alluded to above, food delivery is one of the only operational spaces in which Coupang is not the market leader. It faces formidable opposition in Baedal Minjok and Delivery Hero, which have a market share of 99.2% combined. Baedal Minjok is funded by Naver, Coupang's closest competitor.
Rocket WOW is Coupang's version of Amazon Prime. For roughly $2.5/month, it provides free overnight delivery and a host of other services.
Despite that low price, Rocket WOW's penetration remains relatively low at 32% of its ~15 million active users, compared to 65% of Amazon's user base who subscribe to Amazon Prime. Extrapolating from a former Director's comments within the last year, we can get a sense of the program's progress:
Based on the news published on March 16th , the loyalty membership program subscriber [Rocket WOW] is near to one million in Korea... I think it's the sole largest alliance program so far…
Given that Coupang notes 32% of active members use the service, we can gather that the program has grown from ~1 million to ~5 million in less than a year, impressive progress. WOW also seems to be doing its job: members purchase four times as often as active non-members.
Beyond improved delivery, WOW is a platform for Coupang to release new, higher-margin product lines. It has a video streaming service that drastically undercuts Netflix's offering in the country. Coupang also has plans to launch a live-streaming shopping business line to replicate the model's success in neighboring China. These services will be launched for WOW customers first and then unbundled and sold separately to other customers. Over time, this should make the WOW bundle increasingly valuable, bringing customers into the fold.
If you spend any time on tech twitter, the "Every Company Will Be a Fintech Company" meme will find you sooner or later. And if e-commerce, grocery delivery, and food delivery were not enticing enough for investors, Coupang has a fintech solution, too,. Somewhat anticlimactically named, Coupang Pay in its current form is just a payment API that allows smaller websites to accept payment using Coupang's backend.
But it doesn't take a fintech visionary to imagine all the ways this can be leveraged in the future:
- Instant financing for merchants based on sales revenue and inventory levels.
- Installment plans for customers with high purchase affinity and lucrative purchase histories.
- Co-branded credit cards that lead to sweet interest payments.
If Coupang chooses to focus on the Pay product, it will meet competition in the form of Naver. Still, there's a feeling internally that Coupang has the opportunity to capitalize on Korea's relative under penetration. A Coupang manager noted:
Korea is relatively light on e-payments, so I think that's an open opportunity for them to step into.
If Coupang plays it right, it could become the rails on which money changes hands across transaction types.
Coupang makes money predominantly by selling consumer items online. To run through its business lines:
- E-commerce sales of third-party goods
- E-commerce sales of first-party goods
- Coupang Eats
- Rocket WOW membership
- Fulfillment & Logistics by Coupang (merchant offering similar to FBA)
- SaaS offerings for merchants, including advertising and myStore
All of these business lines drive net revenue per customer in one way or another. As mentioned, Rocket WOW membership, by offering added services like same-day delivery, increases order frequency per active customer by four times.
Coupang's leverage on Cost of Goods Sold (COGS) is predominantly driven by types of goods sold on the platform and mix shift in first-party vs. third-party supply. The team talks about leaning into high-profit categories like apparel, beauty, and consumer electronics. Perhaps not surprisingly, two of those categories are rumored to be particular strengths of Naver. A former Coupang director shared as much:
[I]f you want to buy electronic products, many people are accustomed to using Naver to read a review on there, and also Naver has a lot of very strong bloggers and communities like a lot of clubs…[I]n terms of fashion and electronic goods, Naver is very strong than other companies...
By creating private label brands in those spaces, Coupang increases its inventory, improves margin structure, and better competes with rivals.
The S-1 filing does not break such efforts out. We don't know how much of the $11B in product sales came from Coupang's inventory. That said, gross margin jumped from 5% to 16% in 2019, suggesting the company made significant investments in higher-margin products that year.
Below gross margin, Coupang gets operating leverage from better logistics orchestration, something we've discussed above. Coupang outlaid $700M in capital expenditures (capex) across 2019 and 2020 on building out its network. The company also made investments in designing its own trucks to make delivery hyper-efficient.
Some risks to margin in the future include reclassification of Coupang FLEX workers and Eats drivers and rising costs of goods. While Coupang is less reliant on contract labor than companies like Amazon, DoorDash, Uber, and Lyft, this nevertheless represents a vulnerability.
