CPNG - Coupang's New Eats Program Is Positive

2023-04-19 14:11:58 ET

Summary

• CPNG is a top e-commerce company in Korea with a strong logistical infrastructure moat and a focus on mobile app development.
• Coupang Eats is introducing a 5-10% discount for WOW members at participating restaurants, which could result in increased engagement and GMV growth.
• Fulfillment and Logistics will allow CPNG to expand 'selection' and more efficiently grow GMV while also improving the end-user experience.

Description

I recommend a buy rating for Coupang (CPNG). CPNG has become one of the top e-commerce companies in Korea by concentrating on mobile app development and putting resources into building its own end-to-end in-house logistics operations. This approach has resulted in a fast-paced growth for the company and has allowed it to provide its customers with a pleasurable and convenient online shopping experience. There are 2 key areas that I am focusing on for CPNG in this post: Coupang Eats and Fulfillment & Logistics. I think the company's continued success in these two areas, along with its strong logistical infrastructure moat, has allowed it to maintain and grow its market share in South Korea. In my opinion, the gradual increase in market share will ultimately result in significant enhancements in profitability, primarily due to the advantages of economies of scale.

Coupang Eats

Recently, an announcement on the Coupang Eats app suggested that Coupang WOW members could receive a 5-10% discount on each order from restaurants that participated in the 'WOW discount' program. Coupang WOW members can get a 5-10% discount at participating restaurants every time they place an order, and the discount does not appear to have any limits on how often this can be done. The new perk is being rolled out slowly, so for now it's only available in specific locations. Some investors may have been put off by the fact that CPNG's food delivery service's profitability appears to have increased at the expense of Eats' GMV growth, but I believe this change has allayed their concerns. The company's product commerce has been increasing profitability with sustained market share gain momentum on the GMV level. While the rate of growth is still unknown, I believe CPNG rolling out this program would put growth on steroids. Importantly, I believe the profitability of CPNG should be viewed as a whole, instead of just one segment (i.e. product commerce). I expect Coupang to keep looking for ways to profit from its robust commerce ecosystem, which Eats has helped improve.

Just to give additional flavor of how impactful this 5-10% discount is: With a 5-10% discount, WOW members would essentially be exempt from delivery fees, which is especially appealing in light of the rising consumer burden of delivery fees. A WOW member would only need to place two monthly orders to cover the W3,000 delivery fee. Since we are on this topic, readers should also know that the leading Korean food delivery platform, Baedal Minjok, also launched a similar service with limited availability in March. With the Affordable Delivery option, riders can accept multiple orders at once and charge lower delivery fees to customers and restaurants than with the standard 1P delivery, where each rider delivers only one order at a time. Nonetheless, I perceive the value proposition to be less attractive because it involves sacrificing delivery speed.

Coupang's Rocket WOW membership has remained unchanged at W4,990 (approximately US$4) per month since the first price increase in December 2021. Despite the increase, I think the membership is worth more than W4,990 because of the benefits it provides, such as free next-day shipping, access to Rocket Fresh, free OTT service, etc. Proof positive of the membership program's success is the 2 million increase in users from 4Q21 to 4Q22, bringing the total number of users to 11 million. In my opinion, the new Coupang Eats perk will do even more to keep users within the CPNG ecosystem. Given the company's stated goal of growing its ecosystem by applying the success of its core commerce business to unrelated fields, I see this improvement in the value proposition as providing solid justification for a future membership fee increase.

Financially, I expect this Coupang Eats program to have a positive effect on engagement and, by extension, GMV, as I believe consumers to be quite price sensitive. However, this service is likely to have a negative effect on GPM because CPNG will not be receiving delivery fees from customers. I do not believe it is possible to make an accurate prediction of the financial impact at this time due to the lack of information regarding the percentage of overlap between Coupang Rocket WOW members and Coupang Eats users and the pace at which the service is being expanded. The best way to evaluate this is simply looking at CPNG over GMV growth over the coming quarters, as that is the best way to value CPNG, in my opinion.

Fulfillment and logistics

Based on the CEO's comments about increasing 'selection' during 4Q22 earnings, I believe that CPNG plans to use its existing 1P infrastructure to solve the problems faced by 3P merchants through Fulfillment and Logistics [FLC], thereby expanding 'selection' and more efficiently growing GMV. Products from FLC have a 'Jet Delivery' label and can be expected to arrive the day after they are ordered, much like the 1P products labeled with a 'Rocket Delivery' label. Jet Delivery products have the same advantages for WOW members as Rocket Delivery products.

I like this service because I do a lot of online shopping. From a business analysis point of view, I think that by providing such a solution, CPNG comes out on top because the end user has a better overall experience. Strong GMV growth is indicative of CPNG's success, which follows logically from the company's focus on providing a first-rate user experience.

Risks

A rise in interest rates could reduce consumer spending and stock value, and inflation could hurt retailers, both of which would have a negative effect on CPNG. A slower-than-anticipated increase in the FLC mix could also have an adverse effect on the company's bottom line. Changes to the reopening environment brought on by the COVID-19 pandemic may also be a threat to CPNG expansion. Furthermore, any shift in CPNG's dedication to new initiatives may affect the organization's long-term profitability.

Summary

I recommend a buy rating for CPNG. The company's focus on mobile app development and building its own end-to-end in-house logistics operations has resulted in rapid growth, which has allowed it to provide a pleasurable and convenient online shopping experience. The new Coupang Eats program, which offers 5-10% discounts to WOW members at participating restaurants, is likely to have a positive impact on engagement and GMV, although it may have a negative effect on GPM. The Fulfillment and Logistics program is expected to increase selection and more efficiently grow GMV. While there are risks associated with rising interest rates and inflation, I believe that the company's focus on providing a first-rate user experience will continue to drive strong GMV growth, making CPNG a strong buy.

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