Price War in Distribution Industry
After the intense competition between online and offline companies, there is another price war between online and offline retailers lately. As a sense of crisis is spreading among existing offline companies due to the rapid growth of online retail firms, the nation’s largest large retailers, such as E-Mart and Lotte Mart, declared a price war in some products, saying, “(It is) cheaper than in social commerce websites.”
This price competition has been caused by the marketing effort of E-Mart to strengthen its online business. The company seeks to secure customers in their 20s and 30s, who are familiar with online malls, by selling best-selling products in their ages at a cheaper price than social commerce sites. In fact, E-Mart said in a press release on February 24 that half of 220,000 new customers in its online mall during January to February were teenagers and those in their 20s.
With the company offering the lowest price for diapers, milk powder and female hygiene products in February, E-Mart specifically took aim at Coupang. Coupang also responded, “We will sell them at a cheaper price,” and Lotte Mart, Ticket Monster, Wemakeprice and Gmarket joined the competition. These items are best-selling products in social commerce sites. Since they are daily necessities that customers need to regularly purchase and have high price sensitivity, many customers have been buying the products via social commerce sites which has a lower retail margin.
The reason why Coupang has been the main target in the recent price war in the retail industry is that it is the leading social commerce company which has 26.7 million members as of the end of last year and achieved 2 trillion won (US$1.71 billion) of the annual turnover as of 2014. After beginning the service in August 2010, Coupang has seen an explosive growth in the annual trading volume from 300 billion won (US$256.41 million) in 2011, 800 billion won (US$683.76 million) in 2012 and 1.2 trillion won (US$1.03 billion) in 2013 to 2 trillion won (US$1.71 billion) in 2014. Coupang has maintained its top position in terms of mobile app users among major e-commerce companies for 41 months in a row from July 2012 to November 2015, and an average of 78 percent of its all transactions are generated by the mobile app.
In particular, Coupang has employed its own delivery workers, whom it calls “Coupang men,” for a faster and safer delivery service, unlike other online shopping sites which rely on third-parties to deliver goods. The specialized delivery service was the factor that help securing loyal customers with children, according to market researchers.
Shipping Cost Decides Outcome
The shipping fee has emerged as a variable amid the ongoing price war in the retail industry, which represents the competition between E-Mart and Coupang. The two companies have different delivery charging policies.
Shinsegae Group’s E-Mart and SSG.com offer a different delivery service for promotion products with the lowest price based on the total purchase amount of customers. For diapers, which E-Mart has competed in price for the first time in the industry, customers have to spend more than 40,000 won (US$34.19) in order to get a free same-day delivery. Those who buy less than 40,000 won (US$34) should pay 3,000 won (US$2.56) to get their goods to be delivered on the same day. The company offers a free next-day shipping service to customers who purchase over 30,000 won (US$25.64), and charges 3,000 won (US$2.56) to those who spend less than 30,000 won (US$25.64).
Coupang sells products at the lowest price in the “Rocket Deliver” category, which provides a free delivery service with the total purchase amount of 9,800 won (US$8.38). If a consumer buys the same diaper product on E-Mart mall, he needs to spend an additional 3,000 won in the total amount, including a shipping fee. Considering companies are currently competing with prices of thousands of won and hundreds of won, the additional shipping charge is highly likely to become a decisive factor that determines whether consumers will make a purchase in the site or not.
Top three Social Commerce Websites See Sales Growth Due to Reflective Benefit
After E-Mart has started a price-cutting war for some items against social commerce websites to destroy their strongholds in the market, sales of these promotion products in the nation’s top three social commerce websites, including Coupang, Ticket Monster and Wemakeprice, has greatly gone up rather than declined. In particular, sales of diapers in Coupang between February 23 and March 1 increased by 2.5 times from the same period a year ago.
Social commerce retailers think that E-Mart has extensively promoted the sale of the products at the lowest price, attracting the attention from consumers in all age groups, and the market has grown as a result. Also, it has given not only existing customers in social commerce websites but also potential customers extra incentive to buy the products, creating reflection benefits.
An official from Coupang said, “Although E-Mart said the price of its goods is lowered than Coupang, there is not much difference in price between the two companies. So, it is not an important factor for consumers to willingly give up on Coupang’s customized services, such as the Rocket Delivery Service and Coupang men. In addition to diapers, our overall sales are growing even after the price war.”
During February 25 to March 2, Ticket Monster showed a 72 percent increase in the sales of childcare-related products at the Super Mart, its food and daily necessities sales channel, from a week earlier, while Wemakeprice saw the sales of diapers and milk powder rapidly rise by 153 percent and 164 percent, respectively.
Rumors of Coupang’s Crisis
Under the current circumstances, Coupang is suffering from constant rumors about its liquidity crisis. As rumors are spreading that Coupang will sell two large logistics centers in the capital area to secure funds, some have voiced concerns that the company might be seriously cash-strapped due to its massive deficit.
According to industry sources, Coupang marked a 400 billion to 500 billion won (US$341.88 to 427.35 million) deficit last year. Previously, the company also posted 121.5 billion won (US$103.85 million) in operating loss in 2014. This figure is about four times higher than the operating losses of its competitors – Ticket Monster with 24.6 billion won (US$21.03 million) and Wemakeprice with 29 billion won (US$24.79 million).
With Coupang strengthening the investment in its logistics and delivery services, including Coupang men, its losses are growing bigger than expected. This is the main cause of the company’s financial difficulties, though Coupang attracted the US$1 billion (1.1 trillion won) investment from SoftBank Corp. last year.
In fact, a report, which backs up rumors about Coupang’s liquidity crisis, has been recently released. Hana Financial Investment said in the report called “E-Mart’s counterattack and changes in online retail market.” “There’s a good chance that Coupang has already used more than half of 1 trillion won (US$854.7 million) from SoftBank Chairman Son Jeong-ui last year. Its deficit is growing bigger and bigger than expected and funds are rapidly running out.”
As Coupang made a large annual loss for a second successive year, the company has adopted the austerity measures from November last year. For instance, it is reducing the number of discount coupons, which were frequently issued before, to cut down its marketing costs. However, this has led to the decrease in the number of visitors and in sales.
Accordingly, industry experts say that it is time for not only E-Mart and Coupang, which triggered the price competition, but also all retailers, which joined the race, to start a new competition in products and ideas that make consumers voluntarily open their purses.
According to the data from a market research firm Nielsen Korean Click, Wemakeprice took the No. 1 position in the social commerce market in terms of the total number of visitors to its PC and mobile shopping apps in February, drawing 13.35 million visitors, followed by Coupang with 13.03 million and Ticket Monster with 10.15 million.