Coupang's Big Bet on Taiwan: What Are the Key Drivers of Growth?
Coupang plans to use Taiwan as a starting point to replicate its same-day delivery success in South Korea and expand this strategy to Southeast Asia.
Coupang, a South Korean e-commerce company, said it will accelerate its investments in Taiwan after posting four consecutive quarter profits. The company was the most downloaded app in Taiwan in the second quarter of this year.
"Taiwan is another investment that far exceeds our expectations," Coupang CEO Bom Kim said in a conference call. "We always believed that the transformative retail experience we enabled in Korea could delight customers worldwide. We see how this plays out in Taiwan."
Coupang's next-day delivery service, Rocket Delivery, has grown faster in Taiwan in the 10 months since its launch than Rocket Delivery in Korea in the first 10 months. The company has allocated around $400 million for investment in Taiwan this year.
The move comes months after Coupang suspended operations in Japan in March and denied rumors that it was planning to launch in India in May.
Coupang investment for growths
To provide rapid delivery services to Southeast Asian countries, it is understood that Coupang (NYSE:CPNG) has established a logistics center in the northern part of Taiwan.
In addition to its rocket delivery service within Taiwan, Coupang has also launched a cross-border online shopping service, allowing Taiwanese consumers to purchase goods from South Korea directly.
Seeking to replicate the success of the Korean market in Southeast Asia
Coupang's founder, Kim Bom-seok (English name Bom Kim), is working hard to expand its business in the United States and Southeast Asian countries, mainly replicating its success in South Korea. This includes its iconic same-day rocket delivery service.
"We set the bar high for new initiatives," Kim said. "We have divested investments that did not meet our internal thresholds and shelved countless others that ranked below our most attractive opportunities. So far, Taiwan has far surpassed this benchmark. Given these advances, we will invest in Taiwan more this year."
Coupang's core business, product trading, had net sales of $5.6 billion in the second quarter of 2023, up 21% YOY.
The development division generated revenue of $156.29 million in the second quarter of this year, down 2% YOY.
"Both revenue and active customers grew faster this quarter," Kim said. "And our emerging merchant services like advertising and Fulfillment and Logistics by Coupang (FLC) are growing more than twice as fast as our overall business."
Coupang says its active subscriber growth continues with 19.7 million active users in Q2 23, up 10% year-over-year. Earlier this year, the US-listed e-commerce company opened its largest fulfillment center in Daegu, South Korea, with an army of robots servicing the logistics center.
The company, backed by SoftBank's Vision Fund, reported net income of 75.4 million in the second quarter of 2022.
What do investors think of Coupang?
1) The substantial impacts currency dynamics have had on the business. 2) Its autonomous, vertically integrated commerce engine. 3) Its digital ad business is growing at ~50% presently.
In short, with robust free cash flow margins, a long runway for growth ahead, $4.1B in cash, and $500M in long-term debt, we believe Coupang will be a fantastic business to own in the decade ahead.
Coupang expects its newer categories, like fashion and beauty products on the Rocket Delivery platform and unlimited discounts on Coupang Eats for Wow membership, to increase its profitability, similar to Amazon's Prime.
Coupang's Growth Strategy in Taiwan
CEO Kim Ban-seok has announced that this year, he will invest 400 million US dollars (approximately 12.7 billion New Taiwan dollars) in mid-term projects (Developing Offerings), with the Taiwanese market being the primary focus of the investment.
What is the portion of Coupang's $400 million investment to Taiwan? This question can be answered by comparing the capital expenditures of Fubon Media (Momo Shopping) and PChome Online.
In 2022, The leading e-commerce platform Momo's holding company Fubon Media's capital expenditure was $210 million in 2023, mainly for constructing logistics centers, delivery fleets, and other infrastructure.
Meanwhile, The second largest e-commerce platform, PChome's A7 logistics center, which began trial operations earlier this year, is expected to have a total investment of $68 million.
Coupang has yet to disclose how this $400 million dollars will be allocated. Still, if one-third of it is allocated to the Taiwanese market's development, it already exceeds Momo's capital expenditure in 2022.
