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South Korean food delivery gets a government-backed challenger

Publicly-run app aims to inject competition into fast-growing market

South Korea's food delivery market has grown explosively amid the pandemic, but it is dominated by just two players.   © EPA/YONHAP/Jiji

SEONGNAM, South Korea -- The government of South Korea's most populous province is set to launch a public-private food delivery app in hopes of loosening the iron grip that the two dominant players have on the fast-growing market.

South Korea's food delivery market has grown explosively as the coronavirus pandemic spurred a rise in remote working and put a damper on dining out. According to data from market tracker WiseApp, food delivery sales hit 1.2 trillion won ($1.05 billion) in August, up 28% from the previous month and the highest monthly total ever.

The market, however, is controlled almost entirely by two players, Baedal Minjok and smaller rival Yogiyo, owned by Delivery Hero of Germany.

Into this fray comes the Gyeonggi government's new app Delivery Express, or Baedal Teukgeup in Korean. The province partnered with NHN Payco Consortium to develop the app's interface and technology, and has budgeted 2.1 billion won ($1.8 billion) this year for the project.

Jang A-reum, the leader of the government project, says the app is in the final testing stage and set to enter full-fledged operations later this month. Jang says that Gyeonggi has signed up 4,300 businesses on its platform, exceeding the target of 3,000.

"Our goal is to create an alternative, to reduce the burden on merchants and provide consumers with another option," Jang told Nikkei Asia in an interview at her office.

Delivery Express will start pilot service of the app in three cities: Hwaseong, Paju and Osan. The province plans to expand the service to 31 cities and counties in Gyeonggi Province within the next two years, Jang said.

Gyeonggi Province, which surrounds the capital Seoul, began work on the app in April, after the industry's dominant player, Baedal Minjok raised the fees restaurants pay to display banner advertisements on the app.

The hike led to criticism from restaurants, who argued that they could not afford to pay higher fees at a time when their incomes were shrinking as fewer South Koreans dined out due to coronavirus concerns, leaving delivery as an increasingly important income stream.

Gyeonggi Province Governor Lee Jae-myung -- an outspoken liberal politician considered a possible contender in South Korea's 2022 presidential election -- accused Baedal Minjok of taking unfair advantage of small businesses and vowed to spearhead a public option in his province of 13 million people.

Other gig economy platforms, such as ride-hailing apps, have faced pushback in South Korea, both from regulators and workers who accused them of skirting regulations.

Yoyigo told Nikkei Asia that it is "difficult to specify what kind of impact" a public app will have on the food delivery market. 

"Delivery apps are services that can't carry out their business in the long term if they do not form a cooperative relationship with their partners," the company said. "Therefore, we will work tirelessly for the development of the industry and co-prosperity within the domestic market, and we will continue to make various efforts into respecting our relationship and coexistence with partner businesses."

Baedal Minjok did not provide a response to Nikkei Asia's request for comment as of publication. 

Lacking the established customer bases and marketing clout of the big players, Delivery Express is relying on financial incentives to attract merchants and customers to its platform. Gyeonggi Province provides a 10% subsidy on all transactions through what the government calls "regional currency" -- vouchers distributed to the public that can only be used at local businesses. Delivery Express also charges merchants commission fees of less than 2%, which Jang says is the minimum to cover operating costs. Baedal Minjok charges 5.8%.

Baedal Minjok also charges merchants a monthly fee of 88,000 won to display banner advertisements on the app; Delivery Express charges no fee for such banners.

Baedal Minjok started operations in 2011 and Yogiyo started the following year. Yogiyo is owned by German firm Delivery Hero, which is also moving to acquire Baedal Minjok. The proposed $4 billion acquisition is under assessment by the Korea Fair Trade Commission; if completed, it would give the newly created entity a more than 90-percent share of South Korea's online food delivery market.

Commission Chairperson Joh Sung-wook said during a National Assembly hearing in October that the Commission will render its decision before the end of this year. Joh said that the deal would create an effective monopoly, and that public sentiment appears against approval.

Experts, meanwhile, have raised doubts about Gyeonggi Province's ability to successfully market the app, and whether it will be able to carve out space in the market.

"Even if Gyeonggi Province's app can contribute to market efficiency, the problem is whether a public app can compete on the market, if they'll be able to attract customers and manage merchants," said Yi Jong-hyun, a professor of management studies at Gachon University.

Yi said that size is necessary for a delivery app to be successful, as customers will be seeking a wide variety of choices, and merchants will only want in if an app has a large customer base.

"Baedal Minjok has made efforts to creatively market and provide services, working continuously to satisfy customers. Along with mastering the simple technology behind the app, Gyeonggi Province will have to figure out how to market it successfully," said Lee Sung-hoon, a professor at Sejong University School of Business.

Jang says she knows Delivery Express faces an uphill battle toward establishing a foothold in a market dominated by two powerful players. The app's goal, she said, is not to unseat the heavyweights.

"We hope to create a sustainable platform that can act as a check on the monopolistic tendencies of the market," Jang said.

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