Over time, it will be interesting to see how higher-margin B2B products such as myStore fare. "Other revenue," which includes merchant commissions, membership fees, advertising, and online restaurant ordering, grew faster than retail sales in 2019, demonstrating demand for a broad suite of products.
One of Bom Kim's strengths has been his ability to recruit fantastic leaders. After dropping out of HBS to start Coupang, Kim turned to Ben Sun, a Partner at Primary Venture Partners, to help him imbue his company with the Silicon Valley way of drafting and managing top-tier employees. Over the years, Kim has succeeded in poaching talent from organizations like Naver, Uber, Amazon, and even the Korean government.
Kim himself seems to have a somewhat mixed reputation. Investors speak effusively about his ability to project a vision and woo capital. A former manager described him as follows:
He's very detail-oriented. He'll get down right into the fine details and sit in and dictate what's happening. I'll say he might do better delegating that responsibility, but somehow he finds the time to do that. He's been doing something right. He's great at talking, he's great at raising the morale of his troops. I think he has a philosophy…
I think he's a big part of why the company is so successful. He's hired great people, and he himself, he's been a valuable influence on the company. He's definitely not a hands-off kind of guy.
As alluded to in our introduction, he's also known for his maniacal focus on the customer, something not always common in Korea's deal-driven environment. From an SVP:
He is a good customer-obsessed person. I think that's a very good skill to have as you're trying to disrupt the shopping environment.
The challenge that I think competitors in Korea are having is they're approaching it from a margin degradation or whatever it is as opposed to sitting back and saying, "What does the customer want?" and then, "How do I build a business to satisfy the customer need?"
So kudos to Bom for getting that element of it right. He focuses on the customer then he can figure out how to successfully build a business that supports the customer needs...
That obsessiveness and attention to detail may not always translate into the most copacetic managerial environment, however. One former VP highlighted Kim's style of leadership as a weakness that has resulted in high turnover:
What needs to be improved also is, in my opinion, the stability of the management which is today still at risk because of the personality of the CEO, who is sometimes is very difficult to understand and also very difficult to follow-on because some decisions are just made very brutally and then not well explained and I think this is something that Coupang has to improve in future because when I was there, it was it was really painful and really difficult to handle...
If you look at Coupang and if you look at the management team in Coupang, so you will see that there has been many changes. Let's say in the three last year, for example, there have been many top people going in and out Coupang, so leaving Coupang very quickly, it's because of the personality of the CEO. He can be very brutal in meetings.
For example, I remember when we were discussing about very important things such as the compensation for the delivery men, so we had the long debates, we had long meetings and then the CEO, he likes to have long meetings like two or three hour meeting. Then finally, when it goes into the decision-making process, so he can be very quick, sometimes it's very good, but most of the time he doesn't listen to the managers.
So we had the impression that he was just hiring people from outside and some high-caliber people just to show that he was able to hire outside people, but in terms of making decisions, so he was micromanaging and making decisions on his own...
[M]y opinion about the CEO is that he's a very good sales man. He's got charisma, and then he can explain the Coupang future very consistently, and so I think he can give the investors [what they want]...this is what he did.
This VP goes on to highlight a particular issue around the holiday period. Coupang would invest heavily in advertising and additional staff to maximize sales, then reverse course as soon as the holidays had ended, pushing employees out of the door. The executive believed this "stop and go" policy was damaging and contributed to a feeling among senior executives of not being appropriately considered.
Some degree of dissatisfaction is encapsulated in Coupang's Glassdoor metrics. The company receives 3.8 out of 5 stars, with 72% recommending the company to a friend and 76% approving of the CEO. These figures are not dire by any means (and are, of course, susceptible to manipulation or exaggeration) but are lower than many of the other companies the S-1 Club has covered. As a comparison, 95% of Naver employees would recommend the company to a friend.
Whatever Kim's foibles, it's inarguable that he's assembled an impressive management team that handles Coupang's essential functions and business lines:
- Gaurav Anand, CFO. Formerly of Myntra, Flipkart, and Amazon, Anand brings deep financial experience from the "best of the best" e-commerce companies.
- Daejun Park, Director of Business Development. Park is responsible for Coupang's new business lines, including Coupang Eats. He previously worked at LG Electronics and Naver.
