Firehose #184: 📦 The Whole Coupang 📦

How Coupang conquered South Korea and did what Amazon could not

One Big Thought

Coupang is synonymous with e-commerce for a big chunk of the 52 million people living in South Korea. The company is largely unknown in the US, but is nonetheless a fascinating foil to our own e-commerce ecosystem in the US. In today’s newsletter, I will compare Coupang’s model to the prevailing ones in US e-commerce, and note potential changes on our domestic horizon.

One housekeeping note: no links again this week. Ran out of time. But will hopefully get them back in the next few weeks!

End-to-end logistics

Americans often take for granted the incredible logistics infrastructure that has been built since WWII. Without that infrastructure, Jeff Bezos has noted that it wouldn’t have been possible to start Amazon* in the 1990’s:

"I didn't have to build a transportation network to deliver the packages," Bezos told Norah O'Donnell. "It existed: It was called the post office."

The comments were designed to contrast with the work Bezos is doing to commercialize space travel. Bezos said he was investing up front to build infrastructure, which should enable future generations to enter the field more easily — a bit like what the Postal Service did for Amazon.

"It takes hundreds of millions of dollars to even just get started with something interesting," Bezos said. "What I want to do is reduce that price of admission with reusable space vehicles so that the next generation you can actually have two kids in a dorm room build a great space company."

Coupang did not have access to an equivalent system early on, so it built its own with the almost impossible design constraint of next day delivery. From its S-1:

“Our first watershed decision was to build an end-to-end logistics network powered by the latest technologies. The lack of existing fulfillment capacity and limitations of third-party logistics in the market forced us to build our own from scratch. It was an immensely difficult effort that required significant investments of time and capital, but we never wavered in our conviction that it was the right decision for our customers. We can now do what we believe no one else in our market can — guarantee one-day delivery on all Rocket orders — without reducing our selection or charging for delivery.”

South Korea happens to be the 13th most densely populated country in the world, with 1,338 people per square mile — that’s 14x the USA. It’s less dense than a city-nation like Macau or Singapore, but its population is significantly larger. Bangladesh, with 170M people and 3,063 people per square mile, is both larger and more dense, but its population is much poorer — with 1/17th the GDP per capita of South Korea. As such, if you wanted to pick a country where the cross product of population, density, and wealth were all in your favor, you’d pick South Korea. By this metric, South Korea is the perfect market for e-commerce.

70% of South Korea’s 52 million inhabitants lives within just 7 miles of a Coupang fulfillment center. It has over 25 million sq ft of logistics space, or ~2 sq ft for every South Korean. In comparison, Amazon has 125 million sq ft. in the US. If we just count its 100 million prime subscribers, that’s 1.3 sq ft per person. Relative to Amazon, Coupang has over-provisioned logistics resources per person by more than 60%. That additional marginal investment, along with South Korea’s inherent density, allows Coupang to deliver nearly all products next day, and many same day — a feat even Amazon can’t replicate today in the US.

Coupang’s investment in end-to-end logistics allows it to offer unique services that we don’t see in the US. For example, it uses reusable packaging on 75% of orders — eliminating wasteful cardboard boxes. Coupang also offers effortless returns through its own infrastructure:

“If online shopping for more and more categories of items were so convenient, why couldn’t online returns be as well? That’s why we introduced effortless returns. Customers make returns for Rocket deliveries simply by tapping a few buttons on our app and leaving the item outside for pickup — no repackaging, no labels, no post office trips required.”

In the US, startups like Boox are attempting to build a similar circular commerce infrastructure by working directly with retailers. Similarly companies like Happy Returns have attempted to solve the reverse logistics problem again by working with retailers. In an ideal world, Amazon would itself provide services like these to its customers, but has likely decided that such they are too difficult to implement without owning the last mile.

