Coupang Business History
Building the Leading South Korean Ecommerce Business from the Ashes of Mediocrity
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Founding History.
In 1978, Bom Kim was born in Seoul, South Korea. His father worked for Hyundai Construction and would commonly work outside of Korea to support Hyundai’s growing international business. When Bom Kim was seven, the family moved to America. He would attend a boarding school in Massachusetts and later earn admission to Harvard College, where his entrepreneurial impulse quickly became apparent. His first venture was Current Magazine, a “for students, written by students” publication that he sold to Newsweek in 2001. After graduating Harvard and a short stint at the Boston Consulting Group, his entrepreneurial drive drew him back into the media industry. Sticking with what worked the last time, he raised $4mn to create a Harvard alumni magazine dubbed 02138 (after Cambridge’s zip code). It folded in the midst of the 2009 financial crisis, but not before Bom sold it, protecting his investors from the worst of outcomes.
He headed back to Harvard to attend their MBA program to buy himself some time to come up with his next idea. Given his Korean roots, he wondered whether there was a business in the U.S. that could do well in Korea, allowing him to marry his desire to create a business with his knowledge of the native culture. It didn’t take long for him to come up with something. Just six months after starting, he dropped out of Harvard.
At the time, Groupon, a popular start-up focused on daily deals, boomed with attention. The start-up was so popular that it essentially marked the end of the post financial crisis VC-funding slump. VCs weren’t just clamoring to invest in Groupon, they were happy to throw money at any and all copy-cats. Part of Bom Kim’s impetus to start a company in Korea was the idea that entrepreneurship was less prominent, at least compared to the U.S., which also implied that there would be less competition. However, this couldn’t have been further from the truth. He would become the some 30th odd entrepreneur to try to create a Groupon clone in Korea.
Nevertheless, the funding frenzy meant getting started was easy. He raised an initial $2mn from investors including Harvard-alum Bill Ackman and moved back to Korea. He settled on “Coupang” for the company’s name, a play on Coupon and the Korean onomatopoeia for “fun” or “surprise”.
Business History.
In 2010, their first year of business, Coupang generated $10mn in sales with over 3mn customers. This incredible performance was in part due to the steep discounts users could get on products and the fad-like novelty of the business model, but also because of Bom Kim’s ingenuity. He became one of the first Facebook advertisers in Korea and blanketed the country with digital ads. Recognizing the power of Facebook early didn’t just mean a differentiated channel, but also incredibly cheap ads. CPMs were so cheap that Coupang was able to show every Korean 72 Coupang ads a month. With such visibility, they clinched a top spot amongst competitors such as Ticket Monster, WeMakePrice, and Groupon Korea, despite launching several months after.
At the time, Bom Kim thought of the daily deals platform as a demand-generating platform, noting in the Korean Joongang Daily, ““In the traditional sense of commerce, you needed something so you went shopping. But in social commerce, you see a good bargain and suddenly you need it - and all the while you are socializing on the Web”. He would learn, like many entrepreneurs before him, that getting a sale and giving consumers a great experience can be worlds away. This is particularly true when the business relies on discounting, which can spur impulsive purchases, usually at the cost of higher rates of consumer regret thereafter.
While Coupang could easily acquire customers with very cheap customer acquisition costs, what they were offering was unsustainable. Customers were largely interested in the steep discounts and merchants were only happy to play along until they figured out that the immense traffic the daily deal brought them seldom translated into positive economics.
Coupang, like other daily deal type businesses, was quite successful at getting consumers onto their site—after all, who doesn’t like 50% off? And similarly, most merchants were very receptive to the potential boost in traffic. The way it worked was a merchant would offer a steeply discounted deal contingent on a minimum number of customers participating. In the picture below, a merchant is offering a 50% discount contingent on getting 100 people to participate in the deal. As a consumer, you first sign up for the deal and put in your credit card info, but are only charged for the deal once the minimum number of customers join it. Since you only get the deal if you reach a critical point of participation, you are incentivized to share the deal with friends and on social media.
After the deal “tips”, meaning the minimum number of customers are reached, you are charged the discounted 50% off price, ₩24,700 in the photo above, and receive a coupon to redeem your deal in person. The proceeds received are then split between the merchant and Coupang (the split varies, but on average Groupon took ~40%. Coupang was lower at ~15%). Assuming a 15% Coupang take-rate, the merchant in this case is effectively getting 42.5 cents on the dollar of what they usually charge for the steak meal.
Given the low gross margins of most restaurants, this means that the merchant is likely losing money on the deal and hopes for two things that could make this make sense: 1) they can upsell the customer other items that they can make money on and 2) the customer is going to come back even without a promotion. If it was indeed just a one-time discount to get reoccurring business, then a local merchant would run the deal and lose some money initially, but then have a larger regular customer base that paid full price, giving them a sustainable business boost: the lifetime value of the customer would be far more than its one-time customer acquisition cost.
