Lotte and Shinsegae are expanding their businesses from direct purchase to open market. Their plan is to carry out a two-track strategy that involves mail order and collection of brokerage and expand the interface for online shopping and provide an assortment of various products.
According to the industry, Lotte Shopping has applied an open market platform to its online mall “Lotte ON” that will be launched officially on the 28th. In order to do this, it added electronic financial business as one of business purposes of its articles of association during a general meeting of shareholders that took place last month. It needs to register itself as an electronic financial business in order to carry out an open market business where it would store consumers’ payments and send payments to sellers whenever transactions are complete.
It was confirmed that SSG.com, which is run by Shinsegae, recently received documents from Financial Supervisory Service (FSS) in order to register itself as an electronic financial business. Prior to receiving documents, SSG.com revised its terms such as establishment of mail order brokerage service and get-out clause last month and basically announced its plan to enter open market. It introduced an airline ticket reservation platform based on open market and it is expected to make its plan to enter open market official shortly.
Open market is a market that directly connects consumers to sellers. By providing a platform for mediation, it receives certain amount of commission from sellers. It goes against the recent quick delivery trends based on direct purchase. The reason why major distributors still favor open market is because it is easier to increase volume and improve profitability using open market.
Unlike direct purchase that requires an enormous amount of funds for building infrastructures for distribution and others, open market allows a business to easily expand its assortment of products while earning a stable amount of profit from sales commissions. Lotte and Shinsegae are planning to supplement their profitability by launching open markets while maintaining their current direct purchase business models.
“We are not going to compete with companies that are preserved by their shareholders even though they make more than a trillion dollars in deficit annually.” said Chairman Shin Dong-bin of Lotte Group while devaluing Coupang’s direct purchase business model circuitously. His statement indicates that Lotte will not focus on losing businesses but strengthen its online business. “While maintaining business models such as early morning delivery service that follow recent market trends, we are also going to focus on open market from an aspect of cost control.” said a representative for Lotte Shopping.
SSG.com, which succeeded in external growth but suffered $67.5 million (81.9 billion KRW) in operating loss last year, also needs to improve its profitability in an urgent manner. As a FI (Financial Investor) which invested $825 million (1 trillion KRW) is participating as a major shareholder, SSG.com needs to establish models that can convert its operating loss into operating profit and increase its turnover at the same time.
Also, Lotte Shopping and SSG.com are looking to drastically expand their lineups of products that have limits if direct purchase is the only one available and expand their influence within South Korea’s online market.
GMV (Gross Merchandise Volume) of eBay Korea, which runs G-Market and Auction, is $11.5 billion (14 trillion KRW) and is responsible for 12.0% of the entire turnover of South Korea’s online shopping market ($111 billion (134 trillion KRW)). GMVs of 11STREET and Naver Shopping, which are other open market businesses, are also around $7.42 billion (9 trillion KRW).
On the other hand, the entire turnover from online businesses of all subsidiaries of Lotte Group is estimated to be only $8.25 billion (10 trillion KRW). The turnover was only $5.77 billion (7 trillion KRW) in 2018. SSG.com’s turnover was also only $2.37 billion (2.8732 trillion KRW) even though SSG.com recorded a growth rate of 19.7%. Ultimately, Lotte and SSG.com need to carry out open market businesses in addition to their current online businesses in order to compete with current e-commerce companies in turnover.
Lotte is planning to achieve $16.5 billion (20 trillion KRW) in turnover by 2023 and is looking to become a leader in offline and online markets. SSG.com is also looking to achieve higher turnover this year at $2.97 billion (3.6 trillion KRW) than last year.
It will be interesting to see how eBay Korea and 11STREET, which are leaders in open market, react when Lotte and Shinsegae that are the two powerhouses of South Korea’s distribution industry turn their heads towards open market and carry out offensives. Open market stores will have increase number of powerful channels for selling products. Some predict that there can be changes to commission rate and others for major open market businesses in midst of competitions.
Staff Reporter Park, Junho | junho@etnews.com