The Taiwanese market is becoming increasingly important for Coupang, indicating that this ECommerce giant is vying for the business behind two major e-commerce platforms, Momo Shopping and PChome 24h, prioritizing rapid delivery. Coupang, often called the Korean version of Amazon, had to pivot quickly when it faced challenges delivering fresh produce within 10 minutes.
Founded in South Korea in 2010, Coupang invested heavily in building warehousing and logistics equipment and its fleet of delivery vehicles.
Today, it has over 100 logistics centers in over 30 cities across South Korea, covering over 47 million square meters. In South Korea, which is approximately 2.76 times the size of Taiwan, Coupang's same-day delivery rate reaches 99%. This is the widely recognized "Rocket Delivery" service that Coupang is known for.
In 2021, Coupang debuted, initially touting its "10-minute fast delivery" as its most significant selling point, and began operating in the fresh food e-commerce market. Fresh food e-commerce was booming during the pandemic, with delivery platforms and physical supermarkets all making significant inroads. Coupang's 10-minute delivery promise was the fastest in the fresh food e-commerce industry at the time. This move shows Coupang's ambition to continue its "fast" feature in South Korea.
Strategy shift in Taiwan
Still, because it needs to achieve a 10-minute delivery speed, Coupang's coverage in Taiwan could be faster to increase. It is limited only to certain administrative districts in Taipei and can naturally not grab market share and attention. The industry believes that Coupang's goal in Taiwan is to create buzz and extend the imagination of investors, and then profit through the capital market. From the perspective of market competition, the threat to local e-commerce and delivery businesses in Taiwan is very low.
In October 2022, Coupang made a major strategic shift in Taiwan, discontinuing its 10-minute delivery service, but introducing its signature rocket-speed delivery service and the cross-border e-commerce service that can create market segmentation, "Rocket Overseas".
Insiders revealed, "It is said that Coupang intends to replicate its Korean model in Taiwan entirety."
Strategy 1: "Buying Out" Inventory:
There are three supply models in the retail industry when working with suppliers: buying out, buying with the option to return, and consignment. Coupang states that in both South Korea and Taiwan, they fully adopt the buyout model.
"Coupang mainly follows the Amazon model, purchasing items themselves to gain full ownership, distributing through their warehousing and logistics, and operating with high control and integration, which is very efficient and can lower prices," analyzes Tenten D2C Lab.
Such a model is rare in the retail industry. Suppliers don't have to worry about being unable to sell their goods or the risk of returns, ensuring revenue and profit. However, the purchase price of individual items in a buyout is usually lower, so success must be achieved through sales volume.
The downside of this model is that the overall product quantity may not be as high as in other consignment models, and the supply of goods may not be as stable. Under such circumstances, if the distributor is sourcing goods from everywhere, it's easy for products of various specifications to appear on the platform. Therefore, high forecasting levels, product selection, inventory management, and sales capabilities are big challenges for Coupang.
Strategy 2: Selling Taiwanese Products to Korea.
Coupang's cross-border sales are bidirectional, bringing Taiwanese products to the Korean market." For Taiwanese suppliers, Coupang's cross-border resources are indeed very attractive
An e-commerce industry professional manager analyzed, "The practice of offering a 30% discount for first-time purchases is a model that brands can fully accept. Brands know that promotional activities are the sales channel's responsibility; as long as it doesn't affect my selling price, it's fine." It's like department store anniversary sales, where the entire store offers a discount for every thousand spent without targeting a single item for price slashing. For brand owners, it's a great opportunity to boost performance. "For brand suppliers, revenue is still the most important indicator. An additional platform to generate performance is a cause for celebration for suppliers."
Local B2C may trigger a significant shakeup. Just like Shopee's subsidy strategy in Taiwan. Should Momo and PChome be afraid?
But this time, it's different; if Coupang continues to burn money and perform this strategy in the local B2C market, it would be a lifeline for Momo and PChome.
Although there is still a considerable gap between the scale of local and foreign businesses in Taiwan, with Coupang not reducing its firepower, a life-or-death alarm has already been sounded for all e-commerce operators in Taiwan, and a major earthquake may be brutal to avoid.
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