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Welcome, welcome everybody. My name is Jeff Towson and this is Tech Strategy and the topic for today How Khopang is building a competitive fortress in South Korea alternate title sort of second runner-up title is How Khopang is not really the Amazon of South Korea. It’s actually the mini JD of 2015 of South Korea or Second runner up for the title, well, look, I just really like local dominance in services. And that’s what this looks like to me. Now, for those of you who are subscribers, I sent you kind of a decently long email last week, Thursday-ish, about Copang. They have just filed in the last week or so, so we just gotta look at their numbers. And this struck me as sort of right in the strike zone. for this course. Well, it’s one, it’s an Asia tech story from top to bottom. You know, the comparisons to the US and Amazon make no sense whatsoever. This is an Asia story. This is a developed Asia story, similar to what we see in places like Singapore, Japan, North, South Korea. So those comparisons don’t make sense. and it’s an interesting company and it’s right in that space where I think people aren’t really following it or aren’t getting it. There aren’t a lot of articles on this. They’re all kind of repeating the same talking points and one of the things I like to check is when I’m looking at a company is does it have a Wikipedia page and my favorite companies don’t have one at all. There’s a lot of great Chinese companies that have not a single Wikipedia page. Copang has one, but it’s like three paragraphs. It’s almost nothing. So I like good Asia tech companies that are off the radar as much as possible. And this one definitely is there. So in following in that vein, for those of you who are subscribers, I’m gonna send you a note in the next day, not note, it’s kind of a long email actually, about JD Logistics. This is another really cool one. The financials just came down. They got just filed Tuesday night. So five or six days ago. Fascinating. Absolutely fascinating. I have been waiting for literally three years to get a look at the scope and the details of what JD has been building on the logistics side and the numbers finally became public. So it’s, it’s awesome. I spent two days just going through it and mapping it out. So anyways, that’s gonna come out in the next day or so. And for those of you who aren’t subscribers, feel free, you can go over to jeffthousand.com, sign up there, there’s a 30 day free trial, see what you think. And let’s see, my standard disclaimer here, nothing in this podcast or in my writing or website is investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information… presented may be wrong, the views expressed may be incorrect or may no longer be relevant or accurate, investing is risky, this is not investment advice, do your own research. And with that, let’s get into the company. Now, Kopang, the sort of standard company story that’s being repeated all over the place at the moment, is it was founded in 2010 and sold by a dropout from Harvard Business School. I think people are playing up the whole dropout thing. I mean, it’s not like dropping out of college or something. If you’re successful in business, you can pop in and out of business school. It’s not that big a deal. But that’s the new thing is that, oh, it’s the dropout by Bom Kim, who’s the gentleman who founded this. And they kind of went after the e-commerce space early on. Group buying, I think was how they got their name coupon, i.e. like coupons and stuff. I’m not sure exactly how they evolve to pretty much a standard online retailer. Yes, it’s a marketplace in that they work with merchants and then they sort of do the platform business model approach. But like JD and really like Amazon, you know, they’re a retailer themselves first. You know, they are if you look at their income statement, you’re going to see the cost of goods on their income statement. You don’t see that at Alibaba at all. I mean, all they’re doing is taking fees and marketing fees and all these things. So I mean, they’re kind of a mix of a direct online retailer and a marketplace with the retailer coming first and being most of the business. And that’s really how JD started as well. They didn’t really get, you know, they were founded back in 1999 ish, but the online aspect didn’t come into play until 2003, 2004. They didn’t get into a marketplace themselves until like… 2011 I believe right around then. So okay but focused on South Korea and kind of what I want to talk about for this is the phrase I used in the beginning competitive fortress. I mean this is not going to be oh my god it’s it’s Alibaba in China. No. South Korea’s got 51 million people. Now it has a very high GDP per thousand dollars per year per person. So it is a wealthy country, but it is quite a small country. You know, this is not the US, this is not the EU, this is not China. So we’re talking about a relatively small market in terms of this. However, so what really becomes interesting for me is the competitive strength of the company and it’s really quite formidable. So I thought this would be a good sort of opportunity to go through some competitive thinking and competitive advantages. which if you haven’t figured out already is my go-to subject for almost everything and i think that’s what’s really interesting about this company so the key concepts i really