How Naver is Responding to Slowing Transaction Growth and the Invasion of Chinese E-commerce
🌥️ You can find out by reading this article!
- If you have been following Naver's financial results in 2023, you might remember that Naver consistently emphasized its message of ‘achieving above-market average growth in commerce.’ However, this message was absent in the Q4 2023 earnings report announced on February 2nd. For the first time in 2023, Naver's annual commerce transaction growth rate recorded significantly below twice the market average. How does Naver plan to respond to the slowdown in commerce transaction growth? We have summarized the answers from Naver's executives, including CEO Choi Soo-Yeon.
- Another concern for Naver's commerce situation is the intensifying penetration of Chinese e-commerce platforms in South Korea. Last year, the top two fastest-growing apps in Korea were Chinese e-commerce platforms, AliExpress and Temu. AliExpress even surpassed Gmarket to become the third-largest shopping app in Korea, behind Coupang and 11st. This is not just someone else's story for Naver, which lost its position as the number one transaction platform to Coupang. We listened to what Naver's executives had to say.
- In 2023, there was speculation in the industry that Naver might have given up on 'transaction' growth to focus on profitability. This is because the slowdown in Naver's transaction growth was observed to intensify each quarter in 2023. Meanwhile, Naver's revenue and profit consistently showed double-digit growth rates. In Q4, Naver's adjusted EBITDA profits recorded an all-time high. So, did Naver really give up on 'transaction' growth? Naver's answer is 'no'. Then the question is 'how'? We have summarized how Naver plans to capture both commerce revenue and transaction growth.
- In fact, Naver's strategic direction in commerce business is different. It's about strengthening its three core businesses: search, advertising, and commerce, based on 'technology' capabilities. Recently, Naver has been focusing on the utilization of 'generative AI'. We have summarized how Naver intends to use generative AI in its commerce business. With a recession expected to continue in 2024, can Naver create the turnaround they dream of?
CHAPTER 1
Widening Gap with Coupang
Naver announced its Q4 2023 financial results today. Readers who have been following CONNECTUS’ analysis of Naver’s performance might remember Naver consistently emphasized 'achieving above-market average commerce growth' each quarter. However, this message was missing in this quarter’s earnings report.
Looking at the numbers, until Q1 2023, Naver's commerce transaction growth rate was 13.7%, nearly double the 7% average growth rate of e-commerce transactions announced by the Statistics Korea. However, Naver’s commerce transaction growth rate fell sharply to 8.6% in Q2, slightly above Statistics Korea's average of 7.5%. It worsened further in Q3 to 8.2%, almost on par with the 8% average. (Detailed analysis of Naver’s commerce performance and strategic direction from Q1 to Q3 2023 can be found through the quarterly performance analysis content.)
By Q4 2023, Naver’s commerce transaction growth rate had plummeted below the market average. Naver’s reported commerce transaction volume for Q4 2023 was 12.4 trillion won. Excluding the transaction volume increase due to the acquisition of Poshmark, the growth was only 4.9% year-on-year (11% including Poshmark), which is less than half of the 10.6% growth rate of e-commerce transactions for Q4 2023 announced by Statistics Korea.
Meanwhile, the gap with Coupang, previously considered alongside Naver as the ‘duopoly’ of domestic e-commerce platforms, is widening. According to recent data released by WiseApp, Coupang’s estimated payment amount for December 2023 was 4.275 trillion won, a 22.8% increase year-on-year. This analysis indicates that the gap between Naver and Coupang is widening.
Therefore, during this quarter’s earnings announcement, analysts questioned Naver's management about the slowdown in commerce transaction growth and strategies for this year.
Additionally, concerns about the ‘invasion of foreign forces’ have emerged. The recent rise of Chinese e-commerce platforms like AliExpress, which has jumped to the third-largest shopping app in Korea, is a matter of concern. Analysts also asked about Naver’s countermeasures against the potential loss of domestic e-commerce customers to these foreign platforms.
