Shinsegae Group has emerged as a strong player in the online distribution market. It is the result of aggressive mergers and acquisitions (M&A) under the leadership of Shinsegae Vice Chairman Jung Yong-jin. In particular, he succeeded in acquiring eBay Korea, which was considered the biggest word in the M&A market in the first half of this year, providing an opportunity to be reborn as an 'online distribution giant'.
Shinsegae quickly overtook Coupang and climbed to second place in the e-commerce market share. Here is not the end. The company announced that it would continue its aggressive investment in the future and foreshadowed the possibility of additional M&As. Shinsegae's full-fledged move toward the e-commerce throne has begun.
the eyes and ears of the retail industry were all focused on the new world. On this day, Shinsegae officially announced its acquisition of eBay Korea with E-Mart. It decided to acquire an 80% stake in eBay Korea at a cost of about 3.4 trillion won. In April, it also acquired W Concept, an online fashion mall, for about 270 billion won.
M&A is a milestone that shows the direction of a company's future business. Looking at Shinsegae's recent M&A market, Shinsegae's future business strategy is clearly visible.
The future that Shinsegae envisions is to dominate the e-commerce market. That is why it invested close to 4 trillion won in the first half of this year alone to acquire online-specialized companies.
From the edge of e-commerce to the center, the reason why Shinsegae is focusing on online is simple. This is because the weight of shopping has already shifted online. Let's take a look at the online shopping trends announced by Statistics Korea. In 2018, online shopping transactions exceeded 100 trillion won for the first time. At the time, the majority of evaluations were that the market was growing faster than expected, but recently, the growth potential has accelerated.
The spread of the novel coronavirus infection (COVID-19) has acted as a 'catalyst'. Online shopping transaction amount recorded 161 trillion won last year, sparking a boom in non-face-to-face consumption. Considering the trend in the past, some predict that the 200 trillion won mark this year will be easy.
Shinsegae didn't just look at the online market. In 2018, Shinsegae started spurring the online market. At that time, Vice Chairman Jung Yong jin established SSG.com, a new corporation dedicated to online shopping, emphasizing that the future of the group is 'online'.
By attracting 1 trillion won in investment and creating an online only logistics center 'Neo', they put all their efforts into online conversion. The results were worthy of being evaluated as successful. Within a short period of time, SSG.com was quickly gaining traction. SSG.com posted 4 trillion won in transaction value last year.
However, the gap with competitors has widened and became a problem. The trend of Coupang's transaction amount can be seen at a glance. Coupang’s transaction amount, which was only 1 trillion won in 2013, has grown to a whopping 20 trillion won last year. This means that it has continued to grow so steeply that it cannot be compared with SSG.com.
Moreover, earlier this year, Coupang succeeded in listing on the New York Stock Exchange. In the process, it secured about 5 trillion won of live ammunition and even declared that it would continue to aggressively expand its logistics infrastructure. As time went on, it was obvious that the gap between Coupang and Shinsegae in the e-commerce market would widen.
Although Shinsegae formed an e-commerce alliance through a strategic alliance with Naver, it was evaluated that this method was insufficient to increase the power of its platform like Coupang. As such, Shinsegae seemed to be gradually pushed to the edge of the e-commerce market.
It was only recently that the opportunity for a rebound was prepared. As he got his hands on eBay Korea, which was on sale at the same time, he moved to the center of the e-commerce market at once.
Shinsegae Group’s total online shopping transaction amount, including Gmarket and Auction, operated by eBay Korea, amounted to about 24 trillion won. It has raised its market share in e-commerce to the second place in the industry. It means that we finally have the power to compete with Naver and Coupang. The group's luck in acquiring eBay Korea.
Through the acquisition of eBay Korea, Shinsegae is evaluated to have cast an 'online game' that effectively put the group's fortunes on the line. The amount of the acquisition speaks for itself. The 3.4 trillion won Shinsegae spent on the acquisition of eBay Korea is the largest amount in the group's M&A history. Previously, the highest price was 740 billion won when it took over Wal-Mart, which was struggling in the Korean market in 2006.
With the acquisition of eBay as an opportunity, Shinsegae expressed its plan to completely transform the group's business structure to 'online and digital'.
Our goal is to become number 1 in e-commerce. Over the next four years, more than KRW 1 trillion will be invested in the expansion of an online-only logistics center, and offline stores such as E-Mart will also be transformed into bases for online logistics, thereby maximizing the group's logistics competitiveness and achieving its goal.
Of course, it's not all about rosy prospects. When a large M&A is completed, it is the ‘winner’s curse’ that follows like a tag, and Shinsegae is not avoiding this controversy.
The background to this claim is the question of eBay Korea's growth potential. If you simply list the numbers, there is no problem, but if you look closely at the ‘flesh’, the story is different.
In the case of eBay Korea, it is the only e-commerce industry to make a profit, but it has shown sluggish growth. It is analyzed that this is why the eBay headquarters in the US decided to sell it this time. First of all, eBay Korea's transaction amount as of last year was 20 trillion won, ranking third in the e-commerce market. Performance isn't bad either. Last year, sales and operating profit recorded 1.3 trillion won and 85 billion won, up 19% and 38% year-on-year, respectively. It also has the strength of being the only e-commerce company to make an operating profit with Auction and Gmarket, which it acquired in 2001 and 2009, respectively.
