Coupang: Korean E-Commerce Craze - [Business Breakdowns, EP.169]

23:46Well, they've never disclosed return rates, except if you look at competitors and neighbors, one we'll get into in a little bit. But one of the big advantages Coupon has versus them is that it is much easier to return items because you're dealing directly with Coupon. You're not dealing with this variety of merchants that maybe have different policies, as well as maybe having to go to a post office and package it individually to get it back. And so they've gone further than Amazon in this respect. And some of this is the backdrop of the culture, but they are able to really remove a lot of the frictions from returns, which then when you go to buy something, it means that you're not going to be hesitating to buy it.

24:21And very often, you'll end up just keeping it because it's either cheap enough or good enough and whatever the issue is. But if you're taking some of that pre -research out of the process before you purchase something, then it's much more easy to actually get that conversion. And on pricing, I think you made reference to this. Amazon in the early days, you could typically find the best price, particularly when you factored in shipping, maybe no longer the case today. But where does Coupang stack rank relative to the big box players in terms of price and some of their competitors? In terms of versus traditional physical retailer, they're in line to much cheaper.

24:57But if you're looking at actually the cheapest options, you still do have Timu, AliExpress, which you're not going to get the same quality of items there or the same trust that you would with Coupon. But then there also is Naver, which will fork you off to a bunch of different third -party merchants. But those merchants themselves usually do have much lower pricing. And that's just a byproduct of the fact that they're not paying the coupon commissions, but also sometimes because they also don't have to pay for the fulfillment, the shipping is cheaper, even though you might have to pay shipping individually as a buyer.

25:27And so that's the environment there. They'll quote some study that they did where they say we're cheaper than 60 % of the alternatives across a variety of basket of items. And they are very much focused on bringing that price down. But it's just hard when you do have that much of a commission structure built in to say that you're always going to win on price. But at least in talking to the South Korean consumers that we did and those correspondents, what they said is on very low items, cheap items, they're always going to coupon. They don't care about a small price difference. If you're looking at a very expensive item, it was interesting.

25:57Sometimes they do want a price compare, but at the same time, they're willing to pay more because they want coupon to ensure if anything's wrong, they'll be able to return it. And so they win there, even though they may have a more expensively priced item. And then on these mid -priced items, particularly stuff with apparel, cosmetics, beauty, they're a little weaker in categories there. And so that is also where others tend to do better. But on just pure pricing, they do well enough, but they definitely will lose some portion of the most price -conscious consumers. And just in terms of building up those product categories, what has been the process in doing that?

26:32Has there been any acquisitions? Is it all being developed and done in -house? They certainly have an advantage to the extent that they were shipping third -party volumes just to get a sense of where there's consumer demand. But what has been that process just in bringing more and more of that in -house? Yeah, all of it has always been in -house. No big acquisitions or anything like that. I know Amazon in the early days acquired diapers .com to fill out some of the baby categories, etc. So you do not see the same thing there. It was all 1P to build out the initial categories. And they still do need to go further with that.

27:06they've brought on and emphasized 3P more in the past couple of years. And so part of that is also to help fill out the selection. As I mentioned, cosmetics, beauties, apparel, those are some of the weaker categories that need a little bit of help. They did recently do an acquisition of Farfetch, which is a little confusing exactly why they did that. Although they paid half a billion for the company and they had 4 billion in GMV. And so usually that would be considered to be a pretty attractive price. And so we'll see what they do there, whether or not that is an angle to try to also buttress the apparel category.

27:37But otherwise, it's all been in -house and now leaning more on 3P sellers to fill out that last bit of selection. Bringing it together from a top -line revenue sales base, how do you look at the business just in terms of what it looks like today and maybe some trend lines in terms of how that top line has trended over the past 5 years, 3 years, whatever you think is an important reference point? If you're thinking about the retail TAM, coupon, we'll quote a number that it's $480 billion. Our estimates are a little lower. They include some things like travel services and possibly restaurant spend.

