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Strategy / Korea
                                                                                                                    9 June 2014

 Amazon in Korea: what it means                                                             Online Shopping

 • Amazon’s widely expected entry into Korea could reshape the
   country’s e-commerce industry value chain
 • Market leaders would likely benefit from the resulting shifts in
   retail channels, consumer behaviour, and commerce platforms
 • Main beneficiaries should be online retailers, integrated
   payment gateways, and niche cloud-computing service providers

                                             Cloud computing. With the                    should benefit from the ongoing
                                             potential arrival of Amazon, we              migration to online and mobile
                                             expect its cloud services in Korea           shopping and the growth in mobile
                                             (Amazon Web Services [AWS]) to               commerce as users’ shopping
                                             expand their B2B customer base and           experience improves. In our view,
Thomas Y. Kwon                               spur demand for IT outsourcing               Amazon’s entry to Korea could
(82) 2 787 9181                              services, backed by their cost               accelerate this trend, but in a limited
yskwon@kr.daiwacm.com                        efficiency, global coverage, and             way. GS Home Shopping
                                             services such as data mining.                (028150 KS, KRW237,800, Buy
Sang Hee Park                                                                             [1]) looks well placed to tap
(82) 2 787 9165
sanghee.park@kr.daiwacm.com
                                             Payment gateways (PG). Korean                opportunities arising from the
                                             consumers’ increased exposure to             ongoing industry evolution.
Mike Oh                                      overseas direct purchase shopping
(82) 2787 9179                               online is likely to force domestic e-        Korean companies are likely to ramp
mike.oh@kr.daiwacm.com                       retailers to introduce PG services           up IT spending on cloud services
                                             similar to Amazon’s 1-Click service,         after experiencing AWS, and
                                             and encourage the emergence of               domestic telecoms operators and
■ Summary                                    alternative PG platforms for mobile          niche cloud-computing service
In this report, we look at the               and online payments.                         providers should further monetise
implications of the potential entry of                                                    their captive enterprise customers
Amazon into Korea’s e-commerce               Logistics. We believe Amazon’s               by capitalising on their strong IT
market. We examine how the                   entry would have a limited impact            infrastructure and well-customised
industry value chain is likely to            on revenue and earnings in Korea’s           B2B solutions. Hence, we expect KT
change, and discuss which                    parcel-delivery market, given price          (030200 KS, KRW29,450,
companies would be the main                  competition among existing players,          Outperform [2]) to benefit from
beneficiaries — and those that are           sufficient capacity to absorb                growth in its target markets.
likely to face stiffer competition.          additional delivery demand, and the
                                             likely arrival of new entrants.              Despite continued price competition
■ Likely impact by segment                                                                in the domestic parcel-delivery
Retail. Korea’s department stores            ■ Companies likely to be affected            market, CJ Korex (000120 KS,
and electronic category killers are          Department stores, vertical buying-          KRW111,500, Underperform
already facing ASP pressure from             service sites, and local e-book stores       [4]) seems well placed to be a
the growth in sales by overseas              could see ASPs come under further            partner for Amazon’s 1-day delivery
shopping sites to Korean consumers,          pressure as a result of increased            service.
who are attracted by these services’         shopping on overseas sites, which
low prices. If Amazon (AMZN US,              appeal for their low prices and large        Meanwhile, small web-hosting
USD329.67, Outperform [2]) does              product ranges. Hence, we remain             companies for local IT outsourcing
enter Korea’s e-commerce market,             cautious on Shinsegae (004170                and e-book stores offering a limited
as it is widely expected to do this          KS, KRW205,000, Hold [3])                    range of local content could face
year, we think the promise of faster         and Lotte Shopping (023530                   tough price competition and higher
deliveries and easier return policies        KS, KRW291,000, Hold [3]).                   customer acquisition and retention
could accelerate Korean consumers’                                                        costs. Yes24 (Not rated) and Gabia
use of such sites.                           Home-shopping companies and                  (Not rated) are among the
                                             integrated PG service providers              companies operating in this arena.

See important disclosures, including any required research certifications, beginning on page 44
Online Shopping
                                                                                                      9 June 2014

Executive summary

Amazon in Korea: what it means
With Korean consumers increasingly open to direct-purchase shopping via overseas-
based sites, Amazon’s entry into Korea could reshape the value chain of the country’s
commerce industry.

 Investment thesis                                                             Amazon’s entry could
As Korean consumers become more accustomed to buying via overseas-              accelerate the evolution of
based online sites, the country’s retailers and related infrastructure
companies are having to adapt to changing industry conditions. Amazon’s
                                                                                Korea’s retail, PG, cloud
interest in the Korea market is widely known, and was reported on most          computing and logistics
recently on 23 May by Business Korea. We believe that Amazon’s potential        sectors
entry into Korea could accelerate the evolution of the retail, PG, cloud
computing and logistics industries. Pending clarity on the timing and form
of Amazon’s likely arrival in Korea, we have sought to identify the
domestic companies best placed for, and most vulnerable to, the US
giant’s potential entry.

 Main findings
Competition between domestic retailers and global players is likely to
intensify as Korean consumers become more comfortable with shopping
on overseas sites, and we expect downward pressure on the ASPs of
apparel, electronic goods, and accessories, as there are large gaps between
domestic and overseas prices currently.

Meanwhile, we believe the leading online and mobile shopping sites stand
to benefit from the shift in commerce platforms and the enhanced user
experience resulting from more direct online purchases via overseas sites.
However, domestic e-book stores will likely run into tough competition
upon the entry of Amazon, which offers a popular e-reader device, strong
sourcing and distribution, and expertise in personalised marketing.

In cloud-computing services, we would expect Amazon’s cloud services
(AWS) to continue to add customers from the IT industry in Korea, backed
by its advanced solutions, global coverage, competitive fees, and
established IT infrastructure. And Amazon’s 1-Click payment service could
trigger rapid changes within the domestic PG segment, given the
streamlined shopping experience it provides.

In logistics, meanwhile, we believe Amazon’s potential entry into Korea
likely would not change the competitive landscape or provide upside to
revenue for domestic players, given ongoing price competition among the
leading players and the aggressive addition of capacity by recent entrants.

 Stock implications
Our market research suggests the beneficiaries of the continued evolution       We believe that home-
of the retail, PG, cloud computing and logistics industries, as a result of a
proliferation of overseas based online sites and the potential entry of
                                                                                shopping companies, KT, KG
Amazon into Korea, would be: the Korea home-shopping companies,                 Inicis, Duzon Bizon, and CJ
KT, KG Inicis, Duzon Bizon, and CJ Korex.                                       Express could benefit
However, we expect Shinsegae, Hyundai Department Store, Lotte
Shopping, Yes24, and Gabia to face greater competition.

