Can Coupang survive amid snowballing losses?

2020-07-21(코리아타임스)

By Kim Jae-heun

Coupang, the nation's largest e-commerce company, has drawn unwanted attention from market observers with its business model being called into question, after it has seen snowballing losses over the past years despite these coinciding with a growth in sales.

The company has expanded its sales and market share by employing aggressive marketing strategies and a unique delivery service, but its losses have been ballooning, raising a fundamental question about the e-commerce giant's business sustainability: Can it manage to survive?

Concerns are also growing that the snowballing losses will likely thwart the firm's ambitious plan to attract global investors in a listing on the tech-based Nasdaq.

From a business standpoint, the ailing Coupang is an interesting case to look at as its financial numbers show the contrasting aspects of the SoftBank-backed company.

Founded by Kim Bom in 2010, Coupang made a big splash with its signature Rocket Delivery service that guaranteed delivery within 24 hours, striking a blow at the country's existing retail giants including Lotte and Shinsegae. It attracted $3 billion in investments from Japan's SoftBank and its Vision Fund in 2015 and 2018.

In the early stages, Coupang was impressive. But its focus on pursuing external growth over profitability resulted in huge spending on marketing and advertising, worsening its overall balance sheet. Investors are now saying that Coupang needs to be strategic when it comes to additional costs.

Coupang reported a whopping 1 trillion won operating loss last year, which increased its accumulated losses since 2014 to 3.72 trillion won. However, it did see sales grow 6.3 times to 7.15 trillion won from 2015 to last year.

The rapid spread of the COVID-19 pandemic is adding momentum to the growth of e-commerce, and Coupang has been actively riding on this wave by building more logistics centers and hiring more delivery service people.

The company said earlier that it was planning to pursue an initial public offering (IPO) on the Nasdaq, but it's uncertain whether it can move forward with the ambitious plan given its continued dismal performances.

SoftBank CEO Masayoshi Son, Coupang's strongest backer, said he will not support a company if it is financially struggling.

Citing Coupang's recent moves to bring former U.S. Federal Reserve Governor Kevin Warsh and International Gaming Technology former Chief Financial Officer Alberto Fornaro onto its board of directors, observers said Coupang is still interested in laying the necessary groundwork before the planned, but delayed, IPO.

Crisis management

Top management has the most important function of implementing and executing sustainable company policies.

Amid the spread of COVID-19, Coupang increased the number of its distribution centers in Korea to 168 from 26 in 2014. The number of paid-up members also rose to 34 million last year from 2.59 million in 2014.

Coupang has realized “economies of scale” in the businesses it is directly involved in by purchasing products in large quantities and at lower prices from suppliers.

According to management reports last year, Coupang cut its price ratio of cost to selling by 12 percentage points in overall sales compared to the year before. It saw an increase in labor costs of over 400 billion won between 2018 and 2019 but revenue has soared so much that the ratio of employment expenses against sales is declining.

However, more importantly, Coupang has to address two critical issues to improve its risk management skills.

First, it's been mired in a controversy over allegations of illegal price fixing with its subcontractors. Coupang was said to have pushed its suppliers to sell products at the lowest price on its platform. This raised suspicions that were voiced by then Rep. Lee Tae-kyu of the opposition Bareunmirae Party.

It was also reported by Woowa Brothers, WeMakePrice and LG Household & Health Care for violations of the Fair Trade Act. The firms argued that Coupang abused its power against them in the online trading business.

Second, while Coupang said it has done much in terms of increasing the number of full-time jobs especially those of delivery workers, there are many other employees involved in the logistics side of the business, who are temporary ― only 3 percent of employees at Coupang's distribution center in Bucheon, Gyeonggi Province, have permanent jobs.

According to Coupang's union, only 25 percent of employees are full-time, while the rest are contract workers or part-timers. The union has urged the company to hire more delivery people and guarantee a safer working environment. There have been incidents including one in March where a Coupang worker surnamed Kim died from overwork in Ansan, Gyeonggi Province.