- Thuan Phan, CTO. Before Coupang, Phan was Uber's CTO who helped take the company public. Increasingly, Coupang's initiatives around logistics, delivery, and platform optimization falls under Phan's remit (as we'll soon see on his pay package).
- Minette Bellingan, Director of Coupang Private Label Business (CPLB). Bellingan leads Coupang's initiatives on developing, managing, and selling Coupang's own inventory. She knows this space well after serving in a similar role at Amazon from 2013 to 2018.
- InTae (“Kiro”) Kyung, Director of Coupang Pay. Kyung has been with the company since 2014. Before that, he founded two tech companies of his own.
- Joe Nortman, Director of Coupang Fulfillment Services (CFS). Formerly of Amazon and JCPenney, Nortman is charged with rolling out Coupang's logistical offerings.
To understand the significance of each executive's role, it's important to look at their incentive structure in the form of cash and stock awards:
What's so interesting about this compensation table is that one of their lowest salaried employees serves as a central actor in the future of Coupang. As you can see, CTO Thuan Pham has the potential of earning nearly 190x his annual salary off of stock. Tham's central role in managing the technology platform is vital to the future success of Coupang, particularly around initiatives for payments, logistics, and food delivery. That he is bought into the potential upside is a small but significant sign.
According to one source, Sequoia invested in Coupang almost by happenstance. Visiting South Korea to diligence Kakao, Sir Michael Moritz, and the team were left unimpressed by the social messaging company. With a little time to kill, they decided to meet with another domestic upstart and its charismatic CEO.
Over the course of the meeting, Bom Kim succeeded in selling his vision and demonstrating his understanding and control over the developing business. Sequoia would go on to invest over $100 million in the company.
In total, Coupang has raised $4.03 billion over the last decade and will reportedly be raising $1 billion in the IPO. The massive amount of capital that has gone into the business should not be surprising given the operating model. The company burned $5 billion of cash in 2018 and 2019 alone. The company most recently raised $546 million in 2019 and a $2 billion round led by Softbank Vision Fund in 2018. In addition to the recent primary transaction, Coupang entered into a $200 million short-term loan agreement with Softbank (an affiliated entity) in 2018, which was repaid within six months. Masayoshi and Co. can chalk Coupang up as a major win.
Beyond Sequoia and Softbank, Coupang has raised capital from a rather global base of shareholders, including a good portion of American funds. The largest shareholders (5%+) include Softbank, Greenoaks, Maverick, Disruptive Innovation Fund, while early investors include Altos Ventures, Founder Collective, Sequoia Capital, and Greenoaks. The board includes directors from Sequoia, Greenoaks, and Primary Venture Partners.
Coupang's financials are a Rorschach test. You might see a rocket ship: accelerating revenue growth, economies of scale, enviable cohort data, and options to expand into markets like advertising and food delivery. Look again, and you might see a dud: a river of red ink, muddy expense disclosures, perennial cash burn, and ballooning share count. By and large, we favor the former camp. Amazon, Alibaba, and others have proven the scale e-commerce model; Coupang is running the same playbook in Korea.
Investment philosophy: Long-term thinking
Understanding Coupang's investment philosophy provides context for its financials. Long-term considerations and customer-centricity dominate decision-making. Coupang's goal is to maximize free cash flow and minimize shareholder dilution. While investments are expected to deliver significant growth and cash flow at scale, the company is blunt that investments into new products will depress near-term profitability.
Since 2013, Coupang has invested billions in fulfillment and last-mile delivery capabilities, including 15,000 full-time drivers, custom-designed delivery trucks, and over 100 fulfillment centers. These rails enable end-to-end control of the consumer experience. Infrastructure is Coupang's moat:
Through the course of scaling, we have developed insights and invested in a series of systems and processes that continuously improve to lower costs and increase value to our customers. We believe it is hard to replicate, in addition to the physical infrastructure, the combination of insights, processes, systems, and capabilities around complex operations that have developed over years of refinement over various stages of evolution and scale.
We would agree.
