Investors tell Coupang to get real about bottom line

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Investors tell Coupang to get real about bottom line

Published: 22 Jan. 2022, 07:00

Banners are raised in front of the New York Stock Exchange ahead of Coupang’s initial public offering. The company's shares closed at $19.99 on Jan. 20, down 68.5 percent from its debut price of $63.5 last March 11. [YONHAP]

Coupang has long waved away its red ink as "intentional," investments in the future.

Now the company is scrambling to get into the block as its stock plummets and investors get impatient.

The 12-year old e-commerce company is known for divergent revenue and profit directions. It reported revenue of $4.64 billion in last year's third quarter, up 48 percent on year, and a net loss of $324 million, up 87 percent. Coupang has never reported a profit.

Kim Bom, CEO of the Delaware-incorporated Coupang Inc., says the company’s investment in overnight and restaurant deliveries contributed to the loss. Some 92 percent of its 2021 second quarter operating loss before interest, taxes, depreciation, and amortization (Ebitda) came from direct investments in those two services, including 10 fulfillment centers being built.

Investment has been a viable excuse in the past, and a classic line from a start-up. But Coupang's stock is nosediving, and investors clearly want to see some profit.

Shares closed at $19.99 on Jan. 20, down 68.5 percent from its debut price of $63.5 on the New York Stock Exchange last March 11.

Profit possible after 2024

Amazon, the original e-commerce startup, took seven years to see its first quarterly profit in 2001. For Coupang, the profit horizon seems to be sometime in 2024.

“In 2022, there will be less spent on pandemic-related issues and a rise in consumer prices will improve profitability slightly,” said Park Sang-jun, an analyst at Kiwoom Securities. “To actually generate profits in the mid-term, increasing sales from commissions and reducing promotions for Rocket Fresh and Coupang Eats is important.” Rocket Fresh is a grocery delivery service that began in October 2018, and Coupang Eats is restaurant deliveries, which began in May 2019.

Park is expecting black ink in 2024, when Coupang Eats and Rocket Fresh start cutting into rival services' businesses. Woowa Brother's Baedal Minjok had a 66 percent market share of the restaurant delivery market as of 2021 and Coupang Eats only 13.56 percent.

Kiwoom Securities projects Coupang will report a net loss of $311 million in the fourth quarter of last year, up 180 percent on year.

It predicts revenue of $5.1 billion for the fourth quarter, up 34.4 percent on year.

Starting this year, Coupang hiked the cost of becoming a member of Rocket Wow, a subscription-based service that includes grocery and food deliveries — and much more. New members will have to pay 4,990 won ($4.20) a month, although existing members will be grandfathered to the original monthly fee, 2.900 won per month.

Rocket Wow members don't have to pay delivery fees for Rocket Delivery or Rocket Fresh. They also receive discounts on Coupang products and access to videos on the company's over-the-top (OTT) streaming service Coupang Play.

“In the third quarter conference call last year, Coupang said that its short-run costs rise when its Rocket Wow members order more,” said Oh Lina, an analyst at eBest Investment & Securities. "It mentioned it has plans to decrease costs per delivery."

Coupang is refraining from clearly stating reasons behind the increase in the cost of becoming a Rocket Wow member, but analysts suspect a concern for the bottom line.

The increase doesn't affect existing customers, and even new customers will notice that it's cheap compared to other subscription services, even if they're in different industries.

Netflix charges 13,500 won a month, Tving 10,900 won and Watcha 12,900 won. Naver's Plus Membership costs 4,900 won a month.

A delivery worker unloads a Coupang parcel from his van. [COUPANG]

Higher commissions

Coupang Eats, another big money pit for the company, is jacking up commissions and delivery fees charged to restaurants.

Since the start of the delivery service in 2019, restaurant owners had to pay a flat 1,000-won commission per order to Coupang. On top of that, they paid a 5,000 won delivery fee, which they could pass along partly or entirely to customers.

Starting Feb. 3, Seoul-based restaurants will be able to choose commission rates of 7.5, 9.8, 15 or 27 percent. Choosing a higher commissions will subject them to lower delivery fees and vice versa. The delivery fee will range from 1,764 won to 5,400 won depending on commission level and delivery distance.

"It isn’t an extreme rise," said a Coupang spokesperson. It's lower than the company's original plan in 2019 to charge restaurants a 15 percent commission and a 6,000-won delivery fee split between the restaurant and customers.

“We will probably have to pay higher fees,” said Mr. Kim, a 53-year-old pork cutlet restaurant owner in Yongsan District, central Seoul, "but as a business owner I can’t afford to lose customers who might order through Coupang Eats.”

Advertising revenues is another easy way to ramp up profits, which doesn't require additional investment by Coupang.

Sellers on Coupang can spend more to make their products show up at the top of a search. A similar advertisement system was introduced on Coupang Eats last November.

Revenues from Coupang Media Group, its advertising business, nearly tripled on-year in the third quarter last year.

"It requires a lot of fixed costs to be able to collect [commissions and advertising revenue]," said analyst Park of Kiwoom securities. "But when a company grows and revenue surpasses a certain point, companies can generate high profits because those businesses generate money without much additional production costs."

Investment to continue

Although the company is being pressured to improve its bottom line, it’s not ending big investments.

In 2021, Coupang invested 100 billion won to create exclusive shows on Coupang Play, and will spend more for programs such as "Anna," which will air this year.

The Coupang Play streaming service is included in Rocket Wow membership and the company sees it as a way to lock-in customers in the long run.

"The success of OTT service Coupang Play is expected to increase the number of Coupang's active users, which fell in the third quarter, and help bring up Coupang's market share in the e-commerce industry to 19.8 percent in 2022," said Kim Myoung-joo of Korea Investment & Securities.

In the third quarter, Coupang had 16.8 million active users, falling 1.2 percent on quarter.

Logistics centers will always be a key investment for Coupang, as more hubs allow it to cover more areas, deliver things faster and acquire more customers.

Delaware’s Coupang Inc. borrowed $139 million last October, saying it will use the money to build more fulfillment centers in Korea.

An investment deal of 100 billion won was signed in September 2020 to build a logistics center in Gimcheon, North Gyeongsang, and Coupang announced Jan. 19 it will spend an additional 50 billion won on the project.

BY LEE TAE-HEE [lee.taehee2@joongang.co.kr]