28:12And so we'll peg that a little closer to $400 for $20 billion. And then if you think about e -commerce penetration, South Korea has some of the highest e -commerce penetration of any country in the world. Having said that though, and to the point I was making earlier on them having very limited specialty chain store selection, you would actually expect that. And so e -commerce penetration, we peg around 35%. You could take a range around that. That gets you somewhere around 145 billion in eCommerce TAM today. But if you think about Coupang, they aren't just going after the existing eCommerce TAM.

28:43They could definitely grow eCommerce as a percentage of overall retail TAM. And so right now, they have about a quarter penetration of just the eCommerce market, but it's a high single digit penetration of the overall market. And so they do have a lot of room to run. South Korea, though, the population is not growing. It's flat to slightly shrinking over time. So that's something to keep in mind. But the wealth and how much people are making average incomes are going up a little bit beyond that. But mostly, it is not necessarily about new markets or anything like that. But it's about just more penetration, building out more of these categories, and just continuing to get all of these consumers that are currently purchasing on Coupon to have the behavior of their best customers, which again, we have started to see over time.

29:27The longer people are on the platform, the more they tend to buy, the more categories they buy through. Just taking it down to the cost line, you mentioned a little bit in terms of the labor force and what that looks like. I think that's been one of the hidden benefits to a business like Amazon, where they don't have a union workforce, at least yet. They have the contractor model that certainly works to their benefit in terms of the courier side of the business. What does it look like here just in terms of the big buckets of costs? Any added commentary that you have on the margin profile of the business that would all be helpful?

30:02Yeah. So I'm going to disappoint you here because they only report one operating expense line item. Love it. And they bucket absolutely everything together in there. And so that's definitely one of the criticisms you could get. In terms of gross margins, though, they're doing about 25 % gross margins. And you would expect those to go up more. But it doesn't mean so much as they switch from just emphasizing 1P to 3P. Right now, we estimate that 1P is about 55 % of their business and 3P is 45%. And we were able to triangulate that number because they give different reporting segments from the revenue items.

30:38And so you kick back into that figure. And then they also had an accounting change a year ago, which also helps you triangulate into that. And so big picture, we prefer to think of them in terms of GMV rather than revenue. Because again, if you're selling something on 1P, 100 % of the item is recorded as revenue. If it's 3P, it's just the commissions. And so more 3P distorts the economics of the business. And so we'll think about it in terms of GMV. We estimate GMV somewhere around 38 billion altogether. And there's a range there, call it 35 to 42. And so if you're looking at that, then we would want to look at the margin as a percentage of GMV rather than revenue.

31:15And again, we do this because of the distortions that the different accounting treatments of 1P versus 3P causes. You can go to speedwellmemos .com and we talk more about the different accounting treatments. We have a couple pieces on that that explain the differences if that's confusing. But in terms of cost structure and all that, they give us very little. So that's where we are now. On the third -party commissions, do you have any sense of what that actually looks like, what their take rate is or however you would measure it? Yeah. So there's three components to their commissions. There's the selling commission, which is just any product that lists there and ends up getting sold.

31:50You're paying that commission. That's anywhere in the range of 5 % to 11%. Then you have advertising layered on top of that. We don't have exact figures from that. But in talking to some merchants, that can be pretty considerable. We'll call it anywhere from 5 % to 15%. And then you'll also layer on logistics as well, which could be another 15 -ish percent. Again, this is going to vary though by the type of item, the size of the box, how much advertising you're doing, how well the item is selling. On a total consolidated take rate level, coupon is somewhere only around 11%, which does suggest that there's a lot more penetration to go on the advertising side as well as fulfillment side.

32:27A general rule of thumb people use is that advertising revenues could be somewhere around of 4 % to 5 % of GMV. And fulfillment as well, it just depends on the overall adoption overall, but that could be 15%, 20%. And if you're looking at someone like Amazon, they're fully low to take rates on someone who's using all these services, maybe call it anywhere the vicinity of 35 % to 45%. Thinking about the business overall, you have this large logistics infrastructure. Some of that in terms of couriers, I'm sure there's a variable model there. but it does seem like there's a lot of fixed costs. So is there inherent operating leverage in the business model?