Scale economics: The price is right
Most companies pursue economies of scale. Few share the spoils with customers. Companies that do like Amazon and Costco have built loyal customer bases and generated impressive returns. Coupang fits this mold. The company is obsessive about leveraging scale and passing savings on to consumers. It invests heavily but shrewdly. This story from an employee interviewed by Rest of World about covid-19's impact on Coupang is telling:
There was a person at the entrance who would squeeze us one small drop of hand sanitizer when we went in, probably because they thought we'd use too much if we did it ourselves.
Good things happen when you care about the pennies.
Revenue: Greased rails and accelerating growth
Revenue growth supports a bullish position. From 2016 to 2020, revenue compounded at over 60% per year from $1.7B to $12.0B. As you might expect, growth accelerated throughout 2020, from 79% year-over-year in the first quarter to 100% in the fourth. Higher engagement from existing customers was the primary growth driver. Active customer count grew 18% year-over-year in 2020, a secondary impact.
Triple-digit growth on a multi-billion dollar base is impressive, even to the skeptic. However, 2020 probably represents peak growth rates as covid-19 forced folks to stay indoors and order online. According to Reuters, daily deliveries spiked from 2.2 million per day in late 2019 to 3.0 million per day in mid-February 2020. Similarly, Coupang's drivers' union said that the average number of packages delivered per day grew from 57 in 2015 to 242 in August 2019 to 340 in February 2020. We should expect revenue to continue growing but growth rates to decelerate post-pandemic.
Coupang reports two revenue items: net retail sales and net other revenue. Retail sales account for the lion's share of revenue, 92% of the total in 2020, accounting for sales where Coupang owns the inventory. Other revenue is composed of commissions on third-party sales, Eats, WOW subscription fees, advertising revenue, and other products. The vast majority of other revenue comes from third-party merchants.
Cohort data: Better every year
Coupang's cohort data is Exhibit A for the rocketship view. That the company included it at all suggest Coupang feels confident in the numbers; many other businesses do not include such figures in an S-1 document.
As we can see, spend increases progressively over time. Additionally, more recent cohorts have grown faster than older cohorts. All groups saw significant growth in 2020, though covid-19 means investors should append an asterisk to such figures:
The cohort data also shows that Coupang has a loyal and engaged customer base. Revenue growth with existing customers is faster than with new customers. Coupang's model can subsequently be summarized as: acquire, retain, engage. It's succeeding at both:
The company notes that improving the customer experience directly correlates with higher customer engagement. Expanding owned inventory selection, launching Rocket Delivery, and adding new benefits to WOW like Eats and Fresh have bolstered sales and increased purchase frequency.
Other revenue: A barometer of optionality
Expanding product selection is a pillar of Coupang's growth strategy. This makes "Net Other Revenue" a barometer for its ability to expand beyond core e-commerce. Strategic bets like Eats and WOW, and options like advertising and finance fall into this bucket. Net Other Revenue has grown around 90% year-over-year over the past two, which is encouraging. Still, it accounts for less than 10% of overall revenue. What's more, about 85% of Net Other Revenue is third-party merchant services, representing commissions, advertising, and delivery fees earned from merchants selling goods on Coupang. In 2020, strategic bets like Eats and WOW membership fees accounted for only 1% of revenue.
Cost of sales: The ball and chain
Because it owns inventory, cost of sales (COS) are Coupang's main expense. COS includes product costs, inbound and outbound shipping, and fulfillment. Over the past five years, COS has ranged from 83% to 95% of revenue. As a percentage of revenue, COS has been trending down, most recently to 83% in 2020. The company prioritizes gross profit dollars (revenue less COS) versus gross margin.
Further economies of scale and direct sourcing could improve gross profit. Additionally, as noted earlier, Coupang is investing in under-penetrated but high gross profit categories like apparel, beauty, and consumer electronics. Increasing the mix of private-label goods is another opportunity. Tellingly, Coupang lists Minette Bellingan, who leads its private-label business, as a key employee. Lastly, growth in high-margin advertising, as mentioned earlier, could boost gross profit and margins. This business is small today.
Operating expenses: Boondoggle
Outside of COS, Coupang's expense reporting is a boondoggle. Disparate costs like operating fulfillment centers, customer service, marketing, and product development are muddled into something Coupang calls "Operating, General, and Administrative Expenses." For comparison, Amazon separately reports fulfillment, technology and content, marketing, general and administrative, and other expenses. Coupang's expense disclosure makes it impossible to see what business areas are showing operating leverage or lack thereof. As a percentage of revenue, Operating, General, and Administrative costs trended down from 38% in 2016 to 21% in 2020.