It’s a challenging time for domestic e-commerce platforms, a situation not unique to Naver. How are Naver’s executives planning to respond to this crisis? Connectors has summarized the performance and strategic direction of Naver’s commerce business in Q4 2023, as envisioned by Naver’s management.
CHAPTER 2
Not Giving Up on Transaction Growth, Right?
Starting with the stagnation in Naver Commerce’s transaction growth, Naver’s sales and operating profit have been steadily recording double-digit year-over-year growth. This led to analyses throughout 2023 suggesting that Naver might have given up on the external growth of commerce and focused on ‘monetization’. This trend was reflected in Naver’s Q4 2023 results.
Firstly, Naver’s Q4 2023 commerce revenue was 660.5 billion won, a 35.7% increase year-over-year and a 2% increase quarter-over-quarter. Excluding the impact of incorporating Poshmark, it still recorded an 11.8% increase in sales year-over-year, significantly outperforming the transaction growth rate of 4.9%.
The growth driver of Naver’s revenue this quarter was the ‘intermediation and sales’ segment, including Smart Store, Brand Store brokerage, and sales commission fees. Commerce advertising revenue in Q4 was 279.9 billion won, a decrease of 1% quarter-over-quarter and a 4.6% increase year-over-year, contributing less to the overall performance. Intermediation and sales revenue were 344.1 billion won, a 93.3% increase year-over-year, and even excluding Poshmark, it was a significant 28.3% increase.
This reflects the impact of the Take Rate increase for Naver Shopping sellers and newly monetized solutions such as arrival guarantee. Particularly in Q4, the revenue contribution of the ‘Brand Solution Package’ launched and charged by Naver on October 5 last year was significant. According to Naver, Brand Lounge Solution, Brand CRM (Customer Relationship Management) Solution have been well-received, contributing to revenue performance. The number of paying subscribers is also increasing faster than expected.
Naver’s monetization strategy seems to have influenced this. According to Naver, the company’s total adjusted EBITDA profit in Q4 2023 was 580 billion won, an all-time high with a 19.2% increase year-over-year and a 5.3% increase quarter-over-quarter. Adjusted EBITDA profit margin also improved by 1.4% year-over-year to 22.9%.
According to Naver CFO Kim Nam-sun, this is due to not only improved profitability of Naver Webtoon but also increased Take Rates for CREAM and Brand Store, and improved profitability of Poshmark. Especially Poshmark, which had been incurring losses until Q4 2022, turned to a 6.5 billion won EBITDA profit in Q4 this year, achieving a 5.1% margin rate.
Analysts questioning Naver’s response to transaction slowdown pointed to Naver’s ‘profitability’-focused growth. This implies that Naver is collecting more fees from sellers and brands on its platform than the rate of increase in revenue they generate through Naver. From a long-term commerce ecosystem construction perspective, it’s not an entirely positive indicator. If a competing platform offers better conditions, sellers may no longer continue with Naver.
CHAPTER 3
“We’ll Take Care of Both Revenue and Transaction Growth”
Naver’s executives responded, “We will take care of both transaction and revenue growth.” The reason for the slowdown in transaction growth, as Naver sees it, is due to consumption stagnation caused by inflation and interest rate hikes. This trend is expected to continue in 2024. CFO Kim Nam-sun stated, “We expect the domestic commerce market to grow in the ‘mid to high single digits’ this year, but Naver naturally plans to grow in double digits in both transactions and revenue by increasing the Take Rate.”
The important part is how. Fortunately for Naver, the ongoing slowdown in transaction growth is largely due to the decrease in transactions from external ‘affiliate malls’ advertising on Naver Shopping. In contrast, Naver’s directly operated Smart Store and Brand Store, or ‘on-platform products,’ are still growing at a relatively high rate.
According to Naver, the transaction volume of on-platform products in Q4 2023 was 8.7 trillion won, a 14.3% increase year-over-year (5.2% excluding Poshmark). This is a significant 6.1% increase compared to the 8.2 trillion won reported by Naver in the previous quarter.
