Coupang is known as the Amazon of South Korea
and I've actually been living here for the past few years and have been using
Coupang over the past few months as part of my due diligence
and I've become a loyal customer now and so I'm super excited to share with you
my thoughts on one of the hottest IPOs of the year. What's up
everyone my name is ben, I'm a former JP Morgan investment banking analyst and
welcome to rareliquid, the best channel for tech investing
Today we're going to be talking about Coupang and I'm going to be adding this
video as part of the series of rare deep dives of tech companies which is a
channel on my playlist But before I get started just as a quick
reminder I am not a financial advisor so please treat everything in this video as
for entertainment purposes only Alright, with that said let's get right
to it. First let's go a bit into the history of Coupang.
Coupang was founded in 2010 by Bom Kim, a Harvard Business School dropout
The company started off as a daily deal Groupon type of business
but pivoted into an eBay style third-party marketplace that reached
over one billion dollars in sales within three years.
Coupang almost went public with that business model but decided to pull out
of an IPO because Bom felt like the company was one that
customers liked but not one that they loved. Coupang completely
reinvented itself into an end-to-end e-commerce company
and with the help of a two billion dollar investment from Softbank
in 2018, the company has now become a dominant force
in Korea. This leads us to the next part of the video, which is about what Coupang
has become today Let me first set the stage by providing
the three key values that drive everything that Coupang does. Service,
Selection, and Price. These values pervade all of
Coupang's business and let's talk about the company within
the framework of these three key values First off is Service which is in my
opinion the most impressive part of the company
What differentiates Coupang from all its competitors is that it has invested
billions of dollars into its infrastructure and technology
to create a completely end-to-end service everywhere, from when a customer
places an order, all the way to when that order is actually delivered
The company owns the largest logistics footprint in the country
with 70% of the population living within 7 miles of a Coupang logistics center
This allows the company to offer the fastest delivery service in the country
through rocket delivery which offers the following services
First, millions of items are available for either
same day delivery if ordered in the morning or dawn delivery
which delivers products to you by 7 am if you order by midnight
I actually personally tested this by ordering just a few minutes before
midnight and the items did arrive by 7 am the
next day. Second, nearly 100% of orders are delivered
either by the next day or faster, even before holidays like
Christmas. The company has been able to eliminate cardboard boxes in over 75%
of its orders, which saves the company both costs and in storage space
and of course is also eco-friendly. All produce I order
come in these eco-friendly bags, which I just leave outside my door as soon as I
take everything out and the next time i order something they
pick it up. Fourth are frictionless returns
Instead of having to drop off your items, you simply leave them outside your door
and initiate a return on the app which is super convenient
I also tested out a return as well because I accidentally ordered boiled
eggs instead of just normal eggs and when I initiated a refund they
actually just gave me the money back and didn't collect the items so
sometimes i think if it's a really small loss they'll just want to
delight the customer by giving them the refund and letting them keep the item
The second of Coupang's values to discuss is Selection which is also very
impressive Put simply, Coupang offers more items than
any other e-commerce player in Korea, both for products and for groceries. I've
personally ordered a range of items from tape to strawberries to pens but
you can also order other things like TVs and clothes and I
thought it'd be a little fun and interesting for you
guys to actually see the app itself from my phone
and watch me kind of order something Okay so here's what the app looks like
and as you can tell by the icons you can pretty much buy anything that you might
want So let's say that I want to buy apples. I
put that onto the search bar and if you press the rocket filter on the top left,
then all the apples that can be delivered through rocket delivery show
up. And guys just look at all the number of apples you can choose from. It's just
insane. I personally found that the reviews are also super helpful to know
which one to buy So let's say that I want to buy this one
there's some detail about the product and as you can tell all the photos are
also really high quality Buying is as simple as pressing two
buttons if you want it right away or you can also add it to the cart. The
third, last but not least value, is Price First of all, Coupang offers all of the
great services like rocket delivery and same day shipping
for an insanely low rate of ₩2900 a month, which roughly equates to two dollars and
fifty cents. Coupang's goal is to offer the lowest possible prices to customers
and the scary thing is that there's a lot left for the company to scale
and so its competitive advantage on that front will grow
more and more as time goes on, in addition to being an e-commerce business
that delivers products and groceries The company also has Coupang Eats which
is pretty much like an Uber Eats or Doordash and they
also offer Coupang Play which is a streaming service
When you go on Coupang's website, there's also a travel button where
you can compare flights and hotels and cars
for travel so basically like a Kayak or Expedia
and the company is also working on merchant services just as like how
Amazon can fulfill orders for other companies,
Coupang, with all its different fulfillment centers across the
country, is able to collect inventory from companies
and deliver it on their behalf. There is even more that the company is working on
and all of it are centered around their three core values of
Service, Selection, and Price, but basically what you need to know is that
there's a lot of potential for future growth for this company
beyond just e-commerce. Next let's talk about the market
Coupang is participating in but before I go into the market and the numbers
I actually wanted to provide a little bit of context about what korea is like,
having lived here for the past few years First off, Korea is
incredibly tech savvy. There was Apple Pay before Apple Pay even existed
Koreans have been paying with their smartphones for a really long time now
There's free wifi everywhere, even my grandma has a smartphone, pretty much
almost everyone in the country has a smartphone. Second, as a baseline, Koreans
work incredibly hard After the 1950s and the Korean War, Korea
was pretty much a third world country and since then has been able to work its
way up through almost sheer effort to become the fourth largest economy in
Asia and the 12th largest in the world. A lot