33:04Yeah, there's definitely operating leverage in the business model. I mean, we could just look at what they were doing in 2021, which was they were losing a billion and a half in EBIT. And we fast forward today, and they're doing about plus 500 million. And so if you're looking at how much they invested over that time period, it was relatively small relative to the total amount they've invested over the life of the business. And so you do see some operating leverage there, especially just operating margins inflecting. And on top of that, I think the thing to consider though, is that there's a difference between the maintenance and growth capex.

33:35And so what they're still doing is they're still building out a lot of logistics infrastructure. They have 47 million square feet plus of logistics infrastructure space. And that number itself is from 2022. They have over 100 fulfillment centers, and they're not going to have to continue to build out fulfillment centers indefinitely. And so we'll have to see exactly what the maintenance first growth CapEx portion ends up being. But a lot of these expenses are very much front loaded. And you'll see something similar to Amazon, which is when you're no longer building out all of this infrastructure, you should see the margins continue to inflect up.

34:05The next natural question is, where can this go over time? What is the parallel, whether it's Amazon or something else? I think on that take rate number you gave, in terms of the potential there and what Amazon gets, it's quite impressive. but what else would you point to just in terms of mature business and where it could get over time? And the thing I would point out on the take rate is it's not necessarily the most informative because you could have a very high take rate and a large portion of that could be not very contributive to EBIT, which is usually the case with the logistics stuff. At least for now, it's definitely not as profitable as say advertising.

34:40And so also keep in mind, these businesses are offloading more and more of their operations to Coupang in this case. You have them doing not just the logistics, not just actually getting the item to someone, but also storing it. You have them finding them, the customer. You have them doing almost everything involved in it, except actually picking the item in the listing. And so as it continues to be the case, they're taking on more of the value of the transaction. It makes sense that they're able to take their share of that. In terms of mature margins, everyone plays this game where they say, let's look at a Walmart, let's look at a Costco, let's look at a Target.

35:12These are these fully scaled retailers, and they're able to get, call it anywhere in the range of a 3 % to 6 % margin. We think that if you're swapping out a physical land footprint and the store -to -store logistics operation they have for an e -commerce warehouse footprint and last mile logistics, that we'll be able to have a similar markup on all their items. And so everyone focuses around on a same mature margin framework, which will put you somewhere around 5%. Keep in mind though, again, back to the accounting distortions, it depends if you're doing 1P versus 3P. Something different about Coupang and as Walmart and some of these other retailers are starting to figure out too as well, is that if you get into advertising, then you're able to actually extract more of the value of the transaction.

35:52And of course, a platform like Amazon Coupang, it's very natural to have advertising. People come there with very high intentionality of what they want to purchase, and they tend to not want to be there that long. And so getting a top spot in the search engine results, it's very valuable. And so they're able to monetize through that as well. I believe they said long -term adjusted EBITDA margins are somewhere in the vicinity of 8 % to percent. We'll say that probably EBIT mature margins will estimate somewhere around 5 % to 8%, call it. In our report, though, we'll sensitize around different variables.

36:22And then you back into it to see what the associated return is. So you could see what you're paying for today, instead of an opposite of that, which would be, what do I need to happen? And how much money am I going to make? If I extrapolate that mature EBIT margins versus mature EBIT margins, you're assuming something in the 2 % to 5 % maintenance CapEx, it sounds like. What does that compare to their overall CapEx spend, whether it's a percentage of revenue or something else along those lines, just to give a sense of what that free cash flow unlock could look like? If you're looking at CapEx to DNA, it's over 2x.