                                                         -2-
Online Shopping
                                                                                                                                                                      9 June 2014

 Amazon’s entry in Korea: potential beneficiaries and companies likely to face
tougher competition
                                      Retail/e-book           Cloud Computing   Payment gateway         Logistics
Target market prospect
                                                                                                        
Competition environment
                                                                                                        
ASP and profitability outlook
                                                                                                        
Technology evolution
                                                                                                        
Regulation and infrastructure
                                                                                                        
Potential beneficiaries of     GS Home Shopping       KT, Duzon Bizon               KG Inicis           CJ Korex
changing industry dynamics
Companies likely to face   Shinsegae, Lotte Shopping,      Gabia
tough competition          Hyundai Department Store,
                                    Yes24
Source: Daiwa
Note:  - Positive;  - Neutral;  - Negative

Sector stocks: key indicators

                                                                                                                                                EPS (local curr.)
                                                                        Rating              Target price (local curr.)                FY1                             FY2
Company Name                     Stock code     Share Price           New         Prev.      New        Prev.       % chg      New      Prev.    % chg         New      Prev.   % chg
CJ O Shopping                    035760 KS         346,800      Outperform Outperform     390,000     390,000         0.0%   26,888    26,888     0.0%       31,416    31,416    0.0%
GS Home Shopping                 028150 KS         237,800             Buy          Buy   330,000     330,000         0.0%   20,848    20,848     0.0%       22,061    22,061    0.0%
Hyundai Department Store         069960 KS         124,500             Buy          Buy   180,000     180,000         0.0%   14,584    14,584     0.0%       16,141    16,141    0.0%
Hyundai Home Shopping Network    057050 KS         148,500      Outperform Outperform     185,000     185,000         0.0%   13,306    13,306     0.0%       14,695    14,695    0.0%
Lotte Shopping                   023530 KS         291,000            Hold         Hold   320,000     320,000         0.0%   27,919    27,919     0.0%       31,020    31,020    0.0%
Shinsegae                        004170 KS         205,000            Hold         Hold   235,000     235,000         0.0%   19,017    19,017     0.0%       20,248    20,248    0.0%
KT                               030200 KS          29,450      Outperform Outperform      36,500      36,500         0.0%   -1,795    -1,795     0.0%        2,888     2,888    0.0%
CJ Korea Express                 000120 KS         111,500    Underperform Underperform    96,000      96,000         0.0%    3,506     3,506     0.0%        4,767     4,767    0.0%
Source: Daiwa forecasts; prices as of close on 5 June 2014

                                                                                          -3-
Online Shopping
                                                                                                                                     9 June 2014

Contents

Retail: embracing new ways to shop .............................................................................................. 5
  Main findings .............................................................................................................................. 5
  Implications for the industry ..................................................................................................... 12
  Stock implications ...................................................................................................................... 15
Cloud computing: a beachhead for Amazon ................................................................................. 21
  Main findings ............................................................................................................................. 21
  Implications for the industry .................................................................................................... 22
  Stock implications ..................................................................................................................... 24
Payment gateways: simple payment systems promise to shake up the industry........................ 26
  Main findings ............................................................................................................................ 26
  Implications for the industry .................................................................................................... 28
  Stock implications ..................................................................................................................... 29
Logistics: set to remain a buyers’ market ..................................................................................... 31
  Main findings ............................................................................................................................. 31
  Implications for the industry ..................................................................................................... 31
  The Amazon story in the Japan logistics industry ................................................................... 33
  Stock implications ..................................................................................................................... 34
Amazon: where it stands today .................................................................................................... 36
  Targeting to generate 50% of net sales in international markets ............................................ 36

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                                                                                                                    In 2013, Korean consumers spent USD938m via
                                                                                                                    overseas online shopping sites, up 46% YoY from
                                                                                                                    USD642mn in 2012. However, spending on direct
                                                                                                                    overseas online shopping has not reached even 1% of
                                                                                                                    the estimated USD210bn value of the Korea retail
Retail: embracing new                                                                                               market and is equivalent to only 5% of the market for
                                                                                                                    domestic Internet shopping.
ways to shop                                                                                                        Strong sales growth momentum likely to
                                                                                                                    continue in 2014-16. In our view, rapid growth in
Ever more price-conscious, Korea’s                                                                                  Korean consumers’ spending via overseas online
                                                                                                                    shopping sites is likely to continue over the coming
consumers are increasingly looking                                                                                  years. We forecast Korean consumers’ spending on
overseas for value                                                                                                  overseas online shopping to grow by 50% YoY to
                                                                                                                    USD1.5bn in 2014 and reach USD3bn by 2017,
                                                                                                                    equivalent to around 9% of the domestic Internet
Sang Hee Park
                                                                                                                    shopping market.
(822) 787 9165 (sanghee.park@kr.daiwacm.com)                                                                        
                                                                                                                     Korea: dollar value and YoY growth of transactions by Korean
                                                                                                                    consumers using overseas online shopping sites
Main findings                                                                                                        (USDm)                                                                                 (%)
                                                                                                                    3,000                                                                                   80
1. Overseas online shopping sales growing                                                                           2,500
                                                                                                                                                                                                            70
rapidly but still in early stages                                                                                                                                                                           60
                                                                                                                    2,000
Korean consumers’ spending via overseas                                                                                                                                                                     50
direct online shopping sites grew by 46% YoY                                                                        1,500                                                                                   40
in 2013. Amid consumers’ growing awareness of the                                                                   1,000
                                                                                                                                                                                                            30
large differences in prices for imported goods in Korea                                                                                                                                                     20
                                                                                                                      500
compared with overseas, overseas online shopping has                                                                                                                                                        10
become a popular trend among consumers in Korea. In                                                                       0                                                                                 0
                                                                                                                                2008    2009    2010   2011    2012   2013 2014E 2015E 2016E 2017E
fact, Korean consumers’ spending on overseas online
                                                                                                                                       Amount of transactions (LHS)              YoY growth (%) (RHS)
shopping sites has been growing rapidly since 2009.
                                                                                                                    Source: Korea Customs Service, Daiwa forecasts

 Price comparison: goods available in Korea vs. via overseas
online shopping sites                                                                                                Korea: size of overseas Internet shopping relative to size of
                                                              Dyson                                                 total Internet shopping industry
                                              Samsung       vacuum     Ralph Lauren
Item                               LG TV Electronics TV      cleaner          Jacket       GNC glucosamine          (%)
Overseas model no.              60LA6200    UN65F7100          DC44 Board track racer Mega Glucosamine 1000         10
Seller                           Amazon        Amazon       Amazon     Ralph Lauren                    GNC           9
Shipper                            Malltail      Malltail    Malltail         Malltail         WeMakePrice           8
Price in USD (incl. delivery in
US)                              1,284.98      2,097.99      299.98           329.99                  24.97          7
Price in KRW (incl. delivery in                                                                                      6
US)                             1,349,229     2,202,890     314,979          346,490                 26,219
                                                                                                                     5
Shipping agent cost in USD       190.00           230.00      50.00            20.00                  15.24          4
Shipping agent cost in KRW      199,500          241,500     52,500           21,000                 16,000
                                                                                                                     3
Price + agent cost in USD      1,474.98         2,327.99     349.98           349.99                  40.21          2
Price + agent cost in KRW     1,548,729        2,444,390    367,479          367,490                 42,219          1
Tariff + V.A.T. in KRW          253,655          414,143     59,216           84,197                      -
All inclusive in KRW
                                                                                                                     0
                              1,802,384        2,858,533    426,695          451,686                 42,219
                                                                                                                              2008     2009    2010    2011    2012   2013    2014E 2015E 2016E 2017E
Domestic model no.           60LA6230 UN65F8000AF             DC45 Board track racer Mega Glucosamine 1000          Source: Statistics Korea, Korea Customs Service, Daiwa forecasts
Domestic price in KRW        2,849,980    4,597,590         560,000        1,160,000                85,600          Note: 1) Online-only retail channel for 2013 is based on preliminary figure, 2) For overseas
                                                                                                                    buy, we have assumed KRW:USD = 1,050:1 as the market size data is available only in
                                                                                                                    USD.
Price difference (%)                (37)             (38)       (24)            (61)                   (51)
Source: Compiled by Daiwa
Note: Assumes exchange rate of KRW:USD = 1,050:1