of korean students literally study from 8 am
to almost midnight especially if they're in high school studying for this big
national exam that they all have to study for
And a lot of my friends working in their corporate jobs work pretty long hours
even though they don't get as good a pay as you might get in like the United
States. I really am bringing this up because Coupang is basically employing
a huge part of the korean workforce which as a baseline has an incredibly
high work ethic, which is important and good for the company
The third is that korea's land is pretty small and the cities are
incredibly dense which is probably what helps Coupang be so efficient
and able to deliver to all the different neighborhoods really quickly
Alright, next let's talk about numbers As of 2019, Korea's e-commerce market was
$128 billion dollars and that's expected to grow to $206
billion dollars which represents a 10% annual growth rate
In addition to that, e-commerce spend on a per-buyer basis
is expected to grow from $2,600 in 2019 to $4,300 in 2024. These numbers are
great but what's really astonishing is that the company only really owns
4% of the market which means that there's a ton of room
for future growth Next up, let me talk about the bull case
for Coupang. First, let's talk about the company's scale. In
all of South Korea, Coupang is the largest ecommerce player has the
fastest delivery service, owns the largest logistics footprint
with over 100 centers across 30 cities, provides the largest selection of
products, and has the largest fleet of drivers with over
15,000 employed. Coupang was able to grow to its scale today after raising
3.4 billion dollars, three of which came from Softbank, which
has the largest fund in the world and so it's possible but pretty
challenging for another competitor to come in with that kind of funding
Second is Coupang's tech because Coupang is actually a technology
and logistics company All that money from softbank didn't go
only into capital expenditures but also into a really sophisticated tech
infrastructure that predicts and assigns the fastest
and most efficient path for every order. Coupang's Chief
Technology Officer is Thuan Pham, who was the former CTO of
Uber, so really a perfect person for the job
Each order shifts through hundreds of millions of options of
different types of inventory, routing options, and processing
and all of that happens within just a matter of seconds, so
you know it's really hard for any company to replicate this kind of
technology really quickly Third is an extremely loyal and growing
customer base Some companies like Coupang offer
something what's known as cohort math and it's basically when the company
follows the same group of people and see how they spend over time. As you
can see from this table, 2016 customers took five years to triple
their spending, while it took 2017 customers four years
and 2018 customers only three years. From using Coupang myself i can really see why
this is the case I used to order from various different
websites for different things that I needed
but now that I've been using Coupang, it has everything that I want in one app
and so I don't really see myself spending anywhere else and so that's why
I've been spending more and more on the app
as the weeks have been going on. Next let's talk about what you may need to be
worried about as an investor First the company is unprofitable and is
investing heavily in potential growth drivers and this
could lead to severe losses especially if things don't pan out well
The company points out as a risk factor in its S-1 that it may
expand into other countries and i would pay really close attention
to this since this could take away from the company's focus
and cause losses in the future. Second is the lack of shareholder voting rights.
Coupang's CEO Bom Kim owns about 77 of the company's voting rights and also
acts as chairman of the board So this guy has a ton of influence over
the company If Bom Kim is involved in some kind of
scandal or starts underperforming for whatever reason, then
this is a potential risk for the company Third is Coupang's valuation. As with most
hot IPSs there's usually a frenzy at the beginning
and the valuation could get stretched a little bit too quickly
and with the current environment with interest rates potentially going up in
the future this is something just to be on the
lookout for. My next video is going to be about how to value a company and I'm
going to be using Coupang as an example so if you're interested make sure to
check that out. Fourth is competition, even for a company that has so many
competitive advantages like Coupang In November 2020 amazon invested a 30%
stake in competitor 11Street, which is majority owned by SK Telecom, which is
one of the largest companies in Korea Now I do plan to interview some of my
friends to ask them about the competitive landscape in the
e-commerce market in Korea, so later on I'm going to be doing a
follow-up video about Coupang about a few more things that I dig up, so
if you're interested make sure to subscribe to my channel
Next up let's do a financial overview of the company. Coupang has been able to grow
its quarterly revenue from 0.8 billion dollars in quarter one of 2018
to 3.8 billion dollars in the latest quarter. This was driven by a 27%
annual increase in number of customers from 9.2 million
to 14.8 million in over the past few years
In addition, there has been a 42% annual increase in spend
per customer from 127 dollars to 256 dollars
At the same time, as the company has scaled it has also been able to improve
its gross margins from 4.7% to 16.6%
Even the margins also went up from negative 24%
to negative 2%. And due to the increase in the company's scale,
the company is spending less on operating expenses as a percentage of
revenue, and what's most fascinating to me is
that Coupang only spends one percent of its revenue on marketing
Now going very briefly into the company's cash flow statement,
you'll notice that the company has positive operating cash flow,
which means that the core part of the business is generating money and is a
great sign With negative 485 million dollars in
capital expenditures, the company's free cash flow is slightly
negative, but again I think this is okay given that the company is still growing
Next up really quickly is Coupang's balance sheet the important thing to
note here is that the company has slightly less cash
than it does debt, but after the IPO, it'll probably raise about four billion
dollars, so cash won't really be a problem and it
can be used to fund the business in the future
Okay, so I won't actually be talking about what I'm doing because this is
more for a video that explains what the business
does but if you do want to follow my trade make sure to
check out my Patreon where I share my Buy/Sell alerts
and you can also join the Discord to join the community check those out in
the description below Okay so that pretty much wraps up the
video. Thank you so much as always for watching if you found it helpful
then please do me a favor and like the video and share with your friends
With that said, thank you so much for watching as always
and I'll catch you next time. Peace out