36:59But again, the issue there is we don't know what growth versus maintenance CapEx is. A lot of their CapEx is still trucks. Those definitely have a lifetime. But if you're looking at a warehouse, that has a pretty long lifetime. And you'll have to do some stuff to update it, but you're not buying new land. And so exactly where that's going to shake out, it's unclear. But I will say the advertising portion of it is a big difference versus some of the more traditional retailers. If you're looking at a Walmart at 5 % or something, when you're layering in the advertising, you should be able to get a couple more points on top of that.

37:29And on the advertising, I know they don't separate exactly what they're generating from that. But do you have any gut sense of where they are in terms of building out that muscle and that adoption and penetration in that market? I would just say that the merchants we spoke to didn't get upset about the advertising until a couple of years ago, which was when more of these sponsored ads would show up in the search engine results and they felt like they had to play along. But it's still a relatively nascent effort. And just in that topic more broadly, as you look at a business like Amazon, I have a hard time differentiating the people that I read, their commentary, the merchants on Amazon who complain about it, and how big of an issue that actually is.

38:14I think Google and SEO is very similar just in terms of how much it became table stakes to be spending into that. Do you just have any sense on that phenomenon in general, and how much control these brands will have over the longer term? Yeah, well, branded versus unbranded is a different question. But Bam Kim would say that merchants are like bees and customers are the flowers. And so the bees always go to wherever the flowers are. And so what that suggests is who has the real leverage in this relationship. And it's the one who controls the traffic of all of their customers. So in the case of Coupang, they have tens of millions of people who spend $40 billion roughly on the platform a year.

38:55And if you're looking at that figure and you want to get a piece of that, you're going to have to play by their rules. We've seen this before where merchants try to protest. I don't know, people probably don't recall, but a lot of Etsy merchants would do this every couple of years when they're changing their policies. And they'd say that the platform is changing from what it used to be. And tens of thousands of them would sign these petitions and make a good amount of noise. But it never impacted sales whatsoever because at the end of the day, you're never usually even going into the second page of the search engine results.

39:23And so people pulling out where you're now reducing the 9th, 10th, 11th page, it doesn't really have any impact on the actual sales. And so they have to play along and they don't really have the leverage in that relationship. It's a little different with brands. If you are looking at a brand like Nike or some well -known cosmetic brand where people are searching specifically that brand, they do have more ability to command what they want to command. But in the case of Coupon, they're not going to change their rules just for one person. And so they either have to decide their strategy. Maybe they're only putting on a select number of items on the website.

39:56Maybe they're putting nothing on them. That's their own prerogative to decide what they want. But they do have a good amount of brands. And a lot of brands figure out that if people are searching for something, they may have thought their brand was stronger than it really was. But what people really wanted was to get the item by 7am tomorrow. And so if that's the case, you're losing that sale if you're not on the platform. It truly is incredible now when you search for certain brands, whether it's on Google or on Amazon, And you have to scroll down quite a bit to get to those brands because there is sponsored content or sponsored products from competitors sitting above it.

40:29So just a very interesting dynamic to think through. And I think we're still coming to grips with what the digital age means. It's no longer the shelf space that stands in front of you in the grocery store. It's something that looks very different. As you think through the various buckets of investment and where they are investing dollars, logistics network seems like a big thing. Are there other categories, whether that's just from a dollar standpoint or from a new initiative standpoint, that stand out to you as important potential growth avenues for the business? Yeah, well, they break up their segmentation in terms of product commerce and these developing offerings.

41:04And within that, you have Eats, which is their food delivery service. And so that's something relatively new. But then you also have a couple new markets. They did something in Japan that was more quick commerce, as it was called. And so the idea was that maybe there would be the weakness where people did one items within 30 minutes or so. And so they rolled out these small fulfillment centers in Japan where they had people on motorcycles ready to go as soon as an order came in. And they would only have 300 items or so in bento boxes, which is like lunches. And that turned out to not be so successful.