What actually happened was that the deals worked too well to attract customers, and all of this discount-induced traffic squeezed into such a short time period usually meant an overwhelmed restaurant. The influx of traffic would swamp the staff to the point that they couldn’t offer proper customer service. To get the customers fed quicker, the over-worked staff would often yell “Groupon customer!” when they entered to expediate the meal. However, that made diners feel like 2nd class customers. The large groups of people coming at one time also meant longer waits to get food, further aggravating customers. The customers themselves were also usually price conscious and seldom added to their order beyond what was included in the deal. And rather than becoming a new loyal customer, they moved on to participate in the next deal.
As merchants realized this was not going to bring back lasting business, they either rolled back their discounts or stopped listing daily deals all together. The smaller deal selection with lower discounts would mean a worse daily deal offering for consumers. If consumer interest waned, then merchants would stop bother listing on the platform all together. Compounding the issues is the fact that the daily deal business model relied on local businesses, so there was a limited pool of merchants that they could churn through before they ran out. This meant that no matter how quickly they could add businesses, as long as they experienced high churn, they would eventually be unable to replace the lost listings. Furthermore, even if merchants stayed on the platform, they were limited by their small size in how much they could offer in discounts.
Nevertheless, despite the brewing issues with the business model, they were thriving. Coupang was not only run rating ~$300mn in annualized revenues by the middle of 2011, but was also a high gross margin business with positive cash flow dynamics as customers paid in advance for each deal.
Bom Kim’s initial solution to solve for potential flaws in the daily deal model was modest. He would start broadening their offering to include product sales so merchants could sell on their online website. They would offer discounted products for 3 to 4 days at a time, which drove consumer impulsivity, and their large user base, which exceeded 5mn by then, attracted a lot of merchants with clearance products. At the time, they would describe their business as “discovery shopping”. To quote Bom Kim in 2011, “People [who] come to Coupang haven’t decided what they want. They want to discover deals”.
The idea of Coupang as a demand generator that had a large audience that could sell whatever they wanted, provided it was discounted, was thought of as a business virtue since they could sell things others couldn’t. Despite stiff competition from TicketMonster and Groupon Korea, Coupang became the #1 player in the space. Their relatively cheap customer acquisition costs and the fact that they received money for the daily deal upfront helped them become cash flow positive early on. Just three years after founding, in 2013, they set course for an IPO.
But something was wrong. While the business was okay financially, the business model had fundamental issues. Selling products and services to highly price sensitive customers in a gamified way with pressure to close a sale hardly created lasting customer satisfaction. Additionally, alongside the idea of “discovery shopping” came the fact that they often were selling things customers didn’t really need. Bom Kim thought this would eventually catch up with them and decided he didn’t want to dedicate his life to building a company that serviced mediocrity.
Six months into their IPO process, and just a mere week before the prospectus was supposed to be printed, Bom Kim had a moment of clarity and pivoted the business. Bom Kim thought, “if we really wanted to provide something that really mattered to customers—100 times better, exponentially better—we had to go through an enormous amount of change”. They pulled the IPO, knowing they would have to remain private for the immense business shift and heavy investment period they were about to undertake.
The third party marketplace they operated offered an inconsistent experience with a variety of different sellers and limited logistics coverage nationally. The mixed merchant experience combined with unreliable shipping—half of all complaints were about shipping—helped clarify what Coupang would need to build in order to achieve a “100x better experience”. Coupang would mimic Amazon by building out a large first party offering and their own logistics network.
They went and raised $100mn from Sequoia Capital in May 2014, and then another $300mn from BlackRock a few months later, to build out their logistics network and refine their mobile capabilities, which then was ~80% of traffic. They first focused on diapers and other categories for moms, with the logic that this new period of change usually creates a window for new habits to form.
In 2014 they launched “Rocket Delivery”, which was their company-owned delivery service that directly employed drivers. The delivery force didn’t just help them improve the shipping experience, it also gave them an opportunity to interface with their customers. The “Rocket Men”, as they were called, became known for conscientious deliveries, knowing when to avoid ringing the doorbell so to not awaken a sleeping baby, and leaving hand-written notes for new mothers.
This did not come without a steep cost though; they were rumored to have been burning hundreds of millions annually. For someone familiar with the Amazon model and comfortable with losses, that would prove to be no barrier to invest. In 2015, Softbank invested $1bn in Coupang, which would allow them to continue to invest in their logistics network. By 2016, they had over 3,600 Rocket Couriers, who boasted an incredibly high NPS score of 97. Long gone were the days where shipping constituted the majority of complaints. However, Coupang still wanted to continue to improve delivery times to get them even faster.
In stark contrast to his earlier comments on how people who came to Coupang didn’t know what they wanted and that it was Coupang’s role to effectively direct them with deeply discounted deals, Bom Kim started saying, “we can’t bend the customers to what we want, but we can bend ourselves to what the customer want”. The 1P model they adopted meant that all inventory would be purchased directly by Coupang, and steep deals and overstocks were no longer a part of that equation. What mattered was…
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Coupang Report Table of Contents
Founding History.
Business History.
Business.
TAM.
Competition.
The Coupang Model.
Coupang Flywheel.
Competitive Balance.
Other Initiatives.
International.
Cash Flow & ROIC.
Valuation.
Risks.
Model Summary.
Conclusion.
The Synopsis Podcast.
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