🌲 Reading this article, you will understand:

1. Naver Commerce is being shaken both internally and externally. The internal crisis is the increasingly deepening stagnation in commerce transaction growth. The external crisis can be seen in Japan, a key ally in the cross-border commerce ecosystem that Naver wanted to create. As both Korea and Japan face crises, they both stir significant anxiety. This article interprets the signals of crisis Naver faces based on the Q1 2024 commerce data and compiles thoughts from CEO Choi Soo-yeon.
2. Whenever questions arise about Naver's stagnation in transaction growth, one company that consistently gets mentioned is "Coupang." Although Coupang was seen as forming a duopoly with Naver during the pandemic, flourishing together, recently, it seems Coupang has been monopolizing growth. CEO Choi Soo-yeon acknowledged Naver’s stagnation but mentioned that there are external factors that must also be considered.
3. Regarding issues of the Japanese government pressuring Naver to sell its stakes in Line Yahoo, CEO Choi Soo-yeon also commented. It’s a delicate issue intertwined with international relations between the Korean and Japanese governments, so no detailed comments were made. However, it was clear that the cooperative relationship between Naver and Line Yahoo has changed.
4. Despite the significant anxiety facing Naver, there were positive developments in Q1 for Naver Commerce, particularly with Poshmark and the membership business. Building on this, Naver plans to continue forging a unique path unlike any other worldwide, different from Coupang and Line Yahoo. This outlines the unique path Naver is pursuing in commerce.

CHAPTER 1: Naver Faces Massive Crises Both Internally and Externally

Naver Commerce is shaking both internally and externally. The internal crisis is the stagnation of commerce transaction growth. Since Q4 2023, when growth fell to less than half the market average, this stagnation has continued into Q1 2024. According to Naver, in Q1 2024, the total commerce transactions reached 12.2 trillion KRW, a 6% increase year-over-year, but this was below the Statistics Korea-reported average growth rate of 10.7% for the same period. Even compared to the previous quarter (12.4 trillion KRW), there was observed a reverse growth in transactions.

If there’s an added setback for Naver this quarter, it is that even its own operated Smart Store and Brand Store, known as 'On-platform products', are seeing a slowdown in growth. Naver reports that the year-over-year growth rate for Q1 2024 On-platform products (excluding the effects of acquiring the Japanese 'Soda') was only 8%. When looked at quarter-over-quarter, there was a 1.7% decline in transactions.

The external crisis is observed in Naver’s alliance front. Naver, aspiring to create a cross-border commerce ecosystem linking global sellers and buyers, has consistently pursued acquisitions and investments in e-commerce platforms globally. The largest and starting point of these alliances would be Japan’s 'Line Yahoo (LY Corporation)'. In 2021, Naver and Japan's SoftBank jointly established A Holdings as a holding company controlling Line Yahoo (then Z Holdings) with a 50:50 investment.

However, the Japanese government began pressuring last year, using a personal information leak at Line as a pretext to administratively guide and push for a restructuring of Line Yahoo, which includes selling Naver’s stake in A Holdings to SoftBank.

This has shaken the foundation of the collaboration blueprint originally announced by the two companies, involving technology transfer from Naver and local service operations by Line Yahoo. Meanwhile, the first collaborative project between Naver and Line Yahoo, the Japanese version of Smart Store 'My Smart Store', has decided to terminate services by July. While it’s difficult to pinpoint the exact relationship between this event and the Japanese government's pressure, it’s clear that the business in Japan was far from smooth.

During Naver's Q1 2024 earnings call on May 3, the sense of crisis for Naver was palpable. Although the management tried to minimize references to these issues during their speeches, most of the analysts' questions focused on asking about Naver's response to the transaction growth stagnation and the Japanese government’s pressure. Today's content aims to summarize CEO Choi Soo-yeon’s thoughts on these issues, along with the future direction of Naver Commerce.

CHAPTER 2: Choi Soo-yeon's Stance on Transaction Growth Stagnation

First, let's clarify the position of Choi Soo-yeon, CEO of Naver, regarding the stagnation of domestic commerce transaction growth. During the recent Naver earnings call, an analyst (Eric Cha from Goldman Sachs) asked, "The GMV (Gross Merchandise Volume) based on product standards is lagging behind the growth rate of competitors. Is this a temporary phenomenon due to differences in GMV mix or if it's a structural factor, what efforts is Naver making to reduce this disparity?"