Profitability: A river of red ink
If you look at Coupang and see a dud, it's probably because of profitability and cash burn. As the business has scaled, losses have narrowed, but Coupang has yet to turn a profit. Operating margins have improved from (30%) in 2016 to (4%) in 2020, as Coupang has leveraged its fixed costs. Looking ahead, the company expects continued losses as it invests in growth. Strategic bets like Eats and Fresh are expected to negatively impact profitability and cash flow near-term.
Free cash flow: The cost of control
Building rockets is expensive. Since its launch, Coupang has invested billions building out fulfillment and delivery infrastructure. In 2019 and 2020, the company spent about $220 million and $480 million on capex — mainly funding capacity for future growth. While negative, free cash flow has been trending upwards from ($787) million in 2016 to ($183) million in 2020. Cash flow from operations inflected positively in 2020. Significantly improving free cash flow while investing heavily in operations suggests that things are working under the covers. Additionally, Coupang was cash-flow positive before the Rocket Delivery buildout, according to an interview with founder and CEO Bom Kim.
Foreign exchange: Lost in translation
Coupang reports in dollars (USD) but runs on Korean Won (KRW). Consequently, reported results would be adversely affected by an appreciating USD and vice versa. The impact can be significant. For example, in 2019, Coupang reported revenue growth of 55% year-over-year, but constant currency growth was 64%.
Constant currency growth, which strips out the impact of exchange rates, provides a better view of Coupang's underlying performance. Investors in the company will want to watch foreign exchange along with company performance.
While Coupang's global ambitions have been modest so far, its plans for domestic domination are no secret. That relentless focus has seemingly paid off. This chart, dated April 2020, illustrates that Coupang was already starting to pull away from the competition before the pandemic.
Given the breadth of Coupang's offering, we've broken the competitive landscape into four groups: legacy retail, general e-commerce, niche players, and Naver, a company that deserves its own section.
Korea has a very distinct retail environment, fundamentally different from that of the US or other Southeast Asian nations. As the former Coupang SVP describes it, South Korean retail is controlled by just a few players with a penchant for ratcheting up prices:
[Y]ou're pretty familiar with retail environment in the US. You've got obviously a big company called Amazon that provides e-commerce services, but you also have a very healthy offline set of businesses...
When you compare that to Korea, in the offline space, you only have a handful of players; Hyundai, Shinsegae, Lotte. Lotte being the biggest guy, and then Hyundai probably being the smallest guy.
Hyundai Department Store, then we got Shinsegae, then middle of it, Asahi, and then the bigger size of it is Lotte. These guys, they're not very big. If you take any one of them, Shinsegae is probably the biggest because they have the E-Mart, which is the Walmart of Korea. But comparing them to their category filler in the US, they're significantly smaller, and they're very greedy.
Products are often sold in multiples of MSRP. In fact, Lotte helped pass a law in the fair trade section that it's illegal to disclose MSRP of an electronic item, so that their electronic arm can sell Sony laptop or whatever at higher than what the manufacturers recommending it. So that's the offline landscape.
E-commerce players capitalized on this setup, undercutting retailers on price. The exploitative behavior mentioned above concerning disguising Manufacturer Suggested Retail Prices (MSRPs) is part of the reason e-commerce has been adopted quickly in Korea.
Will these legacy businesses adapt to the e-commerce opportunity? The same executive doesn't seem to think that companies like Shinsegae or Lotte are well-positioned to make a digital leap.
At some point, this offline guys need to wake up. Now, it took Walmart significant investment in Jet to wake up and do something in the US.
I don't know what that corresponding version of it would be in Korea. I think, the Lotte founder has passed away, and there is a family feud about who's going to take over. So hard to tell, status quo, those guys will continue to lose to Coupang.
For the time being, it seems as if Bom Kim will lose little sleep over traditional sellers.
More fearsome competition exists in the form of other domestic and international e-commerce players.
