Coupang, The Fateful August Approaches

Fair Trade Commission Correction Order Disclosure
Legal Battle Likely to Begin
Q2 Earnings Announcement Approaching
Membership Subscription Fee Increase Also

South Korea's largest e-commerce platform, Coupang, is facing a critical turning point next month. Amid the offensive of Chinese direct purchase platforms (C-commerce) known as 'Altesh' (AliExpress, Temu, Shein), the second-quarter earnings report for this year will be released, and a price increase for the paid membership (Wow Membership) is scheduled. Additionally, the Fair Trade Commission's corrective order disclosure regarding unfair preferential treatment of private brand (PB) products is also imminent, putting the distribution industry on high alert.

According to the distribution industry on the 24th, Coupang is scheduled to announce its second-quarter earnings for this year on the 7th of next month. The key focus is whether the operating profit, which halved in the first quarter, will rebound.

① Coupang's Q2 Earnings Announcement... Will Operating Profit Rebound?

Coupang's sales in the first quarter of this year increased by 28% year-on-year to 9.4505 trillion won (7.114 billion USD; quarterly average exchange rate 1,328.45 KRW), surpassing 9 trillion won for the first time. However, operating profit during this period dropped by 61% to 53.1 billion won (40 million USD). This marks the first time since the third quarter of 2022, when quarterly operating profit turned positive, that Coupang's quarterly operating profit has decreased year-on-year. Net loss for the period was 31.8 billion won (24 million USD). This is the first quarterly net loss for Coupang since the second quarter of 2022, returning to the red after seven quarters. The loss reflects the impact of the acquisition of Farfetch in January this year, as well as intensified competition in the domestic online market from C-commerce platforms such as Ali and Temu. Kim Beom-seok, Chairman and Founder of Coupang Inc., noted during the first-quarter earnings conference call that "the entry barriers for Chinese e-commerce companies are low, and consumers do not hesitate to choose other shopping options with just one click."

Sales growth is expected to continue in the second quarter of this year. According to app retail analysis services WiseApp, Retail, and Goods, Coupang's estimated payment amount for Q2 is 10.7931 trillion won, a 25% increase compared to the same period last year. This is expected to be the highest quarterly performance ever. According to the Ministry of Trade, Industry and Energy, major online retailers have maintained double-digit sales growth since the beginning of this year. In particular, sales growth in April surged to 22%.

However, opinions are divided regarding Coupang's profitability improvement. While the influence of Chinese direct purchase platforms has waned compared to the first quarter, the effect of the Wow Membership subscription fee increase for new members is expected to reflect positively, leading to expectations of improved results in the second quarter. On the other hand, some predict that operating profit may decrease due to intense competition among e-commerce platforms, with Coupang responding through large-scale coupons and discount events. Furthermore, the aftereffects of Farfetch's integration are expected to continue into the second quarter. Chairman Kim stated, "Farfetch's journey is just beginning," adding, "We are focusing on approaching annual adjusted EBITDA profitability by the end of the year."

② Wow Membership Subscription Fee Increase... How Large is the '탈쿠팡족'?

Starting from the 7th of next month, the Wow Membership subscription fee for existing members will increase from 4,990 won to 7,890 won, raising concerns in the distribution industry about potential paid member churn. The subscription fee increase for new members was already implemented on April 13th.

As of last year, Coupang's Wow Membership had reached 14 million members. Domestic e-commerce competitors have strengthened marketing efforts to attract the so-called '탈쿠팡족' (탈쿠팡족 refers to customers leaving Coupang) by lowering their membership fees following Coupang's announcement of the membership fee increase.

However, the prevailing analysis is that the '탈쿠팡' movement will not be significant for now. Coupang still offers price competitiveness through Wow Membership, which provides free access not only to Rocket Delivery but also to the delivery app Coupang Eats and the online video service (OTT) Coupang Play. Despite the subscription fee increase for new members, Coupang's monthly active users (MAU) have increased, supporting this analysis. According to WiseApp, Retail, and Goods, Coupang's MAU rose from 30.9 million in April to 31.11 million in May and 31.29 million in June.

If there is no Wow Membership withdrawal, membership revenue will increase from 838.8 billion won annually to 1.326 trillion won. Shareholders of Coupang Inc., Coupang's parent company listed on the New York Stock Exchange, expect that even if there is some '탈쿠팡족,' the increase in paid revenue will be beneficial. For this reason, Coupang Inc.'s stock price surpassed $20 for the first time in a year and a half on April 12th (local time) and has maintained that level since.

③ Countdown to Fair Trade Commission's Administrative Order Disclosure

The Fair Trade Commission (FTC) is expected to notify Coupang of a corrective order and fines this month if it is found that Coupang unfairly exposed PB products at the top of search rankings by manipulating the search ranking algorithm. The specific details of the corrective order and the amount of fines will not be disclosed immediately. It is anticipated that after coordination between the FTC and Coupang, the information will be posted on the FTC website around next month. An FTC official stated, "The disclosure version of the resolution containing the corrective order will be posted on the website after consultation with the company (Coupang) regarding the deletion of trade secrets, so it will take some time."

Previously, on the 13th of last month, the FTC found that Coupang manipulated algorithms through methods such as ▲Product Promotion (fixing direct purchase and PB products in the top 1-3 positions), ▲Strategic Good Product (applying a 1.5x weight to the basic search ranking score of direct purchase fashion products and PB products), and ▲Cold Start Framework (fixing direct purchase and PB products in search rankings from 10th to 5th place at intervals for up to 15 items per search term). The FTC announced a provisional fine of 140 billion won.

Coupang has announced plans to file an administrative lawsuit against the FTC's disposition. It is expected to first file a suspension of execution request with the court to temporarily halt the effect of the FTC's corrective order. The suspension of execution request, equivalent to a provisional injunction in civil litigation, is classified as an urgent case. This means that legal battles between both parties are likely to begin next month. Moreover, from Coupang's perspective, if the suspension request is rejected, it will have to comply with the FTC's corrective order, so it is expected to prepare thoroughly.