The End of the Fast Delivery Competition: Three Directions for 'Logistics' in the Era of Coupang's Dominance

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  1. Coupang's dominance in the commerce industry has become a reality. As of 2023, Coupang has surpassed Naver as well as E-Mart and Lotte Shopping in performance, and it has come close to overtaking the total sales of the Shinsegae Group, which includes department stores, creating the new term "Cou-E-Mart-Lotte" that has become popular in the media. On one side, fast delivery services that benchmarked Coupang's 'logistics' capabilities, such as Naver's guaranteed delivery, SSG.COM's SSook1DAY delivery, and 11st's Shooting Delivery, are still competing in the market. The courier industry has also entered a full-fledged competition with Coupang. But how long can this competition last?
  2. The author predicts that this fast delivery competition will not last as long as it did in the past. This is because the moat created by Coupang is too deep, compounded by the macroeconomic headwinds making it difficult to sustain investment. We can understand why Coupang's dominance is likely to continue.
  3. However, there are still opportunities in a crisis. It's just that they need to be found in areas other than the 'fast delivery' battleground created by Coupang. The author has identified three areas of differentiation in logistics that focus on factors other than speed. In the past, there was a tendency to pursue the scaling of fulfillment businesses dreaming of a Coupang-style success model. Now, the approach needs to emphasize 'expertise' as much as scale, 'service superiority' as much as price advantage, and 'revenue diversification' as much as cost reduction. The details are provided in the article.
  4. Realistically, expecting the emergence of a second Coupang seems difficult for the time being. The environmental factors are different from when there was abundant liquidity, the e-commerce market was growing rapidly, and there was the pandemic - a once-in-a-century issue. Under the current low-growth environment, significant changes are unlikely to occur easily. However, this situation could present opportunities for smaller companies. The article explains how these opportunities can be found in the logistics sector.

CHAPTER 1: The Era of Coupang Has Arrived

"How did we ever live without Coupang?" Bom Kim, CEO of Coupang, has repeatedly declared that their mission is to create a world where customers say just that. And now, it seems that his wish has become a reality, as Coupang's influence is enormous not just in the domestic retail market, but across all of Korean society.

Coupang has already achieved the status of being number one in sales within the domestic retail sector by 2023. It has surpassed not only Naver, which was competing in the e-commerce sector, but also the retail giants E-Mart and Lotte Shopping. It has nearly caught up to the total sales of the Shinsegae Group, which includes department stores, popularizing the new term "Coo-E-Mart-Lotte" in the media. As is well known, Coupang grew its business based on its rapid delivery capability, symbolized by "Rocket Delivery." In the e-commerce industry, there has long been a trend of guaranteeing next-day delivery with services like Naver's guaranteed arrival, SSG.COM's SSG1DAY delivery, Gmarket's Smile Delivery, and 11st's Shooting Delivery.

Courier companies offering delivery services have also internalized the 'fulfillment' process, which involves pre-stocking inventory in logistics centers to create faster speeds. With Coupang intensifying its competition by moving beyond direct purchasing to full-scale fulfillment services for sellers through 'RocketWingrow', and now preparing a 'courier' service that picks up products from third-party sellers' bases for immediate delivery, the crisis has become a reality.

Despite the efforts of these competing companies, the moat created by Coupang, which has invested trillions of won in its logistics system and infrastructure, was deep. Coupang has continually added broader and faster services than its competitors, solidifying its barriers to entry. The burden became even greater for competitors during a period of consumer recession and liquidity deterioration due to interest rate hikes, as Coupang continued to pour in significant investment funds.

Therefore, now that Coupang's dominance has become a reality, it may be time to pose the question again. The keyword 'fast delivery,' which has been repetitively emulated in the form of catching up with Rocket Delivery for years, now needs to be replaced with something new.

CHAPTER 2: The End of the Fast Delivery Competition

It's true that the competition for fast delivery continues at this very moment. However, I believe that the fast delivery competition will not last as long as before. The reason is that it's becoming increasingly difficult for any challenger to overcome Coupang's dominance. Coupang's competitive edge comes from its 'complete vertical integration,' something no other domestic competitor in fast delivery services has attempted. Coupang handles almost all processes in-house, from product receipt to sales and delivery, enhancing operational efficiency and securing a competitive edge in pricing.

For instance, in a fragmented cooperation structure, each entity – the platform, the seller, and the courier service acting on their behalf – needs to secure their own profit when delivering an item. In contrast, as a standalone operator, Coupang only needs to avoid losses, even if the total profit it secures is less than the combined profits of these entities. This margin flexibility can directly translate into competitive pricing.