Here, although not explicitly mentioned, the competitor in question was clearly 'Coupang'. Coupang has reclaimed the position of number one e-commerce platform from Naver as of last year and continues to widen the gap with Naver. According to Hana Securities, Coupang’s estimated transaction volume for Q4 2023 was 16.75 trillion KRW, a substantial 40.3% increase from the previous year's 11.94 trillion KRW.

CEO Choi Soo-yeon acknowledged the slowdown in Naver Commerce's transaction growth but emphasized the need to distinguish between 'macroeconomic market conditions' and 'Naver's growth rate relative to competitors'. The growth of the competitor (Coupang) is a special case, and Naver, even amidst the slowdown in e-commerce growth, is maintaining a relatively steady growth, according to her stance. Here is the specific statement by CEO Choi Soo-yeon.

"After the rapid growth of our domestic online commerce transaction volume during the pandemic, it appears that the market overall is indeed slowing down. However, we believe that our competitors are currently experiencing growth in areas such as groceries, which were previously conducted offline. Considering that most commerce platforms are either seeing halted growth or negative growth, we assess that Naver is recording solid platform growth based on our diverse commerce portfolio including products and services, and our extensive range of long-tail and short-head items." - Choi Soo-yeon, CEO of Naver

Chapter 3: Revenue Is Growing, But...
While Choi Soo-yeon's statements are somewhat accurate, they don't completely capture the whole picture. To highlight what she got right: contrary to the stagnating commerce transaction volumes, Naver's revenue metrics have consistently shown double-digit growth, including a robust performance in the first quarter of 2024. The commerce division alone reported revenues of 703.4 billion won, up 16.1% year-over-year and 6.5% from the previous quarter.

Particularly notable is the 'brokerage and sales revenue', which includes commerce commissions, totaling 390.5 billion won—an increase of 28.9% from the same period last year and 16.8% from the previous quarter. While these figures include an illusionary boost from the recently integrated Japanese platform 'Soda', even excluding Soda, Naver’s Q1 overall commerce revenue still marked a 10.4% year-on-year increase, with brokerage and sales revenue up 17.5%.

Naver attributes the strong growth in brokerage and sales revenue to several factors introduced last October, such as the monetization of the brand solution package and the guaranteed delivery service, as well as growth from KREAM. According to Naver, the steady rise in revenue is driven by initiatives such as increased fees from existing services like KREAM, and new commerce solutions like the paid brand solution packages.

However, this revenue growth carries the implicit risk of unsustainable long-term growth if it is not supported by corresponding increases in transaction volumes. Brands and sellers, who have accepted fee increases or paid for new solutions, ultimately expect these costs to translate into higher sales (or transaction volumes for Naver), and might disengage if these expectations are not met.

Signs of this potential issue are already emerging. For Q1 2024, Naver’s 'commerce advertising' revenue was 264.9 billion won, barely growing by 0.3% year-over-year and actually shrinking by 5.3% from the previous quarter. This stagnation in advertising revenue suggests a decrease in usage by external malls and commerce platforms advertising on Naver Shopping, likely influenced by the macroeconomic downturn and Naver's slowing transaction volume growth.

While Naver remains hopeful that a revival in consumer sentiment could lead to a rebound in transaction volumes, especially for the 'niche long-tail' products where it has traditionally been strong, waiting for the macroeconomic climate to improve may be a risky strategy. The pressure is mounting as investors watch Coupang’s solo run, making it increasingly uncomfortable for Naver under the scrutinous eyes of market watchers.

Chapter 4: Choi Soo-yeon's Stance on Japanese Operations

Regarding the administrative guidance from the Japanese government, Choi Soo-yeon, CEO of Naver, clarified her position concerning the relationship between Naver and A Holdings. She outlined two primary perspectives: one as a shareholder of the joint venture holding a 50% stake, and the other as a technology partner that had provided core technology to Japan's Line Yahoo with the launch of MySmartStore.

Among these, the role of Naver as a 'technology partner' supporting Line Yahoo with infrastructure is likely to diminish due to the administrative guidance. Although not yet finalized, Choi noted that the direction set by this guidance suggests that Line Yahoo will develop its own technological infrastructure instead of continuing to adopt Naver's. This shift could potentially impact Naver's infrastructure revenue.

