Korea’s Online Ecosystem to Grow More Diversified
The author is an analyst of NH Investment & Securities. She can be reached at jy.lee@nhqv.com. -- Ed.
There are many concerns in play over whether, once the Covid-19 crisis passes, there will be a rebound in offline retail activity or the online retail industry upturn will sustain. We believe that, even if Covid-19 subsides, the trend towards online shopping will continue, noting that: 1) online shopping categories and services have greatly expanded this year amid Covid-19; 2) with most retailers now focusing on online strategies, large portions of such firms’ human and material resources are being directed towards the building of online presences which will endure; 3) pandemic-induced unemployment and the collapse of self-employment have been leading more and more private sellers to jump into online startups; and 4) a large number of consumers in their 40s and 50s are now flocking towards online industries. Against this backdrop, we believe that market attention towards beneficiaries of the K-online growth trend will rise further in 2021.
Market restructuring centering on Coupang and NAVER to continue
In 2021, we expect online market restructuring centering on Coupang and NAVER to accelerate. The combined M/S of the two e-commerce players in the domestic market is likely to increase from 7% in 2015 to 25% in 2020 to 29% in 2021. That said, with NAVER dominating the C2C market and Coupang leading the B2C market, Korea has yet to have a player in control of both the C2C and B2C channels. Admittedly, NAVER has been seeking to enhance its logistics operations via a partnership with CJ Logistics, and Coupang has been strengthening its open market services via increasing its number of SKUs to 150mn. But, we view these measures as business portfolio diversification efforts, rather than as a full-fledged attempt to dominate both the B2C and C2C segments. We note that strong capital power and large-scale investment are required for an e-commerce company to dominate both the B2C and C2C arenas (like Amazon or Alibaba do). But, given the relatively small size of the Korean retail market, it remains questionable whether aggressive investment could yield sufficient returns. All considered, we expect a relatively more diversified online ecosystem to persist in Korea for the time being.
New e-commerce players to emerge
We also expect new e-commerce players to emerge in 2021. Online shopping categories have rapidly expanded in Korea to include F&B products, household goods, and luxury fashion items, giving rise to new forms of e-commerce services and platforms. Allowing for fast price comparison, NAVER proves particularly competitive in C2C channels, whereas Coupang fares well in the B2C arena based on its rapid delivery services. Well-known fashion brands are strengthening their D2C operations. Meanwhile, newly emerged e-commerce services and platforms include social media commerce/live commerce/quick commerce services, grocery shopping platforms (Market Kurly), as well as at least one resale platform (Daangn).
Number of individual retailers growing exponentially
Third, the number of individual retailers is growing exponentially. Self-employed workers are flocking to the online retail market, due to sluggish offline store sales and rising labor and rental costs. Also, young generations facing difficulties finding jobs are opening their own online stores. In 2019, self-employed workers broke down by business as: online shopping mall (271,383 individuals) and Korean restaurant (386,161 individuals). The pace of growth for self-employed workers engaged in online businesses has accelerated, reaching +24% y-y in 2019, the fastest expansion among the top-100 categories. We expect such y-y growth to prove even faster this year, considering the spread of Covid-19.
Integration of various operating service providers to accelerate
Considering Korea’s fragmented e-commerce landscape, we believe the more feasible business model in the Korean online shopping mall market is not that of online malls themselves, but those of providers of solutions for online shopping malls (including shopping mall creation, logistics services, ad solutions, price comparison, big data, and security). However, given the respective market’s recent overcrowding, service users (online shopping malls) are experiencing more inconveniences, and service providers are suffering margins decline. Against this backdrop, a market consolidation trend has emerged, mainly led by major online platform companies (particularly NAVER and Coupang). Meanwhile, while individual sellers and large corporations are being incorporated into NAVER and Coupang platforms, new online shopping startups and SMEs appear to prefer to have their own online shopping malls. And, one-stop shopping mall solutions companies such as Cafe24, KoreaCenter, and NAVER Go are meeting such clients’ specific needs. In addition to tools to build new shopping malls, such firms’solutions also help in terms of integrated shopping mall management, merchandise sourcing, ad sales, logistics, and data analysis. With the number of online market participants expected to soar going forward, we expect these one-stop solutions companies to benefit.
Pay attention to online grocery, brand D2C, and shopping mall operation service integration providers
Against this backdrop, the positions of offline retail players (including discount stores, department stores, and CVSs) are likely to further weaken moving ahead. Admittedly, offline-focused firms have been seeking to diversify their distribution channels via the strengthening of online operations as of late. Still, online-dedicated retailers (such as online fashion platforms and quick commerce players) appear to offer more innovative services for now. That said, among traditional offline players, Emart warrants attention in that it provides competitive online grocery shopping services. Meanwhile, fashion brands have shown a particularly swift transition towards the online arena. Expecting FILA Holdings and Zinus to benefit from the ongoing transition towards the online arena in the retail industry, we recommend that investors pay greater attention to these two plays. Amid a rising number of individual sellers, we expect NAVER, a firm that boasts unrivaled competitiveness in the e-commerce arena, to sustain solid growth moving ahead. And, Cafe24 and KoreaCenter are likely to benefit from expanding demand for shopping mall solutions at small/medium-sized firms.