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 Korea retail industry: sales breakdown by channel                                                           As shown in the chart below, the retail price of
(KRWtn)                                   2009       2010    2011      2012       2013     2014E              imported goods is marked up as much as 9 times. This
Department stores                           22         25      28        29         30        31
Hypermarket                                 35         38      42        44         45        46
                                                                                                              is due to the multi-layer distribution channels and the
Supermarket                                 28         30      32        34         36        38              strong bargaining power of retailers.
Convenience store                            7          8       9        11         12        13
Specialized stores                          95        101     106       106        103       101               Korea: product price mark-up relative to the imported price
Retail sales not in stores                  25         29      32        36         38        41              (December 2013 to January 2014)
  Internet shopping (online-only)           14         17      19        22         25        27
Total retail sales                         213        230     250       260        264       268                           Lipstick                                                                                                            9.2

(YoY growth, %)                                                                                                                   Wine                                                                       4.8
Department stores                         10.1       11.6     11.4       5.4         2.6          2.7                  Hiking boots                                                                   4.4
Hypermarket                                3.7        8.1     10.9       5.0         1.9          2.0
Supermarket                                4.1        6.3      8.5       4.8         5.3          4.7           Vacuum cleaner                                                                  3.8
Convenience store                         13.2       17.6     17.9     18.3          7.8          6.6
                                                                                                                            Stroller                                                           3.6
Specialized stores                         3.4        5.4      5.2     (0.0)       (2.6)        (2.0)
Retail sales not in stores                13.0       14.9     10.6     11.1          7.1          6.2                 Mineral water                                                       3.5
  Internet shopping (online-only)         16.1       21.1     12.0     16.5        11.3         11.3
Total retail sales                         5.6        8.1      8.4       4.2         1.5          1.7                  Electric Iron                                              3

                                                                                                                                      Tyre                                      2.9
(Proportion of total retail sales, %)
Department stores                         10.4       10.7     11.0     11.2        11.3         11.4             Electric shaver                                                2.9
Hypermarket                               16.5       16.5     16.9     17.0        17.1         17.1
                                                                                                                                             0                     2                       4                          6               8           10
Supermarket                               13.2       13.0     13.0     13.1        13.6         14.0                                                                                                                                              (x)
Convenience store                           3.1        3.4      3.7      4.2         4.4          4.7         Source: Korea Chamber of Commerce and Industry (KCCI)
Specialized stores                        44.8       43.7     42.4     40.7        39.0         37.6          Note: Survey allowed the selection of multiple answers
Retail sales not in stores                11.9       12.7     12.9     13.8        14.6         15.2
  Internet shopping (online-only)          6.6        7.4      7.6      8.5         9.3         10.2          In terms of products favoured by Korean consumers
Total retail sales                         100        100      100      100         100          100
                                                                                                              using overseas online shopping sites, 42% of survey
Source: Statistics Korea, Daiwa forecasts for 2014
Note: 1) "Retail sales not in stores" encompasses sales from catalogue shopping, TV home                      respondents said they had bought apparel and 41% said
shopping, Internet shopping and mobile shopping; 2) Internet shopping included in "Retail
sales not in stores" includes only those sales of goods from online-only stores, whereas
                                                                                                              they had bought shoes and accessories. Other favoured
"Internet shopping (online-only)" includes sales of goods and services from online-only                       categories include health-enhancing foods, baby
stores, 3) Internet shopping (online-only) data for 2013 is based on preliminary figures
                                                                                                              products, bags and wallets, and cosmetics.
According to the results of a survey by the Korea
                                                                                                               Korean consumers: major product categories for overseas
Chamber of Commerce and Industry (KCCI) conducted                                                             online shopping (2013)
in 2013, only 24% of respondents had experience of
                                                                                                               (% )
overseas online shopping, and 96% of those                                                                     45
respondents said they would continue buying from                                                               40
                                                                                                               35
overseas online shopping sites.                                                                                30
                                                                                                               25
                                                                                                               20
                                                                                                               15
Among the reasons cited by consumers for their                                                                 10
preference for overseas online shopping sites were the                                                          5
                                                                                                                0
lower prices, followed by the wide range of brands and
                                                                                                                                             accessories

                                                                                                                                                                                                      Bags, wallets

                                                                                                                                                                                                                                      Foods

                                                                                                                                                                                                                                               Electronics
                                                                                                                                                                                                                          Cosmetics
                                                                                                                                                                              Baby products,
                                                                                                                           Apparels

                                                                                                                                                           Health-enhancing
                                                                                                                                               Shoes,

products.
                                                                                                                                                                                clothings
                                                                                                                                                                 foods

 Korean consumers: reasons for purchasing via overseas
online shopping sites (2013)
 (% )                                                                                                         Source: Korea Chamber of Commerce and Industry (KCCI)
  80                                                                                                          Note: This survey allows for the selection of multiple answers
 70
 60                                                                                                           Lifting of regulatory measures should spur
 50                                                                                                           interest in overseas Internet shopping. The
 40                                                                                                           Korea government is preparing to implement a series
 30                                                                                                           of regulatory measures that should further increase
 20
                                                                                                              domestic consumers’ acceptance of overseas online
 10
                                                                                                              shopping sites.
   0
          Identical product Brand not available in      More product           Higher quality
        selling at lower price     Korea                 selections
Source: Korea Chamber of Commerce and Industry (KCCI)
Note: The survey allowed multiple answers to a single question

                                                                                                        -6-
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                                                                                                                                           9 June 2014

Among the planned measures are:                                              One-way shipping/air-freight costs tend to be at least
                                                                             USD10 depending on the parcel weight; the heavier the
• simplified customs clearance procedures (including
                                                                             items, the greater the costs. Moreover, consumers who
  a reduction in the time needed to clear goods to a
                                                                             paid import duty on high-ticket items are not
  quarter of a day, from 3 days previously)
                                                                             permitted, under domestic law, to receive a refund for
• broadening in the range of products eligible for fast-                     such duty payments (the Korea government is looking
  track customs clearance (as opposed to six categories                      at revising the regulations to permit such refunds).
  currently, provided they are valued at less than
  USD100 [less than USD200 if shipped from the                               Given the current market environment, an overseas
  US]).                                                                      online retailer that can offer a straightforward overseas
                                                                             returns policy, at low cost to the consumer, could gain
• From July 2014, individual consumers will be able to
                                                                             considerable market share in Korea’s online retail
  submit directly to the Customs Service
                                                                             industry. Given its track record of providing a
  documentation for tax refunds on products that have
                                                                             consumer-friendly return policy in other markets, we
  been returned or refunded, ie, without having to file
                                                                             believe that Amazon is well positioned in this regard.
  the documentation through a licensed customs
  agent, as is currently the case.
                                                                             Long delivery lead times, high shipping costs
                                                                             for fast delivery. At present, unless Korean
2. Players who can reduce the hassle factor                                  consumers use a fast-delivery service provided by DHL
are likely to win out                                                        or FedEx to receive merchandise purchased online, the
                                                                             delivery takes more than a week and can take more
According to the KCCI survey, one area for                                   than a month during busy periods such as Black Friday
improvement was the process of exchanging goods and                          and Christmas. Consumers can save on delivery costs
receiving refunds, which respondents felt was overly                         by having items delivered through a third-party
complicated. Language barriers might be an issue for                         shipping agent, and as some overseas sites do not ship
Korean consumers. Respondents also expressed                                 to Korea, consumers have to use a third-party delivery
concern about poor warranty services and long delivery                       agent anyway when making purchases from such sites.
lead times, among other issues.
                                                                             We show the current shipping process in the following
 Korean consumers: areas for improvement in overseas online
shopping
                                                                             chart.
Recommendations                                                  (%)
Simplify procedures for exchanges and refunds                     68          Korea’s overseas online retail market: how the shipping
Improve warrantee services                                        68
                                                                             service works
Shorten delivery-lead time                                        46                                        2. Find a shipping     3. Make a payment for
Provide authentication verification service                       44            1. Find a product you      agency and get your     the product and local
Simplify order processes                                          28             want to buy from an      identification number     shipping fee to the
                                                                                   overseas online         and a local shipping     shopping mall, and
Provide enough details on products                                25                shopping mall                                    enter the agency's
                                                                                                         address (agency's local
Provide delivery check service                                    23                                        distribution centre)          address
Source: Korea Chamber of Commerce and Industry (KCCI)
Note: The survey allowed multiple answers to a single question