41:35I think they picked that route to try to attack e -commerce in Japan because the environment there is more mature and has a lot of offerings. And so they try to find something that maybe wasn't being fulfilled, but it turned out consumers didn't care about that. And so they ultimately abandoned Japan. They considered that to be a failed experiment. But they went into Taiwan as well. They did something similar initially, but then they switched it. And instead of doing this quick commerce, they decided to do the full RocketWow experience. And as of early 2023, they were opening up fulfillment centers, trying to get as much selection as they can, and really just copying the playbook from South Korea.

42:09And they've noted since then that that's been going pretty well. And on top of that, that they They have the number one shopping app in Taiwan for at least some period of time. And again, the e -commerce market there too is a little different. You don't have Alibaba. You don't have JD .com. JD .com is most similar to Coupang in that they have their own logistics as first party, or at least initially started as first party. Very much focused on that trust and consistency aspect. But there's no player like that in Taiwan. And so they're hoping they could take that niche. And it seemed to be going pretty well so far.

42:40So that's definitely been an area of investment for them. But it's worth noting that when they were investing in Japan and it didn't work, he didn't make any illusions about it or excuses. They just cut the spend there. They said it didn't work and they moved on, which is exactly what you would want to see an owner -operator do. Taiwan seems to be working with some success. Are there other countries, markets that you think are a natural extension of what they've done in South Korea that could also be, at the very least, testing sites? They have an office in Singapore. And so it's potential that they roll something out there, but that's relatively small as well.

43:17There's all of Southeast Asia that could be a potential target, but that is a very tough geography to go after. You're talking about hundreds of different islands. You're talking about multiple different countries, languages. And if you're coming in with the idea that you're going to build out this full logistics footprint, that is going to be very hard and very expensive. And so there's the potential for that because they don't have the same first party, fully integrated logistics operator there. So that door is open. But I don't think that that's going to happen for at least some time, especially considering the fact that you're looking at much lower average household incomes.

43:51Whereas in Taiwan, it's very similar to South Korea. And so that's a very natural extension. And Coupon gets the criticism very often that they can't grow that much because they're pretty mature in a lot of their markets. And that is true to an extent. They don't have this massive greenfield. But for right now, it is mostly about just extending out more categories and getting more people to buy more items on the site. And getting a good customer to become a great customer, in some ways, is an easier avenue of growth than launching a whole new market and hoping it sticks and can end up being profitable.

44:20And I could see where Taiwan and South Korea, the household income maybe falls into a similar category. When I think of Singapore, I think a very high household income, I could have that wrong. But do you think that's fair to say that that would be a different test case in a similar way to maybe how Japan was, not as similar to South Korea? It's definitely similar in terms of them both being populously dense, high average incomes. I don't know whether or not JD .com operates in there or how popular they are there. So you could see a similar opportunity. But again, it's a pretty small city -state really.

44:54So it's not going to really move the needle versus if they could really get Taiwan right. On the risk side of the equation, I think you mentioned a common pushback is that they're heavily penetrated in the South Korean market. So the growth runway is maybe not as attractive as some other more emerging businesses. What else would you say is common pushback that you hear on Coupon? I wouldn't say that that's a risk either. That's just something that limits the potential upside, if you will. The real risk is probably Naver is one of the number one things that I would think about. And just to talk about them a little bit for those that aren't familiar, Naver is basically the Google of South Korea.

45:36A lot of people still will start their search journey, not just on Naver for general search, but for product search as well. And so a lot of our consumer correspondents, it was very common for them to also look up the item on Naver. And so since they do have that early spot in the consumer journey for a lot of consumers, they have the opportunity to continue to make their product better for people to potentially buy there. And so don't think of Naver though as Google shopping because it is much better. They have a lot of price comparison directly on the site. They have something called NaverPay, which almost everyone in the country uses, similar to Apple Pay in that it's very easy, has your preloaded information, banking information, shipping information.

46:15And so it's very easy to check out directly on the site. They also have something called Smart Stores, which is where the merchant will actually upload their catalog of inventory into the Naver format. So it's a uniform format and people know how to navigate it, which again, just increases conversion. And on top of that, you're looking at them being able to aggregate basically every single item available for sale. And so they'll even have coupon items on Naver. You'll have to go through coupon to purchase it, but they can aggregate those results as well. And so a lot of people will start their journey there just to do a price comparison.