Additionally, regarding the continuous media focus on the Japanese government's pressure for Naver to divest its stake in Line Yahoo — essentially a controversy over the potential loss of control of Line Yahoo to Korean interests — Naver's stance remains that there isn't much to discuss in detail at this point. Here’s a summary of Choi Soo-yeon's related comments.

"Regarding the administrative guidance from Japan's Ministry of Internal Affairs and Communications, I know many of you might be curious. It is quite unusual to be directed to reduce our capital control. However, this isn't simply a matter of deciding whether to comply or not; it's about making decisions based on long-term business strategy. We are currently reviewing this internally and haven't finalized our stance yet. We will clarify our position once it is fully developed. In relation to this, we are also in close consultation with the Ministry of Science and ICT among other government bodies in our country. I would like to take this opportunity to express our gratitude to the government for their significant support in this matter." - Choi Soo-yeon, CEO of Naver

CHAPTER 5: Still, I Want to Have Hope for Naver

Despite discussing the unease faced by Naver, not all news from the recent earnings announcement was negative. First, Naver's North American C2C marketplace, Poshmark, which was acquired by Naver, not only achieved EBITDA profitability within just a year of acquisition but also secured an operating profit this quarter. Poshmark has managed to achieve cost efficiencies and simultaneous growth in transactions and revenue in the first quarter, according to Naver's assessment.

In fact, Naver had also expressed a similar position regarding cooperation with LINE Yahoo when acquiring Poshmark. Naver actively transferred its commerce technology and operational expertise to Poshmark to support management efficiency. While the launch of 'MySmartStore' in Japan ended in failure, Poshmark appears to be showing signs of success so far.

For instance, the reasons Naver cited for Poshmark's transition to operating profit this quarter included a near tripling of 'advertising' revenue compared to last year. Another success was the 'Posh Show' live streaming broadcast, particularly the 'K-fashion Posh Show,' which recorded the highest ever new user influx. Both 'advertising' and 'live commerce' have been continuously emphasized by Naver as technical capabilities transferred after the acquisition of Poshmark, and this quarter they led to significant results.

Naver also has strategies in place to counter competition from Coupang. Recently, Naver temporarily added free rapid logistics benefits to its paid membership 'Naver Plus' for three months. This quarter, Naver's membership revenue recorded a high growth of 24% year-over-year and 3.9% quarter-over-quarter.

According to Naver, the reason for adding various benefits to the membership is not merely to increase the number of subscribers and revenue. The goal is to increase the transaction volume and purchase frequency per member. The results of the rapid logistics experiment started this quarter are highly anticipated in the industry.

Similarly, Naver continues to strengthen its logistics capabilities, which it perceives as weaker compared to Coupang. Naver's fast logistics solution 'Guaranteed Arrival' has been supporting significant transaction growth in high-demand categories like kids, food, and beauty, proving its effectiveness. In April, Naver announced the introduction of same-day and Sunday deliveries, focusing on daily necessities and fashion categories, to further enhance Guaranteed Arrival.

With proven results, Naver plans to continuously expand the categories covered by Guaranteed Arrival to enhance user convenience. Although specifics were not disclosed, Naver hinted at an upcoming announcement of strategies to address its logistics weaknesses through this earnings announcement.

While the situation is undoubtedly challenging, Naver's resilience is apparent. Naver finds its differentiated commerce competitiveness in its 'ecosystem.' Commerce services that encompass everything from SME sellers to brands and even products from external shopping malls and competing platforms are unique to Naver globally. More than just a 'commerce' service, Naver is also the only provider offering a seamless flow of services including search, shopping, local (places), payment, and reservation. Thus, Naver believes there is much it can achieve that cannot be explained solely by transaction volume. Statements by CEO Choi Soo-yeon conclude this chapter.

"Naver is a platform that connects all online services including advertising, marketing, shopping, places, and payment. Therefore, it is difficult to judge our growth potential based solely on the metric of transaction volume. For example, Chinese cross-border e-commerce platforms that are actively entering the Korean market are major advertisers on Naver, just like the leading domestic commerce platforms. They are growing with us as partners, not competitors. Furthermore, companies that compete in payments can also become partners that bridge online and offline. Naver aims to expand and lead the domestic online ecosystem as a collaborator growing alongside users, sellers, and partners. Going forward, we will continue to provide convenient solutions to SMEs to support their growth, and we aim to evolve further as a brand marketing platform by enhancing strategic collaborations with brands and providing spaces and products that match their brand images." - Choi Soo-yeon, CEO of Naver

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