                                                                                                                                    4. Request a shipping
We believe the following factors are the biggest hurdles                                                      5. Local online
                                                                                                                                   service to the shipping
to the growth of online shopping for products from                              6. Make a payment for    shopping mall ships the
                                                                                                                                     agency by providing
                                                                                                                                        your purchase
overseas in Korea:                                                              international shipping
                                                                               and taxes to the agency
                                                                                                              product to the
                                                                                                          distribution centre of
                                                                                                                                   information, including
                                                                                                                                   order number, tracking
                                                                                                                the agency
• Returns policy                                                                                                                   number, your domestic
                                                                                                                                         address,etc.
• Long delivery lead time and expensive
  shipping costs for fast delivery
                                                                                 7. Agency ships the
                                                                                                            8. The product
• Billing system                                                                product from its local
                                                                                                         successfully arrives at
                                                                                distribution centre to
                                                                                                               your door
• Language barrier                                                             your domestic address

Returns policy: complicated process. At present,                             Source: Compiled by Daiwa

the main risk Korean consumers face when buying
goods directly from overseas Internet shopping sites is                      Billing system: some overseas retail sites do
that the returns policy is cumbersome compared with                          not accept international credit cards. At present,
when shopping via domestic sites.                                            quite a few overseas Internet shopping sites that are
                                                                             available to Korean consumers do not accept

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                                                                                                                            9 June 2014

international credit cards. In such cases, consumers             Korea’s overseas online retail market: how the buying service
                                                                works
have to use a buying service from a third-party agent.

A buying service enables consumers to purchase goods               1. Find a product you
                                                                                                        1-a. Find a product you
from overseas shopping sites that do not accept                                                           want to buy from an
                                                                    want to buy from a
                                                                                                            overseas online
international credit cards. Typically, consumers                  buying agency's website
                                                                                                             shopping mall
provide a detailed description of the item they want to
purchase. Alternatively, consumers can choose the
items listed directly on the buying agency’s website,
though the selection tends to be limited. The buying                                                     1-b. Request a buying
                                                                                                         service from a buying
service purchases the selected products and ships them                                                  agency by giving details
to the customer’s home address.                                                                          on the product of your
                                                                                                         choice, price, and the
                                                                                                         URL of the local online
                                                                                                                  mall

                                                                                                          1-c. Buying agency
                                                                                                        replies with total costs
                                                                                                           for processing the
                                                                                                         service, including the
                                                                                                          price of the product

                                                                         2. Make a payment for
                                                                          the product, service
                                                                           charges, local and
                                                                                                    3. Agency places an
                                                                        international shipping,
                                                                                                    order for the product
                                                                        and taxes to the buying
                                                                        agency, and enter your
                                                                            domestic address

                                                                         5. Agency ships the       4. Local online shopping
                                                                           product from the        mall ships the product to
                                                                         distribution centre to    the distribution centre of
                                                                        your domestic address             the agency

                                                                            6. The product
                                                                         successfully arrives at
                                                                               your door

                                                                Source: Compiled by Daiwa

                                                                Language barrier. Korean consumers who are not
                                                                conversant in foreign languages generally feel
                                                                uncomfortable shopping from a foreign-language site
                                                                and prefer to purchase the goods through a buying
                                                                agent service. However, we are seeing an increasing
                                                                number of players providing Korean language-based
                                                                Internet shopping sites, which should help boost
                                                                shopping on overseas sites. Notable examples of
                                                                international shopping sites that provide Korean
                                                                language services are Shopbop (an affiliate of Amazon)
                                                                and ASOS, a UK-based fashion Internet retailer.

                                                          -8-
Online Shopping
                                                                                                                                                                                     9 June 2014

 Comparisons of direct buying, shipping service, and buying service
                                              Direct buying                                       Shipping service                                Buying service
Key advantages                                · Shoppers do not have to pay other service         · Allows shipments to Korea of products that    · Easier than other methods for inexperienced
                                              commissions                                         otherwise could not be delivered or would       overseas online shoppers
                                              · Can provide free delivery depending on the        command very high shipping rates                · Allows payments using domestic credit cards
                                              amount of items purchased                                                                           even if overseas shopping sites do not accept
                                                                                                  · Low risk of receiving faulty products as they are
                                              · Allows consumers to buy limited-time "hot deal"   checked upon repackaging                        these cards
                                              items quickly                                                                                       · Consumers are protected under domestic law
                                                                                                                                                  · Low risk of receiving faulty products as they are
                                                                                                                                                  checked upon repackaging
Key disadvantages                         · Difficult to resolve disputes as transactions are · Difficult to resolve disputes as transactions are · High cost due to buying and shipping
                                          not subject to domestic law                         not subject to domestic law                         commissions
                                          · Consumers need to handle ordering, payment, · Consumers need to deal with refunds,                    · Products selling at deep discounts may sell out
                                          delivery, and post-purchase issues themselves       cancellations and other problems independently during the buying service process
                                          · International shipping charges vary by shopping · Shipping service cost charged                       · Consumers may not be able to use the
                                          site but are mostly expensive                                                                           promotion or discount codes
Total cost                                Generally lower than for the other 2 methods as Between those of the other 2 methods, as there is Generally higher than for the other 2 methods as
                                          no commissions are required                         a shipping service commission but no buying         commissions are required for providing the buying
                                                                                              service commission                                  service in addition to the shipment service
Degree of protection for consumers by law Not protected under domestic law                    Not protected under domestic law                    Protected under domestic law
Credit card payments                      Domestic credit cards are sometimes not             Domestic credit cards are sometimes not             Both domestic and international credit cards are
                                          accepted                                            accepted                                            accepted
Refund policy/method                      Refund requests have to be made directly to         Refund requests have to be made directly to the Refund requests may be made to the buying
                                          overseas shopping site                              overseas shopping site                              service agency, provided the agency is
                                                                                                                                                  incorporated in Korea
Shipping method and costs*                Shipping rates for direct shipping differ by        Shipping cost to a PO box in the US depends on Shipping cost to a PO box in the US depends on
                                          shopping site, for example:                         the website, but is USD7.45 on average +            the shopping site, but is USD7.45 on average +
                                                                                              shipping cost to Korea of around USD10 +            shipping cost to Korea around USD10 + domestic
                                          · Company A: free shipping cost for items over      domestic logistics costs are usually included       logistics costs usually included + commission
                                          USD100, cost of USD10 charged for items under                                                           fees vary by servicers, for example:
                                          USD100
                                          · Company B: USD30 per piece (no exact                                                                  · Company A: no commission fees for items
                                          shipping cost policy available)                                                                         under USD100, 9% of price for items over
                                          · Company C: USD32 per piece (no exact                                                                  USD100
                                          shipping cost policy available)                                                                         · Company B: USD10 charged for items under
                                                                                                                                                  USD100, no commission fees for items over
                                                                                                                                                  USD100
                                                                                                                                                  · Company C: no commission fees
Average time from order to home delivery 5-7 days                                             1-2 weeks                                           1-2 weeks
URL sites                                 · shopbop.com                                       · post.malltail.com                                 · amazon365.com
                                          · shop.nordstorm.com                                · box.wemakeprice.com                               · usbay.co.kr
                                          · saksfifthavenue.com                               · iporter.com                                       · hoyausa.co.kr
                                          · iherb.com
Source: Compiled by Daiwa
Note: *Shipping costs are calculated based on an item (1LBS) priced under $100