kinda want you to take away from this are all related to competitive advantage uh… production cost advantages i’m gonna go through these one by one as we talk about as i talk about it production cost advantages, technology, transportation cost, economies of scale, by distribution network density, purchasing economies, IT and R&D spending, and then revenue scale and operating leverage, which I spoke about last week in podcast 69. This is a really good example of a company going for operating leverage in a major way in almost every aspect of their business. So we’ll talk about that as well. Okay. The first thing that jumps out at me when I look at this company is I just really like how well they write about their company. I think the language is incredibly crisp and clear. Really like Alibaba is the same way. You can tell immediately you’re reading somebody who has a very clear strategy in place and sees this. And you can see it literally word by word the language they’re using. Very impressive. I mean, the companies that I have noticed like this over the years, definitely Alibaba’s amazing. This is what got my attention about Shopee and Garena. One of the things early on was how well they sort of described what they were doing. And then this one I would say it’s as good as those two. But I sent out these slides to people in the chat room and other things and on my social media stuff in the last day. But I just, I just. sort of screenshot some of the, how they describe themselves. And I think it’s great. I’m gonna, I’ll put it in the show notes, but you know, their value proposition, first of all, they’re using the phrase value proposition, which is total business school language, but it’s, you know, quote, to create ever improving experiences at lower prices for customers. That is in order to, like in order to create ever improving experiences at lower prices for customers. comma, we focus on innovations around our end to end integrated network of technology and infrastructure, new offerings and effective merchant solutions. Okay, that’s a great sentence. First of all, we focus on innovations around our end to end integrated network of technology and infrastructure. They use this phrase all over the place. End to end. you know, from the manufacturer all the way to the person’s hand, the whole process, integrated network, that is basically exactly how JD describes itself. They describe themselves as an integrated network in terms of logistics. As opposed to, and really, they’re not really, it’s not really integrated. You could, the better word would be bundled services. You know, FedEx just does express delivery. cargo does one thing, cold storage is another part. Those are all sort of very specific services you would do to support an online marketplace or just a business, but they’re all very isolated and disconnected. What JD and Coupang do is they integrate all of those together so that they can provide basically a full solution in terms of e-commerce from the factory all the way to people’s hands. And if that requires express delivery, someone on a bicycle, a big box, whatever it is, they handle all of that together. And most logistics players don’t do that. They focus on one type of service, not a full suite of services. That’s kind of how I would describe it, a full suite of logistics services. Now they use the phrase integrated fulfillment network, or their phrase is integrated network of technology and infrastructure. I don’t really think that’s awesome. Basically, it’s a digital platform plus a logistics network. That’s how I would see it. But you’ll see this language a lot. All right. But clearly, that’s what they’re building. And they do this to, and how do we do this? And then also, in order to, they talk about new offerings and effective merchant solutions. Not as interesting. But how do they achieve that? That’s the first part of the SENS. to create ever improving experiences at lower prices for customers. That is a very clear bottom line in terms of what they’re doing for the customers, the consumers. The lower prices bit is pretty common. Retailers wanna be low prices. JD uses that language, Walmart uses that language, everyday low prices. Very common for a sort of big retailer. It’s the first part of that that’s more interesting, to create ever improving experiences. That is how Alibaba talks. That’s how Ant Financial talked in their IPO filing before they pulled it, was they said, we’re building a platform business model. We are appealing to multiple user groups, consumers, banks, and others. We bring them to the platform, we attract them, we retain them, we get them to engage. How do we keep them coming? The phrase they use is sustained innovation to continually add value and create better experiences. That’s really kind of what they’re talking about here. Yes, we can get people to come to our site, but to get them to keep coming, we have to commit to ever improving the user experience. And that’s how they innovate. I think that’s really well said by them, not by me. And then the quote goes on, these investments help us deliver superior selection, convenience, and low prices to customers. Okay, that’s a very standard pitch as a retailer, superior selection, convenience. Most of that convenience bit is delivery speed. Now they take that one level up, I’ll talk about their delivery stuff, but they offer very fast next day or same day delivery