A super app for commerce

Coupang leverages multiple business models on top of its infrastructure. Most of its revenue comes from core e-commerce (à la Amazon), but the company also offers Coupang Eats (à la Doordash/Uber Eats), Coupang Pay (à la Shopify* Pay or perhaps Paypal/Venmo), and Coupang myShop (à la Shopify’s core product).

In the US, Amazon has failed to execute a last mile food delivery strategy. It importantly owns 16% of Deliveroo in UK, but Amazon missed out on the opportunity in its home market. Meanwhile, Doordash has announced grocery delivery and has signaled intentions to enter last mile parcel delivery in major cities. Could it go backwards up the value chain and eat Amazon’s lunch (pun intended)?

Similarly, Amazon chose to centralize 3rd party sellers in a marketplace. Coupang does that too, but it took Shopify to give Amazon sellers their own space on the web. Shopify today is approaching 40% of Amazon’s 3rd party GMV. Coupang gives sellers the best of both worlds: either sell in Coupang Marketplace, or build your own space online through myShop with 3.5% commissions.

Perhaps most disruptive is the Coupang Pay product. Amazon has its own payment service Amazon Pay, but Shopify’s alternative Shop Pay has quickly become more popular in the US — allowing consumers to check out instantly on Shopify-enabled sites. Because Coupang has bank account or credit card info for nearly 15 million customers (29% of South Korea’s population), its Pay product could become the de facto consumer payment product in South Korea for e-commerce. Of course, it has strong competition on the P2P side from both Naver and Kakao, but as we’ve seen with Paypal/Venmo and Square Cash in the US, the consumer payments market can support multiple players coming from different angles.

Operating cash flow focus

Part of the decision to IPO now could be that growth in 2020 pushed the company into positive operating cash flow territory. As I’ve noted before, Amazon was operating cash flow positive for almost its entire history:

Similar to Amazon, Coupang has begun investing its entire operating cash flow (actually a bit more) back into CapEx. That’s a good thing when you’re building the delivery infrastructure for an entire nation! The flip to positive operating cash flow was almost certainly aided by COVID tailwinds, but the result is that Coupang went from needing $1B/yr from the capital markets to less than 1/10th of that in 2020.

More addictive than Amazon?

Coupang’s net revenue per active customer was $256 in 2020 — doubling in the last 2 years. Amazon’s customers spend more today — $600 on average, and over $1,400 per year for Prime members. But, if you adjust what Coupang users spend for differences in GDP per capita ($32K in South Korea vs. $65K in US), they spent only 13% less than the typical Amazon user. With Coupang’s rate of growth in spend, and its smaller base to build on, there’s little doubt that, adjusted for GDP/capita, a Coupang user will spend more on its platform than an American on Amazon in a few years.

Part of the dynamic here is nearly 100% YoY growth in cohorted spend. That spend drifts down to ~50% by Year 4, but given recent CapEx investments, I would expect that number to increase in future years.

All this data points to a highly addictive platform with a growing set of use cases on and off the core e-commerce platform.

The all-in-one e-comm platform

Overall, Coupang is a unique platform in the global e-commerce market — birthed from a market which is uniquely large, dense, and rich. These factors enabled Coupang to build out a lucrative core e-comm business with best-in-class logistics. And those logistics have enabled it to build other services to extend its reach in commerce. It’s a playbook that Amazon would love to replicate, but instead we’ve seen other companies nibble around the edges of its home market. Amazon’s loss, in not building Coupang domestically, is a gain for those startups, who have the opportunity to build complementary businesses and eventually encroach on Amazon’s established turf.


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Disclaimer: * indicates a Lightspeed portfolio company, or other company in which I have economic interest. I also have economic interest in AAPL, ADBE, AMT, AMZN, BABA, BRK, BLK, CCI, CRM, GOOG/GOOGL, FB, HD, LMT, MA, MCD, MSFT, NFLX, NSRGY, NEE, PYPL, SHOP, SNAP, SPOT, SQ, TMO, TWLO, VEEV, and V.