Shopbop highlights Amazon’s potential to                                                                Shopbop and ASOS (a UK-based fashion Internet
reduce the hassle factor                                                                                shopping site) both focus on selling globally sourced
One of the most popular overseas shopping sites                                                         contemporary fashion brands at competitive prices
among young Korean consumers is Shopbop, which is                                                       relative to those in the physical store. We think it is fair
an affiliate of Amazon. The site offers free global                                                     to say that neither site is as well known to Korean
shipping, an easy refund process, and a storefront in                                                   consumers as a whole as Amazon. However, young
the Korean language. In our view, through Shopbop,                                                      fashion-oriented consumers in Korea have become
Amazon is gaining exposure to and experience of the                                                     active shoppers on these sites, which offer free global
Korea retail market, as well as an appreciation of how                                                  delivery services and a free returns policy.
Korean consumers perceive overseas online sites.                                                        Furthermore, ASOS has improved its technology
Shopbop already provides a free global shipping                                                         platform in recent months and now offers Korean-
service, including to Korea, via the US freight-                                                        language services, making shopping more
forwarding company UPS.                                                                                 straightforward for Koreans. Shopbop, meanwhile, has
                                                                                                        provided Korean-language services since 2011.

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Online Shopping
                                                                                                              9 June 2014

 Shopbop: service available in Korean language                store in 2000, and launched Amazon Web Service and
                                                               an apparel and accessories online store in 2002. This
                                                               was followed by online sports and outdoor stores and
                                                               health and personal care stores in 2003, an online
                                                               grocery store in 2006, and online jewellery and watch
                                                               stores in 2007.

                                                               In Japan, meanwhile, Amazon started with an online
                                                               bookstore in 2000 and a few months later started to
                                                               expand its merchandise on offer to include music,
                                                               DVDs, games, and videos. It was not until 2003 that
                                                               Amazon expanded its product categories further to
                                                               include online electronics, home and kitchen stores. It
                                                               opened an online sports store in 2005, an online health
                                                               and beauty store in 2006, an online footwear and
                                                               apparel store in 2007, online jewellery and car stores in
                                                               2009, and an online MP3/music store in 2010.

                                                               Based on our discussions with participants in the Korea
                                                               book industry, they believe Amazon is likely to have
                                                               lower ambitions in Korea’s book market compared to
                                                               other countries. As such, we believe Amazon might not
                                                               replicate its strategy adopted in the US and Japan if it
                                                               enters Korea, based on the following considerations:
                                                               • Korea’s overall book market revenue is
                                                                 stagnant
                                                               • Korea’s online book market is highly
                                                                 competitive
                                                               • Its e-book market is still small and may not
                                                                 see the same growth as in developed
                                                                 countries
                                                               • Its publishing industry is fragmented
Source: Compiled by Daiwa
                                                               Korea’s book market is seeing stagnant sales.
Exact figures on the revenue generated by ASOS and             The size of Korea’s book market by revenue was
Shopbop in Korea are not available. However,                   KRW2.6tn for 2012, according to the Korean
according to ASOS’s annual report for 2013, its total          Publishers’ Association, and its annual revenue growth
international sales increased by 44% YoY and its               has been slowing since 2005. In fact, monthly average
number of active customers rose by 56% YoY. We                 expenditure on books per household was KRW18,690
believe that only a fraction of its sales growth came          in 2013, down by 1.8% from KRW19,026 in 2012,
from Korea but that its sales growth in Korea should be        according to Statistics Korea.
of a similar magnitude.

3. Amazon’s potential roll-out of online
books in Korea could be limited
Amazon’s strategy in many of its operating markets has
been to start with an online book store and then
broaden its retail platform to include other products.

In the US market, Amazon started its online business
with an Internet bookstore in 1995, and in 1998 it
expanded its product range to include DVDs, CDs, MP3
players and computer software. Amazon opened an
online consumer electronics store in 1999, a kitchen

                                                          - 10 -
Online Shopping
                                                                                                                                            9 June 2014

 Korea book market: revenue growth trend (YoY)                                               Agency of Korea. Unlike the country’s offline and
 (% )                                                                                         online book markets, where there are already dominant
  30                                                                                          market players, there are no dominant players yet in
  25                                                                                          the e-book market.
  20
  15
                                                                                              The offline-based bookstores used to lead Korea’s e-
  10
   5
                                                                                              book market. However, distribution channels that have
     0                                                                                        emerged in recent years — such as Naver Books
   (5)                                                                                        (operated by Naver), T-store and Kakao Page
 (10)                                                                                         (smartphone-based bookstores) and Ridibooks (an e-
 (15)                                                                                         book exclusive store) — now lead the market. Given the
          2006        2007        2008       2009       2010         2011      2012
                                                                                              digital nature of e-books, these new distribution
                         Total book market            Internet book market                    channels, backed by consumer-friendly search
Source: Korean Publishers’ Association                                                        functions and convenience, are becoming increasingly
                                                                                              popular among e-book readers. In Japan, for example,
Online bookstore market is highly competitive                                                 NTT Docomo, a major telecom-services provider, is
Based on data from the Korea Publishers’ Association,                                         seeing a high sales contribution from e-books,
we estimate that revenue generated by online book                                             supported by its move to embed its e-book reader
stores comprised 40% of Korea’s overall book market                                           applications into its mobile devices.
for 2013, up from 16.7% in 2005. There are 4 major
players in Korea’s online book market: Yes 24,                                                The participants we have spoken to in Korea’s book
Interpark INT, Kyobo Books and Aladdin, which                                                 industry expect e-book sales to remain a small part of
together account for more than 80% of online book                                             the country’s book market in the near term, for the
revenue, on our estimates. With the exception of Kyobo                                        following reasons:
Books, the major online book stores do not have offline
retail outlets.                                                                               • Korean publishers have been slow to convert
                                                                                                paper books to e-books due to consumers’
Although online bookstores’ increased their revenue                                             ongoing preference for paper books.
share of Korea’s total market to an estimated 40% in                                          • Korean readers tend to focus on the visual
2013, from 28% in 2008, competition is intense when                                             aspects, whereas overseas readers are more
it comes to pricing and promotions. As a result, Korea’s                                        concerned about the content. Publishers in
online booksellers are not highly profitable. For 2013,                                         Korea tend to place a high emphasis on the quality of
Yes 24 had an operating-profit margin of only 1%,                                               the paper and graphics, reflecting Korean
while Interpark’s book division had an operating loss of                                        consumers’ preferences. Korean readers have a
KRW0.7bn.                                                                                       tendency to select books based on the writer’s
                                                                                                reputation and the publisher, rather than on the
 Sales and operating profit for 2 of Korea’s online booksellers
(KRWbn)                          2009        2010        2011           2012          2013
                                                                                                merits of an individual title.
Book business of Interpark INT                                                                • Korea’s publishing industry is fragmented
Sales                            n.a.        285          239           215           222
  YoY growth (%)                 n.a.        n.m.          -16           -10             3
                                                                                                and many companies face financial
Operating profit                 n.a.        -7.9         -0.9           0.6          -0.7      difficulties. According to the Publication Industry
  YoY growth (%)                 n.a.        n.m.         n.m.          n.m.          n.m.      Promotion Agency of Korea, there are around
  Margin (%)                     n.a.        -2.8         -0.4           0.3          -0.3      46,000 publishing companies in Korea, of which
                                                                                                only 9% generate meaningful revenue. Of their total
Yes 24
Sales                            309           335         355          340        330          publications produced in 2013, 61% were
 YoY growth (%)                  20.5           8.5         6.1         -4.3       -2.8         educational books for students and only 20% were
Operating profit                   11             5           5            7          3         single-volume books. Due to intense price
 YoY growth (%)                   4.0        -50.2         -1.9         38.5      -55.1         competition and a lack of operating scale, many of
 Margin (%)                       3.5           1.6         1.5          2.1        1.0
                                                                                                the country’s publishing companies do not have the
Source: Companies
                                                                                                financial means to invest in their businesses. The
Korea’s e-book market: small and may not see                                                    industry experts we have talked to believe this tends
the same growth as in developed countries                                                       to lead to a lack of quality books on the market.
Korea’s e-book market is small, with its revenue for                                          • Smartphones are commonly used to read e-
2013 totalling KRW116bn, up 45% YoY but accounting                                              books and other e-book reading devices are
for less than 5% of the total book market that year,                                            also available in Korea. Many of Korea’s online
according to the Publication Industry Promotion                                                 book stores have already introduced e-book reading