for free. That’s a good pitch and low prices. Fine. while helping merchants to improve and grow their business fine. So that second part of their description is, that’s a pretty standard description of a marketplace platform. You talk about both of the user groups. For the one user group, the consumers, we offer superior selection, convenience, and low prices. To the other group, merchants, we help them quote, improve and grow their businesses fine. Anyways, I put that quote in the notes. I think that’s really quite clear. I really like the fact about how we’re doing ever improving experiences at lower prices. Okay, now within that they are clearly like JD mostly focused on consumers. Yes, they’re moving towards a mark. This is why I kind of say they’re like JD in 2015. In JD in 2015 was still mostly a retailer. Now the GMB is about half and half and they’re much more of a marketplace now. But Back in 2015, they were much more of a pure retailer. And this was also before they had externalized their logistics capabilities. Back then, they had built a massive, let’s use their phrase, integrated network for logistics and fulfillment. But they were only using it internally. They had not yet turned it into an external business that would then be split off and has just filed to go IPO. Very similar to how AWS and Amazon for the first, go Zillow, how long? Eight years, something like that. The first eight years, their IT capabilities were internal capabilities, and then at a certain point, they externalized them and began selling them in the market, and that became AWS, and then they were just a significant client to them, which is pretty much what JD is today. They’re the largest client of JD Logistics. down to about 50% of their revenue from 60, 70% a couple years ago. Now the big gun within all of this that pretty much everybody’s talking about when they’re writing about these is the delivery. I mean that’s their big, big gun is they do next day or same day delivery and to pretty much every building in Seoul for sure, but across most of South Korea. And they have good names for this. JD has always called this 11 11 or two 11. It used to be called sort of 11 11, but that’s sort of singles day now. So now it’s two 11, which is you order by 11 at night, you get it the next morning, you order by 11 in the morning, you get it that day. JD, I mean, Coupang has basically the same strategy, but they have a better name. First of all, they call their delivery rocket delivery, which is a really cool term. Rocket delivery is really neat. I don’t know who thought that up, but someone in their organization is really good with adjectives. So, rocket delivery, and then they call it, one aspect of that is either same day, which is if you order it in the morning you get it that day, or if you order it the night before you get it the next morning early, and they call that dawn delivery, which is the idea, hey, you can order at night and you’ll get it before you go to work the next day. I think that’s a, that language is pretty great, rocket delivery. Don delivery and you know you can read about all this stuff online but basically you know they’re having their delivery people just blanket the city all day long all the cities and you know coming into each apartment building multiple times every day you know that speed of delivery no waiting plus it’s basically free. That’s their biggest lever in terms of serving consumers, which all gets sort of put under the blanket term of convenience. The other part I like about what they do is they talk about how we wow consumers, another good adjective. Well, actually it’d be a verb in this case, but they say we are committed to delivering a wow experience to all of our consumers every day. Notice how they keep talking about frequency of interaction. That’s kind of neat. This commitment drives every aspect of our operations and pushes us to redefine the standards of e-commerce. Again, that’s kind of under this ever-improving user experience and the way they want to wow them. You can see how they’re speaking to their culture. Plus, it’s just a cool term. So within, how do we wow them? Convenience, which is speed and reliability of delivery. Obviously, same-day delivery, dawn delivery. free and then you can also do a lot of 30 day returns very easily. People don’t talk about this very much. When you talk about e-commerce and everyone immediately talks about logistics, the returns aspect is actually pretty important especially if you’re dealing with apparel because you get such a high rate of return. JD is very good at return and that really one even if you don’t use it you know that you can as a consumer and it plays into that sort of quality experience and trust aspect that JD speaks to, I think coupon speaks to it. Returning stuff to Alibaba, not as easy. Okay, how do they wow their consumers? Convenience, talked about that. Low price, obviously, I’ll talk about that a lot. And vast selection, again, that’s a good adjective, vast. sourced from 200,000 merchants and suppliers in their own owned inventory and third party selection. So that’s the Haywer retailer and Haywer marketplace. And then they have their Rocket Wow membership where you can get some special stuff and sign up. Obviously that’s a lot like an Amazon Prime type thing. Now there’s section describing what they do for merchants. Not terribly interesting. It’s basically reads like