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Flea market operator Mercari in search of new hit services

Former Japanese unicorn sinks deeper into the red on heavy US spending

Mercari is currently in a "growth phase," CEO Shintaro Yamada, right, said at the earnings event Thursday.

TOKYO --Mercari's first earnings as a publicly traded company highlight its dependence on the core flea market business in Japan, as the company explores new growth engines through trial and error.

Flea market app provider Mercari sustained a 7 billion yen ($63 million) net loss in the year ended June, far worse than the previous year, as vigorous spending in its most prized market of the U.S. squeezes earnings from core Japanese operations.

After drawing great interest as a unicorn -- an unlisted business valued at more than $1 billion -- Mercari debuted on the Tokyo Stock Exchange's Mothers market in June, and reported its first earnings as a publicly traded company on Thursday.

The net loss for the 12 months ended June compares with 4.2 billion yen in red ink logged a year earlier. Sales jumped 62% to 35.7 billion yen, driven by the flea market business in Japan. Downloads of the Mercari flea market app reached 75.7 million, up 36% from a year earlier, while consumers who use the service at least once per month increased by 2.3 million to a total of 10.75 million.

But its U.S. business has been a drag on earnings, as Mercari spent proceeds from its stock debut as well as earnings from its Japanese business on advertisements and other efforts to boost brand recognition in America.

Mercari does not report overseas earnings, but the difference between group results and parent-only earnings in Japan shed light on its heavy reliance on its core domestic business. The company suffered a 4.4 billion yen operating loss group-wide, while its parent-only operating profit soared 65% to 7.4 billion yen. This suggests that overseas operations and Japanese subsidiaries incurred a combined operating loss of 11.8 billion yen -- erasing all of the parent's profit.

"Our goal at Mercari is not to boost profitability for the short term but to grow over the medium-to-long term," CEO Shintaro Yamada said at a news conference.

The company has an overwhelming presence in Japan's online flea market sector, and that core operation's earnings power is growing.  But it has yet to develop comparable new businesses -- more than half of Mercari's revenue comes from fees on the flea market app.

The Japanese market for flea market apps surged 58% on the year to 483.5 billion yen in 2017, according to the Ministry of Economy, Trade and Industry. While demand keeps expanding, the pace of user increases is bound to slow down sooner or later.

With Mercari now facing shareholder scrutiny as a publicly traded company, Yamada pointed to travel-related services as a potential new core operation.

Details of the business, to be launched by subsidiary Souzoh in the fall, have not been revealed. But rather than traditional travel services like arranging and selling tours and tickets, it will likely offer a platform for travelers to interact with one another through a mobile app.

Mercari normally focuses on synergies with the flea market business when creating new operations. But the travel service will be developed as a stand-alone business from scratch.

Smartphone payment, to be started this fiscal year by subsidiary Merpay, is another focus area. That service will likely be linked to various group operations, so that purchase data from the flea market platform may be used to assess the creditworthiness of a particular user, for instance.

Mercari is pouring resources into developing new operations, such as expanding the staff at Merpay to 175, while pulling out from businesses struggling to expand their user base. The company discontinued in May the Mercari "Atte" service for users in the same area to interact face-to-face, and will jettison by the end of August three operations including a flea market specializing in name-brand items.

"An average company may keep these operations, but we decided to be rigorous because we aim for the fast growth that the flea market app saw," Yamada said. "We will continue to quickly seize opportunities and swiftly pull out of businesses that don't fly."

But the new businesses on which Mercari has set its sights will draw intense competition. U.S. e-commerce giant has its own smartphone payment service, for example, while search-engine provider Yahoo Japan and virtual-mall operator Rakuten are strengthening their own mobile-pay services.

Mobile-chat app operator Line also sees payment service as a growth engine. The company unloaded a 51% stake in its mobile virtual network unit to SoftBank Group and has withdrawn from taxi-hailing operations in order to narrow its focus.

Mercari is actively recruiting talent, with plans to hire 1,000 over the next three years worldwide. As competition for information technology specialists gains steam, a key question will be how to allocate staff to varying operations.

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