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Harvard Dropout's Startup Loses Billions in South Korea Battle

(Bloomberg) -- Coupang won over fans with personalized service for e-commerce in South Korea, picking up $1 billion of funding from Masayoshi Son along the way. Analysts are now questioning if that is enough as the nation’s powerful chaebol turn their resources to dominating online like they do in the physical world.

While Coupang’s sales are rising, that is coming at a massive cost as losses reached 638 billion won ($592 million) last year. Retailers backed by the SK and Lotte conglomerates are subsidizing web forays with money from their profitable brick-and-mortar outlets, crowding out Coupang and denying oxygen to the eight-year-old startup.

“In a war of cash, Coupang is losing money it can’t afford to, while bigger companies can,” said Park Jong-dae, an analyst at Hana Financial Investment Co. “It’s cutting margins to increase its market share, but that’s not helping to lock in customers, because they would readily flock to cheaper deals at other companies.”

Coupang emerged as a disruptive force in South Korea’s consumer market in 2010, pushing into e-commerce at a time when established retailers were focused on protecting lucrative off-line businesses. It’s also a rare startup success story as the most valuable privately-backed firm in a country where the top 10 family-run conglomerates control more than a
quarter of all business assets. Being early has helped it remain among the leaders, but the gap is narrowing in an online shopping market that grew 19 percent last year to 78.2 trillion won.

While Coupang has raised about $1.8 billion in venture capital, according to Eugene Investment & Securities, the chaebol have their own deep pockets. Lotte plans to spend 3 trillion won over the next five years to boost its online retail business while E-Mart Inc., a unit of retail giant Shinsegae Group, is receiving at least 1 trillion won in investment.

Founded by Harvard Business School drop-out Bom Kim, Coupang started as a Groupon-style website and now handles everything from organic food to consumer electronics. It’s similar to Inc. in that it sells goods itself and hosts third-party merchants.

Harvard Dropout's Startup Loses Billions in South Korea Battle

In 2014, a year before Son’s SoftBank Group Corp. invested at what was said to be a $5 billion valuation, Coupang made a splash with its Rocket Delivery service, promising to get goods to customers within 24 hours. Rocket, which had to withstand legal challenges from South Korea’s transport industry, has proven popular and includes special touches, such as training workers to avoid ringing doorbells at homes with babies when making evening deliveries.

But Rocket has turned out to be expensive. The service requires thousands of Coupang employees and more than 50 storage facilities, which cost the company 150 billion won last year, according to Eugene Investment & Securities. Chaebol rivals are also fighting back, with E-Mart shipping some of its products in as little as half a day to match Coupang’s service.

Requests for an interview with Kim haven’t been returned while representatives of Coupang declined to comment on the record.

Since SoftBank’s 2015 investment, Coupang’s annual gross sales have risen from 1.1 trillion won to 2.7 trillion won. At the same time it has posted operating losses of 1.7 trillion won between 2015 and 2017, according to its annual filings.

Coupang has said the losses are to be expected because it’s committed to growing its consumer base more than making money before a potential IPO. It cites Amazon as its role model, saying the U.S. company recorded years of losses.

Coupang also competes with Ticket Monster, an online retailer backed by Groupon Inc. and KKR & Co., and WeMakePrice Inc., which is funded by the parent of gamemaker Nexon Co. Both of the rival startups are unprofitable, with Ticket Monster posting a loss of 115 billion won last year and WeMakePrice losing 41 billion won, according to filings.

With some e-commerce companies selling below cost to win market share, the sector could face a war of attrition and the need to raise more funds.

“The crucial question is whether Coupang can continue to attract outside funding,” said Yang Ji-hye, an analyst for Meritz Securities Co. in Seoul. “The e-commerce market is in a crisis triggered by a shakedown of prices that Coupang played no small part in.”

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