11 Street Attracts 500 Bil. Won Investment

ecommerce
Competition is intensifying among Korean distribution companies to get ahead in the explosively growing e-commerce market.

As the e-commerce market keeps growing explosively, competition among domestic large retailers has been intensifying to stay ahead of the game.

Investment banking industry reported on May 5 that 11 Street, Korea’s top open market which is run by SK Planet, is at the final stage of negotiations with H&Q Korea, a private equity fund (PEF) operator, to attract 500 billion won in investment from the National Pension Fund and the Korean Federation of Community Credit Cooperatives (KFCCC).

11 Street’s move to attract large-scale investment comes after Coupang, Korea’s top social commerce site, raised US$400 million (about 420 billion won) from global investment firms such as BlackRock, in April. In 2014, Coupang had attracted US$1 billion (1.1 trillion won) from Softbank of Japan.

An IB official said, "It is part of SK Group’s move to make 11 Street a ‘Korean version of Amazon’ by using the information and communication technology (ICT) of SK Telecom. 11 Street is planning to pioneer the future e-commerce market by introducing artificial intelligence (AI) voice order and payment service with the money invested."

It is worth noting that the National Pension Fund, the largest investor in Korea, is expected to invest in SK Planet's open market 11 Street. Analysts take it as implying that the fund is optimistic about the growth potential of not just 11 Street but the domestic e-commerce market in general.

According to the National Statistical Office, domestic online shopping transactions amounted to 91.3 trillion won last year, 41% increase from 64.8 trillion won in 2016. It is expected to exceed 100 trillion won this year. Compared to 2016, when the transaction volume grew 20% from 2015 (53.88 trillion won), the growth rate has been accelerating.

11 Street is competing with G-Market, which is run by eBay Korea, for the top spot in the open market segment of the e-commerce market. Its gross merchandise value (GMV) last year was estimated to be 9 trillion won. It focused on mobile shopping, which has grown rapidly in recent years, and ranked number one in mobile unique visitors (UV) last year by securing 13.23 million users.

However, profitability has not improved due to the intense market competition. This is because it is in fierce competition with social commerce companies including Coupang and Ticket Monster, which have the support of overseas investors. Coupang is backed by Softbank, while Ticket Monster is supported by KKR.

An investment bank official said, "Local capital, including the National Pension Fund and KFCCC, made the investment decision with the thought that 11 Street is highly likely to take a dominant position in e-commerce market in the future.”

The rosy expectation is based on the big synergy effect to be created through the application of SK Telecom’s the state-of-the-art technologies such as artificial intelligence (AI) and big data to the operation of 11 Street, and through expanding collaboration between SK Telecom and offline distribution companies such as BGF Retail, Korea’s number one convenience store operator.

An IB official said, "The enterprise value of 11 Street, which is estimated to be between 2.5 trillion and 3 trillion won, was 0.3 times the gross merchandise value (GMV). It is much more attractive compared to Coupang, which was estimated to be 1.25 times (GMV 4 trillion won, enterprise value 5 trillion won). There is little risk of loss due to the call option and the drag-along clause, and the possibility for rising enterprise value is high. There is no reason not to invest."

Offline distributors also make massive investments online

SK Planet’s decision to attract large-scale investment is based on the strategy to actively respond to offline distribution companies’ move to expand their online operations. The top offline distribution companies such as Lotte, Shinsegae, and Hyundai Department Store are becoming new threats to the e-commerce players as they strengthen their online division to find new growth engines.

The most active is Shinsegae. Vice President Jung Yong-jin plans to attract more than 1 trillion won from global investment companies within this year to acquire other e-commerce companies and enhance their competitiveness. To accomplish this, Shinsegae will create an independent online division by gathering the scattered online operations in its affiliates such as department store and Emart. Currently, under the name of SSG.com, it is running the online business of each affiliate in one platform. It is expected that the company will be able to increase its competitiveness by integrating its business divisions into a new corporation. The new corporation is seeking to attract more than 1 trillion won worth of investment from investment companies such as BRV Capital and Affinity. Shinsegae aims to achieve sales of 10 trillion won through online by 2023. Last year, Shinsegae Group's online business recorded sales of 2 trillion won.

Lotte, the number one distributor in the offline market, also announced plans to invest 3 trillion won and integrate its dispersed online malls last month. Lotte plans to actively use 38 million Lotte members and 11,000 offline stores. It established O4O (Online for Offline) strategy to create a new type of omni channel that goes beyond online and offline stores. The industry is forecasting Lotte is likely to acquire online retailers using its strong financial power.

Hyundai Department Store is focusing on combining IT and distribution by establishing Hyundai IT&E, a separate information technology (IT) corporation, in April. It is offering services such as putting on make-up using augmented reality (AR) at home, or getting product recommendations through artificial intelligence (AI) technology.

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