Shina Chung, CEO of Kakao, Discusses the 'Essence' of the Company and Its Business Outlook for 2024
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- After many challenges, Shina Chung, the new CEO of Kakao, made her first official appearance to disclose the company's performance. Her direction for Kakao this year is to focus on the 'essence'. Here, the essence of Kakao refers to its origin, the mobile messenger 'KakaoTalk'. More specifically, it focuses on the value of 'connecting relationships' created by KakaoTalk. This may sound somewhat superficial. We have organized what exactly Shina Chung means by the business direction Kakao intends to pursue in 2024.
- The reason Kakao focuses on the 'essence' of KakaoTalk is clear. It is believed to aid both growth and profitability. In fact, Kakao's core businesses based on KakaoTalk, advertising, and commerce, have both faced a macroeconomic stagnation over the past year. Despite this, these two businesses, focused on the essence, have robustly contributed to Kakao's performance. Detailed numbers are provided.
- You might wonder what the connection between the advertising business and the 'connection of relationships' based on KakaoTalk means. It becomes clear once you understand that Kakao sees not just ordinary users who use KakaoTalk as a messenger but also 'corporate customers' as another important group of users. Kakao aims to create touchpoints for these corporate customers to connect with their clients, based on KakaoTalk. The methods are explained.
- The same goes for the commerce business. Despite the immense challenge of the onslaught from Chinese platforms, Kakao Commerce believes the impact has been minimal and instead sees it as an opportunity. The reasons, along with the methods Kakao wants to employ in 2024 to enhance the 'context of relationships' based on KakaoTalk, are disclosed.
CHAPTER 1
What is the Essence of Kakao?
“This year, Kakao is marking a new beginning focused on business improvement and regaining trust, shifting from the expansion-driven management strategy that has been pursued up to now to concentrate on the essence of Kakao,” Shina Chung, the newly appointed CEO of Kakao, recently stated at the Q1 2024 earnings call.
Here, the essence of Kakao directly refers to its origin, the mobile messenger ‘KakaoTalk’. More specifically, it connects with the reasons you, the many readers of this article, might think of for using KakaoTalk. Indeed, all of us could, if we chose, delete KakaoTalk right now and install and use another messenger app. However, there are clearly reasons we do not (or cannot) do that.
We use KakaoTalk simply because it is the mobile messenger that everyone we know uses. While I occasionally receive business proposals via Facebook and Instagram DMs, get content curation from someone on Telegram, and chat with foreign friends on LINE, the reason I inevitably use KakaoTalk as my main mobile messenger is that it is the only platform that allows me to connect with everyone without needing any further explanation. It is no exaggeration to call it an app used by all of South Korea, given the convenience created by its massive traffic.
The perspectives of KakaoTalk users and CEO Shina Chung's view on the essence of KakaoTalk align closely. According to CEO Chung, the essence of KakaoTalk is 'connecting relationships'. This includes not only existing relationships with family, friends, and colleagues but also the potential to connect with people previously unknown.
In essence, KakaoTalk started as a 'messenger' service, connecting numerous relationships. With the vast user traffic, nearly equivalent to the population of South Korea, it has expanded into various businesses like commerce, content, and finance. This year, under the leadership of CEO Shina Chung, Kakao plans to focus on strengthening the platform asset of 'KakaoTalk' and the user experience represented by 'messaging'.
CHAPTER 2
Focusing on the Essence Leads to Growth
Kakao's decision to focus on the essence of KakaoTalk is clear. The belief that concentrating on the essence naturally leads to growth is the driving force behind this decision. As repeatedly communicated through CONNETUS, the past year has not been easy for Kakao. Both advertising and commerce, key businesses connected to KakaoTalk, have faced a prolonged slump over the last year. The increase in interest rates led to a liquidity crunch, prompting advertisers to tighten their marketing budgets. Additionally, the commerce sector could not escape the adverse effects of the economic slowdown accompanied by inflation.
Kakao predicts that the external difficulties will continue into 2024. CEO Shina Chung commented, "The external business environment surrounding Kakao in 2024 remains challenging. The advertising business faces a challenging situation with low prospects for economic improvement, and the rapidly changing landscape of the domestic e-commerce industry is adding uncertainty to our core commerce operations."
Despite the challenges, CEO Shina Chung emphasized that Kakao's advertising and commerce businesses are growing above the market average. The reason, according to her, lies in the successful discovery of new business models that align with the 'essence of KakaoTalk'. As examples cited by CEO Chung, in the advertising sector, 'Business Messages (message advertising)' and in the commerce sector, 'Gift Giving' have played significant roles, driving Kakao's performance even through tough times.
"Following the recent revisions to KakaoTalk, our TalkBiz (KakaoTalk-based advertising and commerce) operations have recorded performance exceeding market growth. This success is due to the expansion of relationships and interactions that were previously concentrated only in the chat tab, which has led to an increase in user traffic and the creation of new service spaces" - Shina Chung, CEO of Kakao, during the Q1 2024 earnings call.
