Mired in Deficits
Korean social commerce sites like TMON and Wemakeprice are suffering from operating losses each year. The main reason is that they are conducting cutthroat competition against each other by spending a huge amount of money in advertising and marketing. But some point out that the underlying problem is the high-cost business structure resulting from high wages.
According to industry sources on Oct. 6, TMON has a 1,200 strong workforce, Coupang as 1,300, and Wemakeprice hosts 1,400 employees. Each company has already exceeded the 950 staff of eBay Korea, which runs online auction and shopping mall websites such as Gmarket, Auction, and G9.
However, the social commerce companies' productivity is not high. According to an audit report submitted by TMON, the firm spent 37.653 billion won (US$35.3449 million) on salaries last year. The ratio of labor cost to the company's total revenue (114.883 billion won, or US$107.761 million) amounted to 32 percent.
Wemakeprice turned over 78.582 billion won (US$73.711 million) in 2013, and the weight of labor costs (16.522 billion won, or US$15.494 million) was 21 percent. In contrast, labor costs merely accounted for 8.4 percent of eBay Korea's earnings (662.246 billion won, US$621.650 million) last year.
Experts are saying that there is a fundamental problem with the business structure of social commerce companies. Online auction and shopping mall websites act as a bridge that connects sellers and buyers. Social commerce sites, on the other hand, directly dig out and introduce products. They also plan and produce content. In other words, they recommend and sell products to consumers.
An industry source said, “Sales personnel who find products are very important for social commerce sites. So, their labor costs are bound to be higher than those of online auction and shopping mall websites.” The source added, “Also, the number of products in social commerce sites is much lower than online auction and shopping mall websites that carry hundreds of thousands of products. Therefore, it is hard to narrow the gap in sales.”
TMON posted an operating loss of 70.767 billion won (US$66.429 million) last year, and Wemakeprice reported a loss of 36.069 billion won (US$33.858 million). Both companies have operated at a loss for 4 years after starting their business. In 2013, TMON spent 21.885 billion won (US$20.528 million) on advertisement and sales promotion while Wemakeprice spent 62.927 billion won (US$59.012 million) for the same purposes.