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Business trends

Startups vs chaebol: Inside South Korea's delivery wars

Competition heats up as coronavirus drives demand for meal and grocery services

The coronavirus pandemic has boosted demand for South Korea's emerging delivery market but it has also pushed up costs.   © Reuters

SEOUL -- Online grocery shopping has become a daily habit for Lim Soo-hyang. The 40-year-old homemaker orders milk, snacks, instant noodles and chicken for her six-member family through an E-Mart app on her smartphone. "It's easy and convenient. I can't remember when I last visited a brick-and-mortar store," Lim said.

Lim is far from alone. South Korea's delivery market was already enjoying healthy growth before the coronavirus pandemic. Now, the outbreak is further fueling demand for online grocery delivery services due to remote working and strict social distancing rules. According to the government data, combined sales of 13 online retailers increased 13.4% in July year-on-year, while that of 13 offline retailers fell 2.1%. E-Mart's online subsidiary SSG.COM had a strong first half, with sales jumping 61% to 618.8 billion won from a year ago.

This growing demand has attracted greater competition, and now conglomerates are looking to snatch market share from the delivery startups that cultivated the industry -- and foreign players, too, are looking to expand their footprint in the country.

Naver, South Korea's largest internet company, said last month that it will expand its grocery shopping service by bringing three retail chains -- Homeplus, GS Fresh Mall and NH Hanaro Mart -- as well as Hyundai Department Store's grocery unit onto its online platform.

Lotte -- the country's fifth-biggest conglomerate -- has also recently launched new services to tap the spike in demand. The incumbents in the battle are startups like Softbank-funded Coupang and Market Kurly.

Coupang's Rocket Fresh guarantees fresh groceries ordered one day will be delivered in time for breakfast the next. Established by Harvard-educated Bom Kim in 2010, Coupang is the country's largest ecommerce company by revenue. Its sales jumped 64% to 7.2 trillion won in 2019. Coupang raised $2 billion from Softbank's Vision Fund in 2018, having raised $1 billion from the fund in 2015.

Coupang declined to reveal how much groceries contribute to its revenue, though government data shows that food and groceries accounted for 20.8% of the 13 online retailers' revenue in July.

CFO Alberto Fornaro said last month that the coronavirus pandemic increased its transactions by 15%, but its costs for safety management are also expected to rise by 500 billion won this year. "We are willing to pay for the cost to guarantee safety for 50,000 employees working at our 2 million sq. meters of infrastructure," Fornaro said in an email to employees.

Market Kurly also delivers a wide range of selected groceries, bakeries and desserts for greater Seoul residents by early morning, targeting busy double-income families. Kurly introduced the concept of "early morning delivery" in 2015 with its full cold-chain system.

Former Goldman Sachs banker Sophie Kim founded the company in 2014. Since then, it has grown quickly. Its revenue reached 428.9 billion won last year, almost tripling from 157.1 billion won a year ago. The company's investors include Sequoia Capital China and Euler Capital.

Coupang has played a major role in cultivating South Korea's delivery market. To ensure next-day delivery, the company set up "rocket delivery centers" in 2014 and by 2019 had increased the number of such centers sixfold to 168.

"The extraordinary speed of rocket delivery is due to our technology and infrastructure as we prepare for products what customers are likely to order in advance," Bom Kim said in a statement in April.

Part of that technology is artificial intelligence. Coupang says it uses AI to predict customer orders and then stocks them at its delivery centers in advance. The company has about 2,000 engineers working to make sure the process runs smoothly.

But the game has become more complex as Naver wants to take a bite out of the market. The internet giant has a huge customer base and abundant cash reserves. Analysts say that Naver may attract customers by offering generous cashback promotions, even though it does not have its own logistics infrastructure.

"There's a big discount effect because of Naver Pay," said Park Jong-dae, an analyst at Hana Financial Investment, referring to the company's payment service. "It offers 2% to 3% of additional paybacks on top of 3% to 5% of basic paybacks. Most of them may come from fees paid by retailers."

Industry sources say that Naver has long dreamed of tapping the ecommerce market with its more than 40 million-strong customer base. "Ecommerce was CEO Han Seong-sook's long-held dream," said an executive in an ecommerce company familiar with the matter, asking not to be named.

Analysts say that Naver's ambition reaches beyond the local market, aiming to become a regional player in Asia.

"We added Amazon and Alibaba to the peer group [of Naver] as the company's commerce business is expected to become its future growth momentum," said Lee Seung-hoon, an analyst at IBK Investment & Securities. "We believe that the company can grow as a global platform covering South Korea, Japan and Southeast Asia when Line's management integration is complete."

To fight Naver's challenge, Coupang said it will focus on its customers. "We plan to give more benefits to our loyal customers," said Kim Se-min, a spokesperson for Coupang. "Our best strategy is to offer good services to our customers."

The coronavirus pandemic has further spurred growth in the country's food and meals delivery market, as people remain wary of going to restaurants and bars. The meal delivery industry has long been dominated by Woowa Brothers, which runs the country's largest food delivery app Baedal Minjok, or Baemin for short.

The industry is drawing international interest, with German giant Delivery Hero announcing in December that it plans to acquire 100% ownership in Woowa for $4 billion.

Delivery Hero plans to purchase an 88% stake in Woowa in cash, while the remaining 12% stake owned by Woowa management will be swapped with Delivery Hero's shares. Under the terms of the deal, Woowa will manage Delivery Hero's Asia Pacific business, including South Korea, Taiwan, Hong Kong, Vietnam, Singapore and Thailand.

The deal, however, is pending approval from the country's antitrust agency. Delivery Hero also operates Yogiyo, South Korea's No. 2 food delivery app. Woowa's revenue marked 565.4 billion won last year, soaring 80% from a year ago.

"The deal means that we are recognized globally. We set our eyes beyond the country, expecting to exercise our business skills in Asia," said an executive of Woowa, asking not to be named.

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