                                                                                         - 11 -
Online Shopping
                                                                                                                                           9 June 2014

    devices. As a result, Amazon’s Kindle Fire e-reader                                   With G-Market’s 35% market share and Auction’s 28%
    may not be viewed as a game-changer by Korean                                         market share in Korea, eBay’s cumulative market share
    consumers.                                                                            in Korea amounted to 63% at the end of 2013. Among
                                                                                          the domestic players, 11st Street ranks second in Korea’s
 Korea e-book market: size and growth (2012-17E)                                         open marketplace space, with a 30% market share.
 (KRWbn)                                                                      (% )
 700                                                                          65          Failed case: Yahoo! Korea exited after failing to
 600                                                                                      topple the leading domestic search engines
                                                                              60
 500                                                                                      Yahoo! Korea entered Korea in 1997 and soon ranked
 400                                                                          55          number 1 in the search-engine field. However, it lost
                                                                                          market share to the leading domestic search engines,
 300                                                                          50
                                                                                          such as Naver and Daum. By 2012, its market share was
 200
                                                                              45          down to 1%. We attribute Yahoo’s decline in the market
 100
                                                                                          share to its failure to track rapidly changing trends in the
   0                                                                          40          local Internet industry. In addition, we believe its
           2012       2013        2014E       2015E       2016E       2017E
                                                                                          adherence to a global strategy did not play out well in
                          Revenue (LHS)            YoY growth (RHS)
                                                                                          Korea, where there is strong demand from consumers
Source: Publication Industry Promotion Agency of Korea
                                                                                          for localised content and services. In order to focus on
                                                                                          growing markets where competition was less intense,
                                                                                          Yahoo withdrew from Korea in December 2012.
Implications for the industry
                                                                                          Amazon may aim to position itself as the
International online companies’ interest in                                               leading reliable overseas direct shopping
Korea is nothing new                                                                      channel
Over the past 10 years, a few international Internet
                                                                                          If Amazon were to enter the Korea retail industry by
companies have entered the Korea market, given the
                                                                                          establishing a Korean-language site, we believe it
business-growth potential resulting from the country’s
                                                                                          would target segments that are less well-established, do
high Internet penetration rate and tech-savvy
                                                                                          not have a dominant online player, but have the
consumers.
                                                                                          potential for strong market growth. We would
                                                                                          therefore expect Amazon to position itself in Korea as
Some have had success while others have exited the
                                                                                          the leading player in overseas direct Internet shopping.
market. The companies that continue to have a
presence in Korea are those that have gained market
                                                                                          We believe Amazon would see opportunities in the
share through the acquisition of a leading domestic
                                                                                          Korea retail market as a result of:
player. We believe that Korea is generally a difficult
market for international players to penetrate, due to                                     • gaining exposure to the fast-growing online retail
the lack of access to the distribution channels, a lack of                                  channel,
localisation, and low market entry barriers.
                                                                                          • offering differentiated merchandise compared with
                                                                                            the existing online retailers, and
Success story: eBay leads the open-marketplace
space, helped by G-Market acquisition                                                     • providing reliable and convenient services (ie, a
eBay is perhaps the most successful online company in                                       returns policy, and shipping services).
Korea. The company gained a presence in the country’s
open-marketplace space by acquiring domestic                                              Online retail channels: still the fastest-growing
companies. In 2001, it acquired Auction, which was                                        retail format in Korea
established in 1997 as an open marketplace auction site                                   Of the existing retail channels in Korea, online retail is
for buyers and sellers of second-hand products. In                                        by far the fastest growing. We forecast online retail-
early 2000, Auction started up a B2C platform. In                                         channel sales to increase by 10-12% pa over 2014-16 due
2009, eBay then acquired a local open marketplace                                         to convenience and price competitiveness. Such growth
Internet shopping site, G-Market, the leading open                                        rates are far higher than the overall retail industry
marketplace site in Korea. eBay kept Auction and G-                                       growth rate we expect of 2-3% pa over the same period
Market as separate brands.                                                                and those of the offline retailers, such as department
                                                                                          stores and hypermarkets, and even convenience stores.
                                                                                          In the Korea retail industry, the online-only shopping
                                                                                          channel, which was worth KRW250tn for 2013,
                                                                                          accounts for 9% of total retail sales.

                                                                                     - 12 -
Online Shopping
                                                                                                                                                                                   9 June 2014