a very basic. marketplace platform, how we serve merchants, customer to product matching, fulfillment in logistics, marketing solutions, and then e-commerce storefronts. That kind of sounds like Alibaba or JD 10 years ago. Not that interesting. But then we get, you know, their big thing that they’re building is this end-to-end integrated network for infrastructure and technology. The infrastructure they’re talking about logistics. The technology piece is pretty much what you think it is. It’s just an e-commerce site. So that’s search, personalization, digital payments, easy to pay, good user experience, all that. That’s fine. That’s not terribly interesting. I don’t think they’re rocking anyone’s world on their app, but it’s the infrastructure. It’s the logistics and fulfillment piece, which for them, it’s distribution B2C, it’s last mile delivery. and then it’s a supply chain which connects to manufacturers because they’re operating as a retailer and a marketplace. And one last point and then I’ll get to the competitive advantage stuff which is the goal for today. Why does this look like JD Circuit 2015? Well, a couple of reasons that I just mentioned. One, they haven’t externalized their logistics network yet. Their logistics network is also impressive but it’s also much, much smaller than what JD more or less has, they describe themselves having six synergistic logistics networks. I don’t really think that’s true, but they’ve basically built, let’s say six things. They built a warehouse network, 800 plus warehouses, plus they’ve extended that to 1400 cloud warehouses. Cloud warehouses is when they go to a facility they don’t own and they do a deal with that person and then they provide the infrastructure, the software. the connection to their core network and then the brand. So way of extending, they keep control of the core, but then they can extend their warehouse capabilities beyond that. They have a line haul transportation network. This is basically all their trucks and vehicles, 7,500 of them plus the sorting centers. That’s what moves everything around between their warehouses. They have a last mile delivery network. This is 7,200 delivery stations, almost 200,000 people. This is really what Coupang is about. It’s the last mile delivery network that is, you know, what is really kind of making the difference. Then JD has a couple other things. They have a bulky item logistics network. This is for furniture, heavy items, appliances, much smaller, a cold chain logistics network, fresh produce, perishable items, and then cross border logistics network. Now of those, Coupang has the first three. warehouses, line hall, and last mile. And given the relatively small nature of South Korea as a geography, especially it’s very dense, very high rise cities, it’s a lot about that last mile and probably some creativity on the warehouse network because you’re not gonna build these massive facilities outside of town. You’re probably gonna build a lot of them within high rises because very dense city. Okay, so one, they have the network, they’re still building, they haven’t externalized it yet. They’ve expanded from a retailer to a marketplace, but they’re clearly not pushing that hard yet. They haven’t really expanded into other types of digital services. They do some food delivery, but not really. JD has a partnership with Tencent and WeChat. I mean, they’ve clearly become part of a larger ecosystem. Coupang hasn’t done that yet. JD has also expanded into physical retail. They’re opening stores, that’s all of that. We’re gonna own our own retail space and that’s gonna be an interface point for our customers as well as part of our delivery and our networks. Obviously, Coupang hasn’t done that. So I mean, yeah, they look to me like a small version of JD in about 2015 and I’m watching for them to do those next moves. So why is this a competitive fortress? And not just a competitive fortress, but a local fortress. This is a very sort of, I’d put this in the category of a small giant, although it’s obviously not small. I mean, they’re slated to IPO at 50 billion USD, but still, we’re not at the level of Amazon. We’re not at the level of the China companies. This is a smaller company that is focused on dominating one area, one country, 50 million people. And that it’s sort of like Gojek. Gojek is expanding in Southeast Asia, but they’ve really built a fortress in Indonesia with their vast suite of services. So what jumps out at me is look, they’re building a local fortress. Now, how are they doing that? Okay, look at the retailer play, just as a retailer, forget the marketplace, forget all of that. If we go back to Walmart in 1980, 1985, How did Walmart, when Walmart was basically just in the sort of Arkansas area of the US, I mean they didn’t start in California or New York or any of the major markets. They started in sort of this out of the way small market and that’s really where they got to dominance and a lot of their competitive strength and their profits and all of that came from those areas. And when they later expanded to New York and all the other places and then Mexico, those areas they never had the profits they had in their core sort of isolated smaller market. Now, how did they do that? Well, when you’re out in that area, they started building these big stores and they had a very clear value proposition to their customers, their consumers, which was