CHAPTER 3
Utilizing KakaoTalk in Advertising Business
How exactly does Kakao utilize 'KakaoTalk' in its advertising and commerce operations? Let’s examine this based on Kakao's performance in the first quarter. In Q1 of 2024, Kakao's TalkBiz advertising revenue was 278.6 billion won, marking a 10% growth compared to the same period last year. According to the Ministry of Science and ICT, the online advertising expenses in 2023 increased by 3.6% year-on-year, a figure that KakaoTalk's growth significantly exceeds.
This quarter, one of the key reasons behind Kakao's successful advertising business was a significant turnaround in the sales of display advertising (DA) on KakaoTalk, known as "Bizboard." Although Bizboard's revenue had shown stagnant growth compared to previous quarters, this quarter it achieved an impressive 11% year-over-year growth, marking a successful rebound.
The reason for this success in the Bizboard business can be attributed to changes within KakaoTalk itself. Notably, the introduction of a new Cost per Time (CPT) based Bizboard product in the KakaoTalk friends tab has significantly increased its revenue contribution compared to the same period last year. Although demand for CPT products may be lower during off-peak hours, these times were substituted with performance-linked advertising spaces, thereby maximizing Bizboard revenue.
Despite previous stagnation in Bizboard business performance, another component that has consistently driven Kakao's TalkBiz advertising revenue with double-digit growth rates each quarter is the "Business Message." This quarter, Business Message revenue also showed a high growth contribution of 14% year-over-year.
The Business Message itself is an advertising product that closely follows the characteristics of 'KakaoTalk.' Advertisers can create a 'KakaoTalk Channel' business account on KakaoTalk. Business Messages allow them to advertise to users who have registered as friends on their KakaoTalk Channel, much like sending messages between friends.
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Particularly this quarter, Kakao noted a significant 12% year-over-year increase in the number of active Business Message advertisements, especially in the finance and commerce sectors. This growth has been attributed to the proactive addition of message advertising templates that reflect the specific needs of these industries. This strategy is also an extension of enhancing the connectivity for another category of KakaoTalk users—businesses. This focus on strengthening business relationships through tailored messaging is directly linked to the performance improvements observed.
"Active advertisers, including major advertisers using Business Message marketing, continue to increase. For financial advertisers, there is a need for various templates that match custom skins or content to prevent spam and smishing and to communicate more safely. Fulfilling this need has resulted in a continuous increase in revenue per advertiser. In the commerce sector, the provision of templates that allow for personalized messages and the use of rich images or videos is improving advertisers' reach and conversion rates. This is also resulting in a more substantial increase in revenue relative to the number of messages sent," said Shina Chung, CEO of Kakao, during the Q1 2024 earnings call.
Kakao anticipates a 4% growth rate year-over-year for the domestic online advertising market this year. According to CEO Shina Chung, the goal is to grow the TalkBiz advertising business above this average growth rate. Kakao plans to strategically enhance its product lineup to match the communication context and expand its advertiser base through extending relationships in the ‘business’ aspect, which is core to Kakao's services.
A key example of this strategy is the expansion of 'local business,' a focus that was continuously emphasized even during the tenure of the former CEO, Hong Euntaek. Kakao aims to massively recruit local small business owners, referred to as 'long-tail' clients, as advertising customers through its Business Message products. Kakao has also mentioned ongoing efforts to explore related solution models to support this initiative.
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CHAPTER 4
Utilizing KakaoTalk in Commerce Business
Kakao continues to enhance the essential context of 'connecting relationships' in another core business area, commerce. In the first quarter of this year, revenue from Kakao's 'TalkBiz transactional (commerce)' business was 243.5 billion won, marking a 5% increase compared to the same period last year. Kakao reported that the total transaction volume for commerce in the first quarter grew by 7% year-over-year to 2.6 trillion won, which is below the average e-commerce market growth rate of 10.7% for the quarter.
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Despite this, Kakao's own assessment is that its 'Gift Giving' service on KakaoTalk has carved out a unique niche. For instance, while the expansion of Chinese commerce platforms into Korea is seen as a crisis in various sectors of the e-commerce industry, Kakao's Gift Giving is less sensitive to price due to its value-delivering service nature. Moreover, it focuses on global high-end brands that are not chasing the low-cost strategies of Chinese platforms, thus limiting the impact of Chinese e-commerce platforms compared to other commerce platforms. CEO Shina Chung has evaluated that the entrance of Chinese platforms has a limited impact on Kakao's commerce platforms.
In the first quarter of 2024, the revenue from Kakao's Gift Giving increased by 6% year-over-year, and the transaction volume grew by 7%, slightly outpacing the overall growth rate of Kakao Commerce. Notably, luxury brands within the Gift Giving service showed a significant increase of 13% compared to the same period last year. The growth of physical product deliveries, including luxury brands, has been particularly noticeable over several quarters and was highlighted again this quarter.