46:47And so of the consumers we spoke to, about 20 % said they use Naver more than anything for their e -commerce purchases. And so that is very dissimilar to the US, where I don't believe there is a player that has this 20 % market share position, second to Amazon. And so that is something that's there. It's a latent risk if they continue to get better. Coupang, though, was used by about 60 % of consumers as their number one e -commerce platform. And so they do have a clear lead there. They definitely are hitting higher consumer preferences, delivery speed, consistency, trust, order ease, selection, and to a lesser extent, price.

47:24That is hard for others to hit on. But Coupang, the thing is, it's going to continue to get better. They're going to continue to reiterate on that. And as long as Naver is trying to aggregate all these merchants together with different incentives, the merchants don't necessarily want their inventory housed in Naver Warehouse, which is an initiative they have in partnership with CJ Logistics called Naver Shipping Alliance. And so they're trying to back into creating this unified front where they can offer a similar experience. It's just very hard when you're coordinating all of these different parties together.

47:53And as an example, we can look at Alibaba, who tried to do something similar. Their shipping service they put together was called Sanyao. And they grouped together, I believe it was six different shipping partners. Ultimately, they had to invest in them and take stakes in them. And it makes sense that you provide the software and all of the volumes that these shipping partners will be able to connect and figure it out. But in reality, everyone has different prerogatives. And if you look at a Coupang truck, it is literally designed for these small parcel packages. And you open up the door on the side, whereas other trucks open up in the back.

48:24And that seems like a small thing. But if you're shaving off a few seconds every time or minutes every time you make a delivery, that's going to add up to more efficiencies over time. And Coupang, the thing is that they can really optimize for just a few variables. And they could continue to iterate to make their offering as good as possible, whereas everyone else, they're all balancing these different prerogatives. But what Naver is going for, it is vastly cheaper, including payment processing fees. You're looking at a take rate of less than 5 % to sell in there. Of course, a lot of people still search on Naver.

48:56So you do have considerable consumer traffic. And to the extent that they get this right with Naver Shipping Alliance, maybe you do also get quicker delivery. On the Naver Coupang, basically having two players that have very large percentages of the market. When you think about where this market is in five years, is it a winner -take -all market where Amazon seems to be the dominant player? I think you have Walmarts and Costco's who have big box presences. So it differentiates them just a little bit in terms of the delivery. The other market that I think of is Uber and Lyft being the two players that have carved out space in the ride share and ride economy.

49:36What do you see on the horizon for these two players and the way that this market settles out in 5 to 10 years from now? There definitely could be more than one winner. I see Naver as being a little bit more like Shopify is in the US. And so you still have that dynamic where there's this alternative, you get to control a little bit more, except at least in Naver's case, they do also help bring in some consumer traffic. Coupang definitely has the opportunity to just take share from a lot lot of these other e -commerce players. There's a bunch of them that don't provide a very clear and strong value prop.

50:06And they're more legacy players that are just hanging on to some of the customers that they still have. And so that I think is one avenue for them. And then you will see physical retail will still be there. There will be some players that are able to leverage, especially Shinsegai, their omni -channel abilities. And then there's also going to be a lot of vertical specific marketplaces. One focused just on cosmetics and beauty. And then Market Curly is just focused mostly on grocery, although they're moving out a little bit into cosmetics as well. And so you'll see all of these other players chip off.

50:34But if you're thinking about the sort of position that stays top of mind, where it's like, I need something, I want it quick, what is it? Where do I go? That's going to be coupon. And that's what they're trying to win. And that behavior and that sort of commerce transaction is definitely the most valuable of all of them, because it's very frequently that you're going to purchase something. It's essential goods. So you've got to buy it usually. And then on top of that, it's just going to be a huge volume. And so something else they've done that we haven't talked that much about is Rocket Fresh, which is their grocery initiative.