 Korea: online-only retail-channel sales growth vs. overall retail                                    Costco Korea: financial comparison vs. E-Mart and Lotte Mart
industry sales growth                                                                                 (2012-13)
 (%)                                                                                                                              Costco Korea                E-Mart               Lotte Mart
 25                                                                                                   (KRWbn)                      2012       2013         2012       2013         2012        2013
                                                                                                      Sales                        2,290     2,537       12,685      13,035       8,955       8,836
 20                                                                                                     YoY change (%)               9.8       10.8         19.0         2.8         5.7       (1.3)
                                                                                                      Operating profit               137        137          736        735         320          220
 15                                                                                                     YoY change (%)               4.3        0.4       (14.5)       (0.1)       (6.8)      (31.0)
                                                                                                        Margin (%)                   6.0        5.4          5.8         5.6         3.6         2.5
 10                                                                                                   Net profit                     110        111          436        476           63        109)
                                                                                                        YoY change (%)               6.5        1.0       (19.9)         9.3      (26.3)        n.m.
  5                                                                                                     Margin (%)                   4.8        4.4          3.4         3.7         0.7       (1.2)
                                                                                                      Source: Companies
  0                                                                                                   Note: Costco Korea’s financial year starts on September 1 and ends on August 31
         2007       2008       2009          2010    2011       2012        2013         2014E
                   Overall retail industry                  Online-only retail channel                We believe that Costco’s success in Korea, despite some
Source: Statistics Korea, Daiwa forecasts for 2014
                                                                                                      inconveniences (ie, it is difficult to park, an annual
Note: 1) Overall retail industry excludes auto and fuel retailers, 2) online-only retail
channel includes online-only retailers (retailers that operate both online and offline stores         membership fee is required, it has a warehouse-style
are excluded), 3) Online-only retail channel growth rate for 2013 based on preliminary
figure
                                                                                                      store format, and only cash or Samsung Card are
                                                                                                      accepted), are due to the following.
Offering differentiated merchandise from the                                                          • Price competitiveness on the back of the wholesale
existing online retailers                                                                               format.
There are numerous online shopping sites in Korea
involved in B2C and B2B retail due to the low entry                                                   • It has differentiated imported merchandise
barriers and low capex requirements. In order to be                                                     compared with the offline retailers and prices on
competitive, we believe that Amazon would have to                                                       imported goods are competitive. About 70% of
offer differentiated merchandise, rather than rely on                                                   Costco Korea’s sales are from imported goods, which
domestic merchandise.                                                                                   it sources directly.
                                                                                                      • It has a 100% return policy on products. If a
We see Costco Korea, which has been in Korea for 18                                                     customer is not happy with a product, he/she can
years, as a good example of how a foreign retail                                                        return it within 1 month of purchase and receive a
company can gain a competitive edge in the country’s                                                    full refund.
highly competitive retail market. We note that
international players Wal-Mart and Carrefour exited                                                    Costco’s pricing competitiveness vs. the other retailers for
Korea due to the intense competition in 2006.                                                         imported goods and domestic products
                                                                                                                                                           E-Mart                        Price diff.
                                                                                                      (KRW)                                Costco (incl. Traders)        Lotte Mart            (%)
The hypermarket industry saw 2% YoY sales growth for
                                                                                                      Imported brands
2013 as a result of the industry’s maturity and stores                                                Downy (5.03 litre)                    12,990          19,880         20,000               -35
having to close 2 days a month. The sales of the leading                                                                                                           (for 3.96 litres)
domestic players, such as E-Mart and Lotte Mart,                                                      Philadelphia cream cheese              9,790          15,396         16,110               -36
                                                                                                      (200g * 3)
achieved respective 2013 sales growth of 3% YoY and a                                                 Martinelli's apple juice              23,990          49,000              N.A.            -51
sales decline of 1% YoY, while their respective                                                       (296ml * 24)
operating-profit margins contracted by 0.2pp YoY to                                                   Tabasco (355ml)                        6,990           7,380              N.A.              -5
5.6% and 1.1pp to 2.5%. Although Costco Korea has a
                                                                                                      Domestic brands
wholesale business model, and so it may differ slightly                                               Petitzel fruity vinegar                8,990           9,900             9,900              -9
to the hypermarket model, the company faces the same                                                  (2 bottles)
regulatory environment as the hypermarket industry.                                                   Shinil Fan                            55,990          63,800              N.A.            -12
Despite this, it achieved sales growth of 11% YoY for                                                 Source: Compiled by Daiwa
                                                                                                      Note: Price difference is based on the price available at Costco and the lowest price
2013 and an operating-profit margin of 5.4%.                                                          available at local retailers

                                                                                                 - 13 -
Online Shopping
                                                                                                                       9 June 2014

Acquisition strategy likely to be one way of                           shipping companies in China at the time, Amazon also
winning share in the domestic B2C market                               bought a local company with a COD system and an
If Amazon aims to gain a presence in Korea also by                     efficient nationwide distribution system.
selling domestic products to consumers, we believe that
an acquisition strategy is likely to be the best solution,             Some of the factors behind Amazon’s
rather than starting the business from scratch. This is                success are already in play in Korea
because the company does not have a first-to-market                    Given the well-established B2C Internet shopping
advantage and competition is intense. In the B2C and                   market in Korea, we believe that Amazon will have
C2C online channels, there are already large retailers                 difficulties being competitive if it offers the same
with a solid presence in the Korea market.                             product categories as the existing dominant players.

 Korea: top players in B2C and C2C Internet shopping                  Indeed, we believe that some of the factors that
B2C                                                           C2C      contributed to Amazon’s success in Internet shopping
Interpark                                                G-Market
GS Shop (GS Home Shopping)                                 Auction
                                                                       sites in other markets may not be applicable to Korea.
CJ Mall (CJ O Shopping)                                 11st Street    • Quick delivery service. One of the services
Hyundai H Mall
Ellotte (Lotte Shopping)
                                                                         offered as part of an Amazon Prime subscription is
Shinsegae                                                                free 2-day shipping in the US. However, consumers
AK Mall                                                                  in Korea are already used to 1-2 day delivery services,
Source: Compiled by Daiwa                                                as many shopping sites tend to compete on delivery.

We believe the main goal for Amazon in the                             • One-click payment. When a first-time user orders
acquisitions it has made globally is to gain a                           a product and enters his/her payment and delivery
competitive edge in technology or to expand its market                   information, the one-click payment system is
presence. For more than 2 decades, the company has                       enabled automatically so that the customer can
expanded its online retail presence through aggressive                   simply click the “Buy now with 1-Click” button to
acquisitions, mostly in the US, but it has also                          bypass the convoluted purchasing process.
undertaken sizable deals in Europe and China.                            Currently, this approach is legally prohibited in
                                                                         Korea, though a planned relaxation of the
Acquisitions to expand product categories.                               government’s regulatory measures should ultimately
Some US acquisitions targeting special categories                        drive Korea online shopping-site companies to offer
include Pets.com, Homegrocer.com, Tool Crib, and                         services similar to the one provided by Amazon.
Ashford.com, a luxury goods retailer, all in 1999. In                  • Strong search-engine function and abundant
2006, Amazon acquired Shopbop, a retailer of designer                    consumer review database. Having a presence
clothing and accessories; in 2008, Reflexive                             in the online business for nearly 20 years, Amazon
Entertainment, a game developer and a distributor; in                    has also amassed a huge product-review database,
2009, Zappos, an online shoe and apparel retailer; and                   which helps customers have greater confidence
Double Helix Games in early 2014.                                        when making a purchasing decision. As the Internet
                                                                         environment is advanced in Korea, there are already
Acquisitions to gain competitiveness in                                  leading dominant players in many Internet
technology. Amazon has also acquired companies                           shopping-site categories. Naver, in the search-engine
that can enhance its operational infrastructure. In                      field; Aladdin and Yes 24 dominate the Internet
2012, it acquired Kiva Systems, a manufacturer of                        book-store. In the open marketplace space, G-
warehouse robots, in response to the rising labour costs                 Market and Internet Auction are the leaders.
at its fulfilment centres.
                                                                       Opportunities exist for Amazon as an
Acquisitions to help international expansion.                          integrated digital-content provider
The company has been gaining a presence in overseas                    On the digital-content front, we believe that Amazon’s
markets through acquisitions. In 1998, it acquired                     interests would lie in e-books, music, and movie
Bookpages (an online bookstores in the UK), Telebook                   distribution.
(an online book store in Germany), and Internet Movie
Database (IMDB) (an online information database on                     However, the company would have to compete with
films and TV programmes ) to facilitate its expansion                  existing players, such as Naver, T-World, and Ridi-
in Europe. In 2004, Amazon entered the China market                    books. Without differentiated services, it would be
by acquiring Joyo, the country’s largest online retailer               difficult for Amazon to attract customer traffic, in our
of books, music, and videos. Given the wide use of cash                view.
on delivery (COD) payments and a lack of reliable

                                                                  - 14 -
Online Shopping
                                                                                                                                                                                         9 June 2014