In South Korea, Coupang competes with GMarket & Auction (owned by eBay), 11st, WeMakePrice, and TMON. Many of these players have been slogging it out in this hyper-competitive market for over a decade. As shown in the chart above, Coupang has done an excellent job outmaneuvering these competitors. A strong indication of Coupang's dominance is the shuttering, restructuring, or attempted selling of businesses by competitors. eBay Korea and Groupon have had assets openly on the trading block for months. Concerning eBay, a former VP highlighted the strangeness of the decision and the potential for Coupang to capitalize:
I do know for a fact that eBay Korea is eBay's biggest and most profitable business.
That's interesting that they are putting up for sale. But regardless, I think that could be a very interesting acquisition for Coupang, if they were able to piggyback off of their fulfillment capabilities to help a lot of the sellers to deliver the same quality service that their retail business offers.
That both eBay and Groupon's domestic lines have not found buyers suggests that Coupang has probably passed on the opportunity. Beyond these sales, other competitors have shown weakness, too: TMON has been forced to shutter several business lines, while 11st shelved its plans to IPO after weak financial results.
Coupang may worry most about international competitors. Amazon is always a threat, though the company has tried to operate in South Korea without making significant inroads. A more direct concern may be Shopee, the e-commerce arm of Sea Limited. With a tightening grip over Southeast Asia, could South Korea be in the company's sights?
Another ex-VP discussed the company:
I like Shopee...In a market like Vietnam, in three years, they've gone from being a zero-based business to generating 1.3 billion in GMV. So they have above 50% market share in Vietnam, right? In three years, which is pretty impressive...
They were not a name that I had really heard of during my time in Singapore 4-5 years ago, but now they're doing $14-17 billion in GMV.
Like Amazon, Sea Group has the benefit of a money-spinning operation to finance new, lower-margin endeavors. While Amazon has AWS, Sea has Garena, its gaming arm. While South Korea is a difficult market to break into, and Coupang has built strong customer affinity, Shopee is a formidable adversary lurking on the outskirts of Coupang's current arena.
"Niche players" are those that compete with Coupang on a single product line. Mapping across business lines, Coupang's competitive set might look something like this. (We've excluded Naver since we address them below.)
Coupang competes with Emart, Homeplus, Wemakeprice, Market Kurly, and others in the grocery delivery space. Some e-commerce companies like GMarket also play here. As of January 2019, Coupang was the most used online shopping website in the country, with 21.9% of share. Emart was in second place with 14.8%. We would expect Coupang's position to have strengthened over the intervening two years.
As mentioned earlier, Coupang's market share in food delivery is considerably lower. Delivery Hero has merged with local market leader Woowa Brothers to create a food delivery superpower in the region. As part of that deal, regulators have ordered Delivery Hero to sell its existing Korean operations, though it's unlikely to consider Coupang a viable purchaser. Whoever does purchase the subsidiary will have the second-largest food delivery platform behind the new Delivery Hero/Woowa entity.
In the payments space, Coupang competes with the company Sequoia shunned: Kakao. With 34 million users, Kakao Pay is considered the most popular mobile wallet, followed by Samsung Pay with 19 million. Others in the space include 11Pay, Toss, Naver, and LG Pay. With the value of mobile wallet transactions expected to reach $581.3 billion in 2024, Coupang will want to make sure it gets in on the action.
The most realistic threat to Coupang is an equally unique company. It is neither pure-play e-commerce nor a niche app but a search giant: Naver.
A glance at the e-commerce market share chart above might make this position seem like a stretch — Naver has ~8% share compared to Coupang's ~25% — but there are reasons to support this hypothesis.
Lines between business models in the Korean market are reasonably blurred. As discussed, Coupang started as a daily deals play, a far cry from the Cerberus of e-commerce, food-delivery, and grocery it resembles today. That's a big jump for a company to make on any timeline; it's a phenomenal transformation in just ten years. Huge credit goes to the management team, of course, but it also illuminates Korean consumers' willingness to adopt new products and services from brands they trust.
This brings us back to Naver. While the "Naver = Google" comparison is an apt one as it pertains to search, it doesn't accurately reflect the scope of Naver's business. In addition to search and a growing e-commerce business, Naver has products like Naver Plus (think Amazon Prime without the video), Naver Pay (payments), and Naver SmartStore (third-party marketplace). As noted, it's a significant backer of Coupang's chief competitor in the food delivery space, Baedal Minjok. (We think the answer is no...but could Delivery Hero let Naver take its South Korean food delivery business off its hands?)