Moreover, since becoming the market leader in 2022, Coupang has exerted strong downward pressure on supplier margins based on its purchasing power. This reduced supply price has started to contribute to Coupang's stable operating profit from 2023. The gradually improving gross profit margin of Coupang's revenue supports this.

Therefore, to compete with Coupang, a platform needs to first secure a minimum amount of transaction volume. Platforms that fail to reach this threshold are essentially declaring their exit from the competition. For example, Lotte Group's Lotte ON has abandoned competing as a comprehensive platform and pivoted to a vertical strategy, which is indicative. Similarly, SSG.COM is recently focusing on vertical categories.

This trend is expected to spread to the courier industry soon. The courier industry cannot be profitable without economies of scale. In fact, CJ Logistics, the market leader, once had a market share of over 50% during its heyday in 2020.

However, with Coupang's growth, CJ Logistics' market share plummeted to 33.6% as of August 2023. In contrast, the market share of Coupang's delivery subsidiary, Coupang Logistics Services (CLS), has nearly doubled year-over-year to 24.1%, becoming the second-largest player. The market share of Coupang's courier service is expected to rise further, leading to the exit or consolidation of smaller courier operators, similar to the ongoing restructuring in the e-commerce platform industry.

In conclusion, in both the e-commerce and courier markets, the number of companies that can compete with Coupang will be very few, and as a result, the competition on 'delivery speed' will naturally conclude. Does this mean there are no more opportunities in the delivery market? I don't think so. While competing on scale may be difficult, new opportunities will emerge as the market grows. And here, factors other than speed will become the key competitive elements.

CHAPTER 3: Differentiation Beyond Speed: Capturing Vertical Markets

As emphasized several times before, the key factor behind Coupang's success was ultimately 'speed.' Initially, the word of mouth for Rocket Delivery was spurred by the kindness of the directly employed delivery personnel (Coupangmen), but the essence was the convenience stemming from the assurance that 'if you order today, it will definitely arrive tomorrow.' This has become the current standard in the market, and Coupang has forced its competitors to compete in their own way.

However, if competitors try to compete with Coupang on 'speed,' they are unlikely to win for various reasons mentioned earlier. Instead, they should seek differentiation in areas other than speed. While there was a tendency to pursue the scaling of fulfillment businesses dreaming of a Coupang-style success model in the past, now it is necessary to focus on 'expertise' as much as scale, 'service superiority' as much as price advantage, and 'revenue diversification' as much as cost reduction to create a sustainable business.

The most crucial thing is to define and preempt a market where you can be number one. The competitiveness of logistics comes from cost efficiency, which, in turn, is based on economies of scale. Thus, becoming the market leader is essential for survival, a fact that will not change in the future.

However, it's unrealistic to expect to be number one in the entire market. Therefore, it's necessary to segment the market, even if it's smaller, and to dominate that niche with expertise.

In the logistics industry, companies specialized in verticals are emerging. 'Hauzer,' specialized in furniture logistics services, is a prime example. Furniture is challenging to handle due to its bulk, weight, and variety of shapes. Particularly, the number of installation technicians is limited, and furniture demand varies, often leading to long wait times during peak seasons. Additionally, scheduling is challenging because visits must occur when customers are home.

Hauzer boldly took on this challenging market. It built a specialized logistics system and infrastructure and gathered a delivery workforce. As expertise was developed, customers naturally started to gather. Currently, Hauzer collaborates with Coupang's Rocket Installation, Naver, and E-Mart, working with all the top players in Korea's e-commerce market.

Innovating logistics processes and creating a gap in this manner is very orthodox yet challenging to implement. Especially competing against a company like Coupang, which has already achieved economies of scale, is very difficult. However, Hauzer even counts Coupang as one of its clients, thanks to its focus and differentiation in the furniture logistics vertical.

According to the Small and Medium Business Administration's system, Hauzer's revenue in 2022 was 27 billion won, a 32.9% increase from 20.3 billion won in 2021. Although it recorded an operating loss of 3.5 billion won in 2022, it is considered manageable with future revenue growth. The furniture-specialized infrastructure and systems that Hauzer has continuously invested in will serve as barriers to entry and strengthen its position.

While this is a specific example, I believe there will be more vertical logistics markets. The challenge is how to identify such potential markets. The remaining markets will likely be those where 'standardization' is challenging and not very large. Among these, you should select areas where some efficiency can be drawn through digital transformation. Then, you should differentiate through customized services.