In order for the company to provide a differentiated           department stores could continue to see a declining
service to consumers, we believe that it may attempt to        ASP trend for imported branded apparel, shoes and
become an integrated digital-content provider, ie,             accessories.
provide a service bundling e-books, music, and movies.
                                                               One of the main reasons for the large price gap
In order to provide e-book content on its website, it          between imported goods and products directly sourced
would need to sign individual contracts with each of           from overseas markets is the high commission rates
the existing publishers, which we believe is unrealistic       collected by the leading retailers in Korea, as illustrated
as the publication industry is very fragmented in Korea.       below.
Therefore, if Amazon were to enter Korea’s e-book
market, we believe it would be likely to: 1) seek an            Example of cost breakdown for an imported women’s
alliance with an opportunity to acquire a distributor of       contemporary apparel brand
e-book content, and/or 2) acquire an existing online                (Index)
                                                                   100
book-store operator.                                                90
                                                                                                                                                                                                  29
                                                                    80

However, the total size of the e-book market is not                 70
                                                                                                                                                                              15
meaningfully large in Korea, in our view.                           60

                                                                    50            100                                                                        8

                                                                    40                                                                   18

Stock implications                                                  30

                                                                    20
                                                                                                                         6

                                                                    10                                24

Whether Amazon decides to enter Korea or not, we are                 0
                                                                              Retail price         COGS              Various tax      SG&A            Ven dor's margin    Sale lad ies         Retailers
already seeing a paradigm shift in the Korea retail                                                (in cl. of                       (marketing,                          comm issions         comm ission
                                                                                                manufa cture r's                   logistics, e tc)
industry, whereby a growing number of consumers are                                               margin)

willing to shop online for products from overseas                                            (Manufacturer's cost)                 (Vendor's costs)                                (Retailer's costs)

suppliers, in turn reflecting how Korean consumers are         Source: Fair Trade Commission
becoming more price-conscious and recognising that
goods purchased from overseas suppliers can often be           Korea’s department stores enjoy high commission rates
cheaper than those purchased locally. We believe that          due to the industry structure in the country, whereby
should Amazon decide to enter Korea, this could                the leading 3 players enjoy close to 90% market share,
trigger a further acceleration in the growth in online         as compared with less than 50% in many other
shopping for goods from overseas.                              developed countries. In addition, as the department
                                                               stores operate on a consignment basis, the stores do
We believe the following trends could develop within           not have an inventory burden and hence retailers have
Korea’s retail industry:                                       less need for large discounts to reduce inventory.
• ASPs could come down further for certain imported
  consumer goods which consumers do not feel
  comfortable about purchasing on-line, and those              ASPs could continue to fall for branded
  consumer goods supplied by domestic retailers                imported apparel, cosmetics, shoes and
  whose prices are inflated compared with similar              accessories sold in department stores
  products available from overseas retailers.                  Despite steady growth in customer traffic to Korea’s
                                                               department stores over the past 2 years, the average
• Domestic consumer brands that compete directly               transaction price per customer at department stores
  with imported consumer brands could see their                has declined by 2-3% per annum over the period (as
  retail prices come down.                                     the next chart shows).
• Amazon could provide a platform for local vendors
  to gain exposure to overseas markets by setting up           This is a reflection of a combination of consumers
  their own online stores on Amazon’s overseas                 trading down in a period of overall consumer spending
  websites.                                                    weakness in Korea, along with rising competition from
                                                               lower prices offered by parallel imports and consumers’
Negative impact on department-store ASPs                       growing interest in buying from overseas shopping
Price gap between the imported brands and                      sites.
products from the overseas exists due to the
retail commission structure
If Amazon were to enter Korea’s online shopping-site
segment as an overseas retailer, we believe domestic
                                                          - 15 -
Online Shopping
                                                                                                                                                       9 June 2014

 Korea department stores: average transaction price per                                               Price-cutting has also been evident in Korea’s
customer vs. customer traffic and SSS growth (YoY)
                                                                                                       cosmetics segment over the past year. Fresh, a perfume
  (% )                                                                                                 and cosmetics brand under the LVMH umbrella,
   10
                                                                                                       lowered its prices for 19 items sold in Korea’s
   5                                                                                                   department stores by 20% on average in early 2013.
                                                                                                       Also, Stila, another imported cosmetics brand, reduced
   0                                                                                                   its prices for more than half of its products (ie, for 120
                                                                                                       items) by 10% in early 2013.
  (5)

 (10)                                                                                                  In addition, given the government’s goal of
         Jan-12   Apr-12   Jul-12   Oct-12   Jan-13   Apr-13     Jul-13   Oct-13    Jan-14   Apr-14    implementing deregulatory measures aimed at
                                    3MMA average transaction price YoY                                 lowering the prices of imported consumer goods by 10-
                                    3MMA average customer traffic flow YoY                             20% from current levels, we expect a steady fall in the
                                    3MMA SSS growth YoY
                                                                                                       consumer prices of imported goods over the next 2-3
Source: Ministry of Trade, Industry and Energy
                                                                                                       years unless there is a strong pick-up in consumer
 Divergence between private consumption growth and                                                    spending and until the prices of imported consumer
department same store sales growth                                                                     brands sold by department stores fall to levels
  (%)                                        SSS growth lower than                                     competitive with those available online.
 16                                          private consumption
                                             growth due to
 14                                          consumer spending
                                                                                   Gap emerges         Among the department stores’ product categories, we
                                                                                   from
 12                                          decline on luxury goods               lowering ASP        would expect contemporary apparel brands, shoes,
 10                                          following overspending                on imported
                                                                                   goods
                                                                                                       accessories and cosmetics, which can be easily
                                             from the prior two
  8
                                             years
                                                                                                       purchased through overseas on-line sites, to be
  6                                                                                                    negatively affected. These categories make up a quarter
  4                                                                                                    of an average department store’s total sales. Assuming
  2                                                                                                    these products see a 20% price cut over time, we expect
  0                                                                                                    the average transaction price to decline by around 5%
 (2)                                                                                                   over the next 2 years (a 2-3% decline per annum).
 (4)
 (6)
                                                                                                       We believe that consumers are willing to shop at
         1Q09
         2Q09
         3Q09
         4Q09
         1Q10
         2Q10
         3Q10
         4Q10
         1Q11
         2Q11
         3Q11
         4Q11
         1Q12
         2Q12
         3Q12
         4Q12
         1Q13
         2Q13
         3Q13
         4Q13
         1Q14
         2Q14
         3Q14
         4Q14

                                                                                                       domestic department stores, rather than overseas
                  Private consumption YoY growth               Department store YoY growth             direct Internet shopping, if the price gap for imported
                                                                                                       goods is no more than 30%, given the costs related to
Source: Statistics Korea, Ministry of Trade, Industry and Energy, compiled by Daiwa
                                                                                                       customs tax, shipping, and the risks involved with
                                                                                                       return policies.
Some imported consumer brands that are not priced
competitively vis-à-vis those available from overseas
                                                                                                       As it stands, we believe that consumers tend to favour
online retailers lose market share within department
                                                                                                       overseas Internet shopping for items that sell at a 50%-
stores, and as a counter-measure some brands have
                                                                                                       plus discount to the merchandise price available in
lowered their prices in the past 2 years.
                                                                                                       Korea. Therefore, we believe that an additional 20-30%
                                                                                                       price cut for directly comparable products would make
For instance, Polo Children, an imported children’s
                                                                                                       the existing department store channel more
wear brand saw its sales decline by 3% YoY in 2012. As
                                                                                                       competitive in terms of pricing.
consumers can purchase identical items from online
overseas sites at much lower prices, and hypermarket
stores in Korea sell parallel imports of Polo Children
products at prices that are 20-30% below those sold by
department stores, consumers have been shying away
from buying such products from official Polo Children
retailers. In response, it cut its product prices by up to
40% in July 2013.

                                                                                                  - 16 -
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