Many investors, mentors, and advisors in Korea will tell you that sales/profits are everything for a startup. Turning a profit shows that you have succeeded and it is what every business should strive for. Or is it? Most businesses exist to make money, so why is it that some of the biggest companies in the world like Amazon didn’t turn a profit early on? Coupang, the biggest eCommerce startup success story in South Korea, continues to succeed despite being unprofitable.
In 2019, their operating loss was over $590 million which was down 50% from the previous year. 2020 saw Coupang have an operating loss of a little over $500 million. In 2021, Coupang saw its operating loss set a record high of $1.5 billion! However, this has vastly improved to only a loss of $92 million in 2022.
The more interesting aspect is that most of these unprofitable companies like Coupang have no plans to turn a profit anytime soon. This issue is not just seen in one particular industry. Dozens of major companies in South Korea and startups in every sector of the economy from energy, retail, telecommunications, medical, and technology are in this profitless model. So what is going on? Why would any investor put their money into a business that is not making a profit?
Growth over Profits
So looking at Coupang in particular, why does it look so attractive to investors like Softbank? Every business or startup always starts off as being unprofitable. From any startup in Korea to the biggest conglomerate Samsung had to operate for a period of time building its infrastructure, developing its product, and growing its customer base. This is a part of any business life cycle. The goal for most of these businesses is to get to the break-even point. The break-even point means they are able to pay all their expenses including payroll which means they make zero in terms of profit. For many startups in Korea, this is a key goal. This represents the point where the founders no longer need to contribute their own money to support the company.
After the break-even point, the next step is to turn a profit by continuing to grow revenue and lower expenses. However, some startups want to continue to grow. How big? Big enough to get listed on the Korean Stock Exchange or better yet in the case of Coupang on the New York Stock Exchange. In order to do this, they will need to get investments. These investments will come through funding rounds once the startup achieves new goals such as taking 50% market share in their industry, reaching 1 million users, or having now spent all their funds from their last investment.
Investors in Korea are very interested in startups that have achieved a growth goal. This is why startups in Korea these days have a mentality of growing at all costs. The investment is needed to keep the startup alive as it continues to scale. So how much has Coupang grown? They currently have over 20 million users (10 million WOW members) in a country of 50 million people. Their annual sales revenue reached $15 billion which exceeds those of Emart, Korea’s largest retailer.
Coupang – the Top Online Retailer in Korea
Coupang has a strong market share in the eCommerce space in Korea. They are not only the Amazon of South Korea but also the UPS and have the potential to be the Doordash of Korea as well. They have spent a lot on marketing and advertisements and now Coupang averages over 4 million deliveries a day. Coupang now holds a 25% market share in Korea’s online retail market and created over 40,000 jobs. They continue to scale while being unprofitable. However, their growth is because of the massive funding they receive as they grow.
The reason why Coupang is such an attractive investment for venture capital firms is that they are following the same business model strategy that Amazon had. The success of Amazon is one of the key factors in why Coupang is seen as an attractive long-term investment for investors. Coupang even has its own version of Amazon Prime in Rocket WOW which provides unlimited free shipping with no minimums, free returns, exclusive discounts, same-day delivery, and their popular Rocket Dawn service. Rocket Dawn allows customers to place orders before midnight and it will arrive in front of your door by 7 am the next day.
Coupang Logistic Centers
Similar to Amazon, Coupang has been investing heavily in logistic centers. They have a large distribution network with over 100 fulfillment and logistic centers in over 30 cities across Korea. This is how Coupang is able to make such quick deliveries that can not be matched by their competitors.
Coupang goes Public in 2021
Coupang launched its IPO back in 2021. In the past, companies have been profitable when going for an IPO. This is no longer the case as Amazon has proved that a company can be unprofitable for many many years before turning a profit. Coupang has also paved the way for other startups in Korea that are currently unprofitable.
In addition, Coupang has played a role in helping other startups and SMEs in Korea with distribution. Most large distribution companies deal with large producers. However, Coupang allows Korean startups and SMEs a chance to sell their products and use their own brand name so they can build a reputation with their customers.
Coupang has become a platform for many startups in Korea to grow not only their brand but their customers. They not only provide logistical support but also payment services, storage, and 24-hour customer service. Therefore businesses in Korea can focus more on their core business while Coupang takes care of the rest.
When will Coupang Turn a Profit?
With so much success Coupang has had without ever turning a profit, one wonders if they ever plan to. Coupang continues to invest in the future and back into their business. They have incorporated Rocket Fresh for fresh produce and Coupang Eats for food delivery. This will bring more and more customers onto the Coupang platform and it is only a matter of time before Coupang has over half of all Koreans using their service. When you have this kind of market share, you can pretty much do anything. They can advertise on their marketplace, much like how Amazon generates massive amounts of revenue from sellers on their platform. They can even sell their own products and services. The possibilities are endless.
Coupang also launched a subscription-based video streaming platform called Coupang Play in December 2020. The video streaming market in South Korea is very competitive with competition coming from domestic players such as Wavve and Watcha, as well as foreign competitors Netflix, Apple TV, and Disney Plus. Coupang Play is offered as a benefit valued at $2.40 extra per month to Coupang’s WOW-tier members.
What Investors in Korea Will Look for in the Future?
The idea of investing in companies that don’t make money is going to be more common in the future. Startups in Korea will need to show growth and scalability above anything else. The success of Coupang shows that this trend will not be slowing down anytime soon. Investors in Korea will want to see a startup dominate a particular market in Korea. Once a startup can show just how much market share they have, funding will come. Coupang has already proven that growth and gaining market share are the key factors for a startup to reach the ultimate goal of going public. They have laid out the blueprint for other startups in Korea to follow.
