Online malls come back

When Choi Sang-gi, a senior manager at the Internet Auction Co., left a large, established firm and joined the one of the forerunners of the Internet shopping mall craze at the peak of dot-com boom in 2000, Auction was still struggling, though considered a company with fine potential. It had its office on the sixth floor of a 20 story building in the Teheran Valley, the dream street for dot-com startups in southern Seoul. "More than 100 workers were jammed in the room," Mr. Choi said. "Sweat was always streaming down in the summer because we did not have air conditioning." But after the dot-com bubble burst and during the prolonged industry-wide slowdown, many of big name dot-coms fled the skyscrapers lining each side of Teheran street, a long boulevard connecting the upscale areas of Yeoksam-dong and Samseong-dong, in southern Seoul, looking for cheaper rents. Auction is one of the few firms that survived those wild times. Not only that, the company today occupies three floors in the same building, and its 200 employees now enjoy spacious offices, thick carpets, conference rooms adorned with luxurious, wooden fittings on the walls and translucent windows, plus plenty of good, strong air-conditioning. The company may deserve the modest splendor: Auction, for the first time in four years since its creation, is expected to report year-end profits when releases its 2002 performance report tomorrow. After posting 14 billion won ($12 million) in losses in 2000 and 7.1 billion won in losses in 2001, the company saw 1.8 billion won in operating profit through the third quarter 2002. The firm aims at 12.5 billion won in operating profits on 50 billion won in revenues for the year 2003. After six years of struggling, something similar is happening for other major Internet shopping malls in Korea as well. Many large shopping malls, who are scheduled to release their annual performance reports later this month, are expected to end 2002 in the black. Take, for example, LG Eshop, the largest online shopping mall in Korea in terms of sales. The company, which was founded in May 2001 as part of LG Television Home Shopping channel, started to generate monthly profits in October 2001, although did not end that year in the black. "We forecast about 281 billion in revenues in 2002, 2 percent of which will be operating profits," Hwang Gyu-ran, a publicist with LG, said. Samsungmall, which handles 350,000 products, including 150,000 books, said it expects to post 3 billion won in net profits in 2002 on 300 billion won in revenues. Lotte.com said it expects to turn to a profit this year, and predicts about 3 billion won in operating profits on more than 300 billion won in revenues. Interpark, an online only shopping mall that deals in 300,000 products, including a large quantity of books, is also expected to observe significantly reduced losses this year. Its operating loss is 1.7 billion won through the third quarter, compared to 9.1 billion during the same period last year. "Interpark and Hansol CSN are expected to turn profits in the fiscal year of 2003," Kim Ki-young, an analyst at SK Securities, said. Since Interpark and Lotte.com opened an era of electronic shopping in Korea in 1996, Internet shopping malls, whose number now exceeds 2,000, have been suffering losses. Some industry analysts even questioned the validity of Internet shopping malls as a profit model. "As other dot-com companies, Internet shopping malls believed in the bubble, and thought that increasing the number of customers would automatically lead to advertisement profits and increases in sales," Jun Park, an analyst at Good Morning Securities, said. So they made hefty initial investments to lure as many as customers ahead of competitors. But the concept of buying products online was still new, and the customer base was small. Collapses of numerous Internet shopping malls followed the burst of bubble in 2001. Among first comers and larger players, those who could weather the repercussions survived, which now enjoy a far more hospitable environment, Mr. Park said. First of all, the pie of the industry has grown significantly. According to the National Statistical Office, the total transactions occurred through Internet shopping malls reached 5.4 trillion won through November 2002, which was an 80 percent increase from the same period in 2001. About half of the population in Korea now use the Internet. The number of Internet shopping mall users has also ballooned three times from 2.3 million in 2000 to 7.8 million in 2002. "By the end of 2000, 85 percent of our users were men who generally bought electronics gadgets or computer products in the spare time at their offices," Mr. Choi of Auction said. But the number of broadband subscribers exceeded 10 million in Korea as of October last year, and as of the end of 2002, women took up 41 percent of Auction's customers, mostly married women in their 30s. Second, most leading firms are now four to six years old, and have completed the initial investments and establishment of an infrastructure, Mr. Park said. "Since we were founded in 1998, we have recorded annual losses because we have had to make initial investments in establishing systems," Choi U-seok, from Samsungmall, said. Mr. Kim, the SK analyst, also pointed at the improvement in information security and emergence of more convenient ways of online settlements. Internet shopping malls also attributed their improved performances to overhauling business structure based on the initial trial and error. Samsungmall has recently completed the transformation of its business structure and developed a "cooperation system" with suppliers. By sharing information with suppliers and delivery companies, the company could improve efficiency and cut operating costs, Mr. Choi said. The most dramatic step for Auction came when the company was taken over by eBay, the U.S. auction site, in February 2001 for $120 million. By trimming one-third of the workers to a staff of 140, eBay overhauled Auction's business model so it became more simplified and efficient, Mr. Choi said. In the past, Auction hired up to 60 merchandise directors, who negotiated with suppliers one by one to set the supply amounts and prices. Auction also had to deal with part of inventories. As a result, the maximum number of newly-listed products for group buying -- customers buy a product at bargain prices by making the purchase in group -- remained 200 a week. As the company increased the supply of products, it also had to hire new staff to handle them, thus labor costs increased along with the increase of the variety of the products. After the takeover, the company, aiming at creating an equivalent of Dongdaemun or Namdaemun traditional market places online, opened up the opportunity to everybody. Without going through consultation or price negotiations with merchandise directors, anybody, whether it be professional stores or individuals who wanted to sell their old clothes, was now able to directly register their products on the Auction site and sell them. That could also open opportunity for fraud and customer dissatisfaction. So the company came up with the system to prevent that. First came an escrow system. To prevent such cases where sellers took the money and disappeared without sending products or buyers dissatisfied with the products that they had bought, the company plays an intermediary role and withhold money that buyers sent until buyers received the products and click the "receive" button to express their intention to buy the product. Then the sellers get the money minus commissions ranging from 1.5 percent to 5 percent according to the prices of the products. Then came a feedback system. Buyers evaluate the credibility of the sellers, which is reflected in the table on the sales pages. The company also simplified the commissions system, and eliminated the differences that the company applied in the commissions between business to customer transactions and customer to customer transactions. Thanks to such efforts, Mr. Choi said, Auction, which make profits on the commissions, now take up 70 percent of the online auction market, compared to 1999. by Kim Hyo-jin