51:02And grocery is such an important category for an e -commerce player. And it's the reason why Amazon and Walmart are tripping over themselves to try to win this because it's something you have to do, usually weekly, if not bi -weekly, you got to buy food. And so high frequency, it's essential. You can't do without it. You don't have substitutes. And then on top of that, it's usually a pretty large order value in and of itself. But it's mostly about getting that behavior and habituating the consumer to your platform. So they're continuing to purchase. And once you get that, then you have your cross -sell opportunities, of course.

51:31And when you're looking at a company like Amazon Coupon, it's not about cross -selling them necessarily in the moment. It's more about getting that position in their mind where they think they want to buy something and they think Coupon. And that is where you want to be, where it's almost simultaneous, where you say, I want to purchase something and Coupon. You could buy something on their site in under 30 seconds. You whip out your phone, click the app, search it, you hit buy, and that's it. You don't have to worry about it anymore. And so that is ultimately the kind of commerce transaction that is the most valuable.

51:58And there's always going to be other players that offer more variety and more selection, brands that don't want to sell on there, and they're never going to win it all. But if you could get a huge chunk of that most valuable behavior, then that's going to be a pretty good business. On valuation, I think your earlier point on the pushback, it's not necessarily a risk, but it could cap your upside in being in this market, having seen such high penetration. It just makes the valuation question really interesting here. So how do you approach valuation for a name like this? And I'd be very curious just in terms of how you think the market views the name and how much that question mark over long -term runway plays a role.

52:44Yeah. So I approach it the way I always do, which is the reverse DCF. And so you see what assumptions that you're comfortable with, and then you see what the implied return of those assumptions would give you. And so you can sensitize around various growth rates, various market share assumptions, and then what they ultimately will do in terms of EBIT as a percent of GMV. And then you'll see the associated return with that and make a judgment whether or not you think the potential risk you see is worth that return. And that's how I always answer these questions. But it is the case that you're right.

53:16It is potentially limiting. But you may also feel that a company that has such dominance in a market and is able to grow by just adding more categories is a lower risk growth than opening up a new market and having to count on that being successful. Any sense just in terms of what the market is saying at the current valuation of where it is, is it highly evident that there is a question mark over long -term growth? Yeah, I'm going to be honest. I never know exactly what the market's thinking. I think that maybe they were expecting even more growth or something like that. But they did 18 % revenue growth in 2023.

53:51They accelerated revenue growth a bit. And it's also FX messes up those numbers as well. So they're a little bit higher, but I don't know what you would really expect or what you would want to see. And so that's hard to get into the mind of the market, if you will. but they're doing 1 .5 billion in free cash flow. And again, this is just 10 years after going into this fully integrated large logistics operation. And that's much quicker than even Amazon was to turn on profitability. For every dollar of inventory they hold, they have $3 in accounts payable. And if you know AutoZone, they love to talk about their accounts payable as a percent of inventory.

54:26And this number for coupon, it's 300%. And so it is much higher. They're doing almost 10 times inventory turns. And some of this is a little byproduct of the fact they have this third -party marketplace and all that. But they are just turning inventory very quickly. And if you were to go look at their financials when they IPO'd, and they IPO'd at a much higher valuation, I believe it was around $60 billion, they were losing money. They didn't have the same grip on the consumer as they do today. They didn't have the same number of active customers or Rocket Wow. There was a couple more question marks there for sure.

54:57And so it seems like everything Bomb Kim wanted to execute on, he's been able to execute on. Getting into the mind of Mr. Market is not something that many of us can do. Start to wind down the conversation here. It's a question I've asked you on the other episodes you've been on. But what would you point to as the key lessons from Coupon? I guess that you could be a pretty late entrance. And as long as you are fulfilling consumer preferences that are still unmet, you still have an opportunity for this top leadership position. And I think too often people think of this first mover advantage in this amorphous way.