Furthermore, the entry of Chinese e-commerce platforms has been seen as an opportunity for Kakao's advertising business. Kakao has been proactive in meeting the marketing needs of these platforms, securing their marketing budgets and positively impacting its Q1 advertising performance. This is also expected to have a positive impact on future advertising revenue growth. However, the impact of Chinese platforms could potentially have a negative effect on the advertising spending of existing domestic commerce advertisers, prompting Kakao to keep a close eye on overall market changes.
Returning to the topic of Gift Giving's growth this quarter, KakaoTalk's role was pivotal. Firstly, the activation of KakaoTalk's redesigned third tab, 'Open Chat', has led to an increase in gifts to acquaintances. According to Kakao, there has been an increase in the practice of sending light gifts to online friends in Open Chat rooms who share similar interests and tastes. Additionally, there is a rising trend of individuals purchasing limited-edition products from their favorite brands as gifts to themselves. This new pattern of gift purchasing is contributing to the profit growth of Kakao Commerce, and based on the expansion of friend relationships, Kakao plans to continue developing its Gift Giving business this year.
KakaoTalk plays a crucial role not only in Gift Giving but also across Kakao Commerce. The 'Business Message' mentioned earlier reappears here. Kakao is exposing products of sellers and brands that have entered the Marketplace Talk Store through KakaoTalk's fourth tab, 'Shopping'. Last year's redesign of the shopping tab has been actively promoting personalized product recommendation services to users, as well as encouraging users to add brands that match their tastes as friends on KakaoTalk Channels.
Going forward, Kakao plans to continue expanding its 'relational services' by offering various business solutions to Talk Store sellers based on expanding KakaoTalk Channel friend relationships. There is a growing number of sellers and brands that integrate KakaoTalk Channels with the Talk Store to conduct marketing based on friend relationships, which has been effective in increasing repurchase rates within KakaoTalk. As of the first quarter, the number of Talk Stores has expanded to 50,000.
Additionally, there is an increasing trend of Talk Store sellers engaging in real-time communication with buyers through Kakao Shopping Live, which facilitates the sale of products. In 2023, the number of live commerce sessions generating over 100 million won per session has more than doubled compared to the previous year. This growth in live commerce is a testament to the effectiveness of integrating real-time interaction and sales through Kakao’s platforms.
CHAPTER 5
Enhancing the Context of Relationships
As mentioned at the beginning, this year, Kakao is focusing on strengthening the context of 'connecting relationships,' which can be considered the essence of KakaoTalk. This focus stems from the belief that as relationships strengthened through KakaoTalk grow, so will the connected advertising and commerce businesses. This is because KakaoTalk's substantial traffic itself acts as a barrier to entry, making it difficult for competitors to penetrate, thus enabling Kakao to build a unique advertising and commerce business.
Moreover, Kakao’s TalkBiz business has the highest contribution to operating profits among Kakao's ventures. According to Kakao, the operating margin in the consolidated financial statements for the first quarter of 2024 was 6%, but the operating margin for the advertising and commerce business, based on Kakao's standalone financial statements, was significantly higher at 21.5%. Thus, strengthening KakaoTalk-based businesses is also seen as sufficiently contributing to improving Kakao's 'profitability.'
CEO Shina Chung has set two main goals to strengthen the connection of relationships through KakaoTalk this year. The first is to increase the frequency of users visiting KakaoTalk. The second is to enhance user stickiness (DAU/MAU ratio). More specifically, Kakao is preparing services that allow users, including businesses, to connect through stronger and more diverse relationships based on various usage patterns and activity data.
For instance, Kakao plans to discover new types of open chat rooms suitable for various purposes this year, to facilitate more convenient interest-based connections among users. Additionally, Kakao plans to sequentially improve and prepare features like social graphs, multi-profiles, and multi-accounts to encourage users to expand their friend relationships and use KakaoTalk more frequently.
As a result, Kakao expects to discover new business opportunities beyond the previously successful Business Message and Gift Giving, by strengthening the context of relationships. The essence of relationships entails more than just messages, gifts, and money transfers. Focusing on the essence of KakaoTalk, CEO Shina Chung emphasizes that Kakao can continue to enhance growth and profitability through diversification into various new items.
Of course, as the Kakao management team has acknowledged, the macro environment of the advertising and commerce markets this year is expected to remain challenging. Amidst this, Kakao has found its sharp differentiation from competitors in the national messenger 'KakaoTalk'. Can Kakao, under the leadership of CEO Shina Chung and emphasizing the essence of 'connecting relationships,' prove its growth through 2024? We conclude with CEO Shina Chung's vision for the new Kakao.
"The offensive by overseas online commerce companies in the domestic market is intensifying. Amidst this, we believe that Kakao can create cases where profitability is enhanced in our own playground through services focused on relationships and context that only Kakao can offer. Based on the solid performance of our core businesses like enhanced advertising and commerce within KakaoTalk, we will reinvest in high-growth businesses, creating a virtuous cycle that continuously increases the group's profits to a sustainable level. We will also continue our efforts to restructure group governance to focus on our core businesses." - Shina Chung, CEO of Kakao, during the Q1 2024 earnings call.
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