CHAPTER 4: Differentiation Beyond Speed: Establishing Integrated Services

Indeed, due to the inherent limitations of verticals, there's a ceiling on market size. Therefore, it's necessary to expand services further based on the specialized areas that have been secured. There's a particular need to benchmark the B2B SaaS market. In this sector, it's common to see the job market service diversify into specific fields like hiring for developers, designers, etc., or to see the market expand by segmenting services based on functions like recruitment process management, reputation management, and interview programs.

In the logistics industry, there's a need to diversify businesses by extending services to heterogeneous areas related to specialized fields such as finance, IT, procurement, and marketing, in addition to logistics business. Particularly, in the future, aggregators that provide various functions integrally are likely to gain popularity.

Aggregators enhance efficiency and reduce complexity by offering an integrated suite of services. Amazon's FBA (Fulfillment By Amazon), Coupang's FLC (Fulfillment & Logistics by Coupang, aka RocketWingrow), and Naver's guaranteed arrival are based on this concept. They have gained support from sellers by integrally handling all logistics areas, including receiving, dispatching, delivering, and returning, as well as covering marketing (increasing exposure and generating revenue) and customer service. Naturally, once accustomed, it becomes difficult for sellers to leave. The moat that commerce market leaders have historically built to prevent sellers and suppliers from switching to competitors has been 'traffic' and 'transaction volume.' These factors not only provided greater revenue opportunities for partner companies but also allowed for cheaper consumer offers based on purchasing power, deepening the moat.

However, now it's necessary to identify elements that can retain partners beyond these areas. Specifically, it's crucial to target convenience areas that can compensate for a slight disadvantage in pricing and increase the switching costs for partners. This is applicable in the logistics industry as well. The focus should not be solely on cut-throat price competition, which has resulted in losses for everyone, but on identifying services that can substitute for pricing and, if necessary, integrating services beyond logistics.

CHAPTER 5: Differentiation Beyond Speed: Diversifying Revenue Models

Lastly, significant switching costs and providing integrated services offer an additional advantage: the opportunity to generate more revenue. Traditionally, the logistics industry focused on attracting more clients through low-price competition, reducing logistics costs through economies of scale to generate profits, and using this process to outcompete rivals.

However, now it might be more effective to accept losses or minimal profits in the logistics area if these can be offset through revenue from associated services. This is especially true for businesses that are not the number one or two players in the market.

Within the logistics sector, it's more advantageous to adopt an approach that allows for additional revenue from individual functions rather than integrated service pricing. This strategy not only increases revenue but also creates extra margin flexibility and competitiveness for the future. Of course, each individual function must provide tangible value to the customer. The rise of Logistics as a Service (LaaS) operators, who charge based on the use of individual logistics services and systems, is worth noting.

In the long term, the scope of monetization must expand beyond logistics. Here, the approach of the vertical commerce company 'WaveBox,' as introduced by CONNECTUS, can be informative. WaveBox offers a direct-from-source seafood service based on a logistics innovation that involves pre-settling the product price before fishermen go out to sea. Recognizing the limitations of market scale, WaveBox is planning phase two, including financial services and an information platform. For WaveBox, the direct-from-source seafood commerce is just a stepping stone to attract more fisheries and fishermen to the platform, potentially becoming users of future fishery financial services. If WaveBox solidifies a structure combining finance with a producer-linked model beyond logistics, it will create a formidable entry barrier for competitors. Similarly, logistics companies must continuously seek new revenue-generating opportunities beyond logistics to ensure the sustainability of their businesses.

CHAPTER 6: A Great Crisis Can Sometimes Turn Into an Opportunity

We may have already entered the stage where, as CEO Bom Kim said, we cannot live without Coupang. However, even if Coupang has revolutionized our lives, life might be less exciting if there were only Coupang. The market needs to continue evolving and changing dynamically for the overall utility of society to increase. Therefore, companies offering new paradigms besides Coupang need to keep emerging.

Yet, expecting a second Coupang to appear seems challenging for the time being. The environment is different now compared to when there was abundant liquidity, rapid e-commerce market growth, and the once-in-a-century issue of the pandemic. Under the current low-growth trend, significant changes are not likely to occur easily.

On the other hand, the current situation could present opportunities for smaller companies. As the overall pie has grown, customer needs have diversified. Markets that Coupang has not reached or deliberately chosen not to penetrate still exist.

Looking forward, I hope to see an increase in services that can interpret these market changes and offer differentiated business models. I also hope that this text can contribute, even if only slightly, to fostering such changes.

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