55:30Oh, we relate to the e -commerce game. But it's not about just serving e -commerce, quote unquote. It's about actually finding what these things are that consumers value and figuring out how to serve them. And so if you think about Coupang, they basically optimize their entire business around these six factors of delivery speed, consistency, trust, order ease, selection, and price. and everything they've done is to serve those preferences better than anyone can otherwise. And so I talk about this idea of a meta optimization, which is what are you optimizing your business for? What outcomes are you optimizing your business for?

56:06And so the thing you see with Coupang is they were very late to this game, but they were able to pick the right preferences and optimize for them better than anyone else before that they were able to win to such a large degree. I mean, look at how their model, how their flywheel is set up. It all starts with the warehouse. If you want to go and compete against them, you got to get this huge warehouse footprint. Then you have to store it with a lot of inventory. You're not going to be able to get third party merchants to send you inventory. So you're going to have to go the first party route. If you go the first party route, you're not going to get very good terms initially because you don't have the volumes.

56:38Otherwise, it's very expensive to try to buy in bulk for items you're not even sure you're going to be able to sell. Then once you get the items and you get the exclusive inventory, then you have to figure out how to get the customers, which by the way, Coupang already has half of all of Korea signed up for their service and on their membership program. And then once you get the customers, you're going to have to get them to buy and habituate them so they continue to create these volumes. Then you're going to need all of these volumes in order to create the data that allows you to know where to actually put the inventory so you can properly optimize your logistics network to get anywhere near one day, let alone seven hour delivery.

57:11And all in the process, you're going to have to do these process innovations. You're going to switch the way that you upstream sort your packages. You're going to move from cardboard boxes to plastic, which by the way, they got rid of 85 % of all the cardboard they used to use in their operation, which isn't ESG thing. It's about saving space. Now they can stuff way more items in an individual truck and have one person deliver more, making each truck more profitable. And so all of this feeds into itself. And then you get more consumer habit because you have a great service and people trust you more and they're ordering on your site more and it creates more volume and the volume creates more data.

57:45it creates more ability to go out to your suppliers and buy more at a cheaper price and on and on and on. And then once you do that, then it's very easy to add in this third -party merchant aspect because you already have all the consumers on board. And then you can use your 1P to make sure you're keeping your 3P merchants in line. So the 3P merchants have to offer a similar value prop as to what they could do. Otherwise, they're just going to fall way down in the search engine results. And so you have to have all of these things together in order to really serve the consumer well, which is the problem that a lot of companies make all the time is they'll see a couple of these preferences and they'll try to go after them.

58:20But they can't go after them unless they re -architect their entire platform to really serve the consumer in these specific areas. And so you can't half -ass this stuff. You have to do it all. And there was Shinzegai, which is SSG .com. They tried rolling out very quick delivery in Seoul. And if there's any area in the world where it'd be easy to do it, it would be in Seoul because how populously dense it is and how wealthy they are on average. and still they weren't able to do it. And they weren't able to do it because they're trying to work from a store footprint. You can't do it if you're holding all your inventory in a department store and you have someone picking and packing from the aisles of the men's clothing department where everything is out.

58:56You have to be fully in and you have to re -architect everything to iterate on these specific preferences. And so that is what I would say the lesson is that you could be very late, but as long as you identify preferences that are unmet and you are able to organize your entire business to fill those preferences better than anyone before, you still have an opportunity. Very well laid out. Still feeling some similarities and parallels to Amazon, particularly after you got past the they were late part. And I think there's just a really, really interesting case study here from the initial pivot to the founder, owner, operator, and to everything that goes into, like you said, if you're going to have this flywheel, which can get thrown around a lot.

59:38It really does need to be incorporated on so many sides of the business and certainly looks to be the case here. Drew, thank you again for sharing the knowledge. It has been a pleasure as always. And it was a pleasure going outside of the US with you. Well, thank you for having me. And if an hour of Coupang isn't enough for you, we have a 2 -hour and 10 -minute episode on Coupang on our podcast called The Synopsis. So you could learn more about Bomb Kim. There we go. Thank you very much again. Thanks for having me.