As emphasized every quarter in 2023, the growth driver of Naver’s on-platform transaction volume was the ‘Brand Store’. According to Naver, the number of new brands joining Brand Store in Q4 2023 increased at a similar level to the previous quarter. Particularly, high-ticket categories like digital/electronics and food and health brands using the arrival guarantee solution contributed evenly to growth this quarter.
However, Naver did not announce the specific year-over-year transaction growth rate of the Brand Store in Q4 2023. This omission suggests there might be negative aspects to the Brand Store’s growth rate. For reference, the year-over-year and quarter-over-quarter transaction growth rates of Naver Brand Store in Q3 2023 were 46% and 0% (estimated), respectively.
Naver also announced the performance of its live commerce platform ‘Naver Shopping Live’ this quarter. According to Naver, Naver Shopping Live grew by more than 18.8% year-over-year and 11% quarter-over-quarter in Q4, solidifying its position as the industry leader.
Regarding this, Naver is keeping a close eye on the potential for commerce business integration with the short-form content platform ‘Clip’, which saw 36,000 applicants in a recent creator recruitment, and the streaming platform ‘ChijiChik’, which secured over 1.3 million MAUs in just a month after its launch in December last year.
For Clip, like other short-form platforms like TikTok, creators can actively participate in Naver’s commerce ecosystem with creator commerce. ChijiChik is also expected to involve streamers in commerce content, adding an element of fun to the content. According to Naver, the ChijiChik platform and ‘live commerce’ are not significantly different technically.
Lastly, Naver sees potential for transaction growth in ‘Poshmark’. According to Naver, recent trends show that Poshmark’s transaction growth rate is better than domestic e-commerce. Considering this growth, Naver expects to achieve desired levels in both transactions and revenue this year.
“Poshmark solidified its position as North America's number one C2C platform, maintaining growth in all aspects, including Q4 EBITDA profit, sales, transaction volume, and market share. Alongside the growth of existing businesses and 1P advertising revenue, we are enhancing our business competitiveness through the increased revenue contribution of the live streaming broadcast, Posh Show. Through initiatives that can create synergy with Naver, we will strive to achieve both transaction and top-line growth” - Choi Soo-yeon, Naver CEO
However, Poshmark's growth might feel somewhat unrelated to the transaction growth of e-commerce sellers on Naver in Korea. Of course, if Naver, as it has long planned, connects domestic Smart Store sellers with global platforms built in North America or Japan, it could create a mutually beneficial growth picture with domestic sellers, but this was not mentioned in this earnings announcement.
CHAPTER 4
No Problem with the Offensive of Chinese Platforms?
Next, regarding the offensive of Chinese platforms, Naver analyzed that they are growing rapidly due to the 'low price' value they offer consumers. However, Naver believes the impact of Chinese platforms on Naver is still difficult to quantify and is likely to be limited.
According to CEO Choi Soo-yeon, there are two main reasons. First, Naver provides a wide range of product information, already including products across various price ranges.
Second, the business structure of Naver Commerce, which reflects products from external affiliate malls in Naver Shopping search results, makes Chinese platforms competitors but also strategic partners. For example, AliExpress is already one of the partners using Naver Shopping advertising products, integrating its database with Naver search results.
Interpreting further, Naver seems to consider the influence of Chinese platforms on price to be limited, as it operates a business model that directly incorporates Chinese platforms. Naver also hinted at expecting strengthened commerce advertising revenue due to the penetration of Chinese platforms.
“Naver will continue to monitor the trends and ripple effects of Chinese platforms rapidly penetrating with their capital strength. We cannot disclose specific ad spending by individual advertisers, but AliExpress has been executing ads by integrating its database with our platform for a few years. The recent rapid growth of Temu, which is increasingly interested in the Korean market, is expected to increase the scale of ad execution. We expect this to have a positive impact on us” - Choi Soo-yeon, Naver CEO
CHAPTER 5
Creating a ‘Hyper-Personalized Shopping Experience’ with AI
CONNECTUS always pay attention to the CEO's initial remarks at corporate earnings presentations. We believe they implicitly contain the company's recent strategic direction.