But when you look at the rate of increase in transaction volume, the story is different. The rate of increase in transaction volume, which once increased by more than 10% annually, has fallen to single digits (about 5%) last year.
An industry official said, "More than anything else, the single-digit increase in transaction volume despite the fact that online shopping malls benefitted greatly from the COVID-19 crisis last year is the same as a negative growth." "Ebay Korea, which has not adapted to the fast delivery trend, is virtually completely It has been pushed back by Coupang and Naver. "Isn't the eBay headquarters in the US also decided to sell it because they decided that there was no chance of winning any more?" he said.
In this regard, there is a controversy surrounding the acquisition price “bubble” surrounding eBay Korea. This means that Shinsegae took over eBay Korea, which has virtually no tangible assets such as a logistics center, at an excessively high price while its growth potential is declining. Currently, eBay Korea has only three logistics centers.
Park Jong-dae, an analyst at Hana Financial Investment, said:
“It is known that Coupang is currently operating about 100 logistics centers. In order to compete with Coupang, not only a huge investment in logistics infrastructure, but also extensive promotions are required. In addition, as Coupang announced that it would invest 5 trillion won in the medium and long term, Shinsegae should invest at least 2 to 3 trillion won in logistics. The outcome is difficult to predict, but it will be a very tough fight and performance may deteriorate in the process.”
Will you escape the winner's curse?
However, there are also a lot of anticipation towards Shinsegae, which has undergone a major change. Lee Jin-hyeop, an analyst at Yuanta Securities, analyzed that eBay Korea failed to invest in logistics infrastructure and eventually fell behind in the fast delivery trend because of its interests with the headquarters.
In fact, it is estimated that about 1.3 trillion won has been recovered from eBay Korea to eBay headquarters in the United States over the past five years. In fact, they could not afford to invest in logistics. This analyst predicted, “The situation will change rapidly in the future as Shinsegae becomes the owner.”
Shinsegae also expected to benefit from the synergy of the acquisition. Shinsegae SSG.com has not been able to expand its online only logistics infrastructure as quickly as Coupang, but it is analyzed that there are several reasons for this. This is because of the factory utilization rate.
Analyst Lee said, “If you enter the market as a latecomer and build large-scale online-only logistics centers blindly in a situation where the transaction amount is not large, it will only increase inefficiency. There is virtually no need to worry. It may take some time, but Shinsegae will also spur the expansion of logistics infrastructure in the future and increase its market share.”
Hi Investment & Securities analyst Lim Soo yeon also gave a similar outlook. Shinsegae SSG.com, which has a strength in food delivery, and eBay Korea, which has a strength in industrial products, expressed the view that they will create synergy in the long term.
However, he said, “Currently, SSG.com’s online only logistics center Neo has a very high utilization rate. It is estimated that more than 90% of the products come out, so in the short term, it is not easy to proceed with eBay Korea’s fast delivery using Neo. “I think the market share will rise,” he said.
Shinsegae is also considering how to maximize synergy using eBay Korea. As the acquisition of eBay Korea has not been completed yet, we are taking the time and thinking carefully.
Shinsegae's acquisition of eBay Korea is expected to be completed early next year. This is because it usually takes about 6 months from the acquisition contract to finalization.
An official from E-Mart, the main body of eBay Korea's acquisition, said, "During this period, we will consider various additional measures to increase our influence in the market."
In this process, if necessary, the possibility of trying a new M&A is also open, attracting attention. An official from Shinsegae emphasized, "We will focus on the group's capabilities and assets to further expand online channels and secure digital technology for on-offline synergy."
Lotte vs Shinsegae, who was the wiser choice?
After announcing the takeover of eBay Korea, Shinsegae Vice Chairman Jung Yong jin emphasized that “how much, not how much, can be made is the standard for decision making.” In the end, Shinsegae decided to take over, but some in the industry are paying attention to whether Shinsegae has failed to bet, citing the difference in the amount of acquisition written by Lotte and Shinsegae as an example. Lotte competed with Shinsegae until the end to acquire eBay Korea. Shinsegae, which paid a higher price, eventually became the final buyer.
It has not been confirmed exactly how much Lotte has set for the acquisition, but it is estimated that it has written approximately 2.5 trillion won. Compared to the amount Shinsegae spent (about 3.4 trillion won), the difference is close to 1 trillion won. It is pointed out that there is a problem that the difference in the amount spent between companies competing for the acquisition until the end is this much.
A distribution industry official said, “Looking at the past, Lotte has a lot of experience in making many bigger M&As than Shinsegae, such as the acquisition of chemical affiliates of Samsung Group. In light of that, it is difficult to conclude that Shinsegae's eBay Korea betting was successful."
As Shinsegae also thought carefully about these controversies, there is also an interpretation that the announcement of the acquisition of eBay Korea was delayed than originally planned. In fact, Shinsegae Vice Chairman Jung Yong-jin even said that immediately after the acquisition of eBay Korea, he seemed to be conscious of this, saying, "The standard of decision making is not how much, but how much it can be made." Whether one of the two companies made the wise choice remains to be seen.