As Naver has faced slowing growth in display advertising, it has actively stepped up its focus in other areas, as illustrated by a recent push into grocery delivery with a project titled "Jangbogi." Naver's increased focus coinciding with the retrenchment of other e-commerce players creates the potential for Naver to take meaningful share. Indeed, by mapping Naver's offerings against Coupang's it becomes clear the company is reasonably well-positioned in the spaces Coupang hopes to dominate. That's without highlighting the business lines mentioned above, for which Naver is best known.
Some might reiterate that Naver's relatively small e-commerce business indicates they don't pose a serious threat to Coupang, but things can change quickly in this market. Two years ago, with almost double the market share as Coupang, eBay Korea was the dominant e-commerce player; today, having lost pole position, eBay is trying to cash out. As both Naver and Coupang scale, a clash seems inevitable.
The company is expected to go public at a $50B valuation, representing a 5.6x step up from their last valuation of $9B in 2019. Valuation comes down to how you see this company: is Coupang an e-commerce giant that has reached its zenith, or much more?
Coupang's finances indicate that right now, it is mostly e-commerce, with 92% of net revenue coming from product sales. That is not far off from Amazon's ratio today, with 88% of their revenue from product sales versus other business lines like AWS. (Fun fact: AWS is 3.8x the size of Coupang's consolidated business.)
Traditionally, e-commerce revenue is not valued at a premium multiple. Unlike software, the marginal cost of delivery is not $0. Commerce comps trade at 0.76x (Walmart) to 1.94x (Wayfair) NTM revenue. If you give Coupang credit for 50% growth next year, which is quite conservative given how cohorts have behaved even before covid-19, $50B represents a 2.97 NTM revenue multiple. That means that investors are still paying a premium to peers on a growth-adjusted basis.
Triangulating with TAM, the category ($534 billion of addressable consumer spend in Korea by 2024) feels like it supports a nice growth story from $50B. It's also worth calling out Coupang's analog competitors (Lotte, Shinsagae) in Korea are $2-3B market cap companies laden with a good amount of debt. We wouldn't want to bet against Coupang stealing share from them.
Of course, a bigger prize is potentially available. If you believe Coupang has a shot at becoming a platform company or super app, it might be likened to Alibaba (4.5x NTM revenue) or Amazon (3.3x NTM revenue). The thing to note is that both companies have closer to 40% gross margins versus Coupang's 17%. Amazon had 22% gross margins in 1996, so it doesn't feel impossible for Coupang to progress along a similar curve, particularly given its 10% leap in 2019.
In sum: investors need to believe in Coupang's ability to deliver profit dollars at scale. Telling the super app or platform company story requires a little hand waving right now since the S-1 doesn't detail how the company will invest in future opportunities. However, even if Coupang remains primarily an e-commerce company for the foreseeable future, it feels uniquely positioned to improve operating efficiencies and grow into Korea's large e-commerce TAM.
The culmination of positive factors around Coupang makes a compelling case for going public now. Undoubtedly the recent concerns around inflation and the resulting sell-off for tech names make the timing incrementally worse for Coupang. But the IPO market still seems to be quite hot, particularly for fast-growing tech companies with structural moats.
New issues aside, perceived winners in e-commerce, from Amazon to Mercado Libre to JD.com, have traded well as the already healthy e-commerce trends accelerated during the pandemic.
Even without the narrative tailwind, Coupang's recent performance justifies a push to go public. Expanding market share in both mature and recently launched business lines and a restructuring of the Korean e-commerce landscape that seems—at least partially—like a response to Coupang's recent growth should provoke considerable investor interest. As Coupang separates from the pack, the flywheel of scale advantages and service improvements should only compound its lead.
There are also pragmatic considerations for going public now. Coupang is far from profitable and will need access to capital sooner rather than later. Softbank has a big balance sheet, but tapping public markets is a more sustainable way to fuel future growth for the long-term. Just as with Sam Walton, who took Walmart public in 1970, Bom Kim will hope that listing is just the beginning.
The Generalist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Our work may feature entities in which Generalist Capital, LLC or the author has invested.
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