“Hello, this is CEO Choi Soo-yeon. Naver, continuously unfolding new challenges for greater leaps as a global company, is focusing on strategically executing various platform competitiveness enhancement plans utilizing technology and data capabilities, aligned with users’ content consumption behaviors. Especially this year, we will provide hyper-personalized content based on generative AI technology and enhance services to ensure that content of interest to users is more easily discovered, while striving to link user experience improvements to monetization (omitted in the middle)” - Choi Soo-yeon, Naver CEO
As quoted, CEO Choi Soo-yeon of Naver emphasized business focus on providing hyper-personalized content based on generative AI technology in this earnings announcement. This message is also reflected in Naver’s commerce strategy. The strategic direction of Naver’s commerce business this quarter was also ‘AI-based hyper-personalized shopping’.
The generative AI-based search service ‘CUE:’ applied to Naver PC integrated search since November 30 last year is a prime example. Naver applied local service reservation and shopping gift recommendation scenarios to CUE search results aligned with the year-end and New Year season. Naver built a process leading from search to final purpose, such as reservation purchase. Generative AI responds in natural language to Naver search users, recommending product purchases within the Naver ecosystem. Naver received positive user feedback and plans to expand CUE service beyond PC to ‘mobile’ in the first half of this year.
Regarding this, the Naver app also applied ‘personalized recommendation technology’ using generative AI last November. According to Naver, the Naver app home feed, where generative AI was applied, doubled its user numbers within a month. The home feed ad efficiency was also more than twice as high as traditional ads on the mobile main page.
Naver expects generative AI to increase dwell time and ad conversion rates within the Naver app, enhancing efficiency in the ‘commerce advertising’ business. While it’s uncertain how soon this change will impact commerce revenue, it’s projected to positively affect long-term commerce advertising revenue growth.
“On January 11, Naver began a pilot test of ‘CLOVA for AD’, a new form of advertising that provides a hyper-personalized experience by connecting brand needs with user information and consumption flow using generative AI technology, in partnership with Nike. Naver users can engage in a conversation with the brand through the button (entry point) displayed at the bottom of the display ad during a brand search. The conversation leads to an extended experience, connecting product recommendations to purchase. During the test period, ads with the entry point for CLOVA for AD showed a CTR (Click-through Rate) about 20% higher than ads without. Additionally, 30% of users who conversed explored products afterward. We will continue to analyze user patterns and incorporate advertiser feedback for product improvement during the upcoming CBT” - Choi Soo-yeon, Naver CEO
However, Naver doesn’t expect the current advertising market recession to improve in 2024. CFO Kim Nam-sun stated, “We think the Korean advertising market will grow at a low to mid-single digit level similar to last year.” Responding to a question about whether AI technology will help ad product profitability, CFO Kim said, “It seems no one, including global big tech like Google and Meta, has figured it out yet.”
Nevertheless, if the domestic economy recovers, Naver expects another robust growth phase for its advertising revenue. Although it's difficult to predict exactly when that will be, Naver plans to continually strengthen its AI-centric hyper-personalized business portfolio while preparing for that time.
Ultimately, Naver’s key strategy to overcome the recession is ‘technology’. Plans include enhancing core business competitiveness in search, advertising, and commerce through ‘personalized’ search results, ads, and product recommendation exposure based on technology.
Indeed, Naver’s commerce had a challenging 2023, numerically speaking. Will Naver be able to create the ‘turnaround’ they desire in 2024? We conclude with a statement from CEO Choi Soo-yeon.
“The year 2024 is expected to be challenging due to economic instability and high interest rates dampening consumer sentiment. In this situation, Naver will strengthen collaboration with partnered brands through solution enhancement and expanding the application range of the arrival guarantee service. Simultaneously, through advanced AI-based recommendations and search, we will provide a more accurate and appealing hyper-personalized shopping experience, enhancing the competitiveness of Naver Shopping” - Choi Soo-yeon, Naver CEO
Written byUm Ji-yong. He is the co-CEO of BEYONDX and also serves as the Head of Content Operations at CONNECTUS.
Interested in learning more about Naver's commerce business? Please contact CONNETUS at cs@beyondx.ai.