everyday low prices. We have a massive selection and everything’s cheap. and the quality’s fine. So, pretty much like Coupang without the convenience part because they weren’t doing delivered. And they started to get some traffic and what did they do? They basically built themselves on two competitive advantages. Now the first one everybody talks about, which is they had economies of scale, purchasing economies to be specific. There’s multiple types of economies of scale. the one that they started with was purchasing economies. As they got big in their market, not globally, in their market, recall economies of scale mean that you have an advantage by being bigger than a competitor, a specific competitor within a prescribed market. So within that, because they were bigger, they could squeeze their suppliers, give me a discount, give me a discount, give me different payment terms, all of that. relative to their number two or number three or number four competitor, that made them cheaper in that market. Now this doesn’t work if your competitor gets as big as you because you lose your advantage. And it doesn’t work as well if the market’s growing real fast or doesn’t have a prescribed border because then there’s room for that person to get to their scale, your scale. You need to sort of have a boundary where you’re 40% of the market and it’s not possible for that person to also get to 40%. That gets you purchasing power. You translate that into lower prices for your consumers. And then in theory, you grow bigger over time. You keep passing on your savings to your consumers and you leverage your purchasing power by virtue of scale economies. That’s their biggest lever, always has been. It’s a very difficult life to be a supplier to Walmart. Now a second. economy of scale advantage they had within this region was distribution network density. They had big stores. They had lots and lots of trucks. They had trucks and warehouses all going back and forth within a certain density that got them at the end of the day a lower per unit cost. If you have a hundred trucks and your competitor has a hundred trucks. and you’re all moving them back and forth, but yours are 95% full and theirs are 50% full, that’s basically a fixed cost and you end up being cheaper on a per unit basis. A lot of companies do really well on network density. A lot of the food delivery companies do very well because as they get more market share within a specific city, they can capture these sort of network density advantages. They reroute their trucks, they reroute in real time. They drop up here, pick up there, all of that stuff. And as Walmart had that going as well, because yes, they have these big stores, but they also had a big logistics network behind them. And within that region, okay, they had purchasing economies and they had distribution network economies, which were both economies of scale, cost advantages versus competitors. As long as they were bigger, they were cheaper, which they then passed on to their consumers. And that made them even cheaper and they probably grew their market share. Okay, the other one people don’t talk about, this is still sort of Walmart 1985, is location cost advantages. Okay, where did most retailers in the 80s open their stores? Well, we got to go where the people are. Let’s go downtown. Let’s get in the shopping mall. Walmart didn’t do that. They went on the edge of town. Cheaper because they had such a vast selection at low prices, they could convince people to make the trip. Most retailers are all about high traffic locations which tend to be expensive. Walmart, Costco and others are all like, we want to go way outside of town and be cheap. So they had sort of a location cost advantage. And then when the one no one talks about at all is people don’t travel very far to get their retail stuff. Yes, Walmart would be competing with other retailers in Arkansas. They weren’t competing with retailers in Florida. Why? Too far. It’s a local game at the end of the day. If you’re selling beer in Bangkok, you are not competing with breweries in Vietnam. That’s just not how it works. Certain businesses are sort of bounded by the geography. So, you know, everyone likes to be online because online is cool and it’s fun, but you know, if you’re online, you’re pretty much competing with everybody with a webpage. That’s really hard. If you’re a really big retailer in Arkansas, you’re not worried about people in California at all. So those are kind of the three circa 1985. Location cost advantages, which is a variable cost advantage. distribution network density, purchasing economies, both of those are economies of scale. Okay, 1990-ish, I’m making these dates up, but they’re approximately true. Walmart starts building another advantage, which is by flooding money into IT. And they start putting a huge amount of money into this intelligence, the data analytics of their entire network. And they start to… know who people are and what they like to buy and what items ship and what and they the whole system starts to get smarter. And that turns out to be a very big advantage over the next 10 to 15 years but you could also put this under the category of an economy of scale advantage. Because they were so much bigger than everyone else they could just keep out spending them as a fixed cost percentage of their revenue. The same way Apple outspends its competitors on R&D spending, Walmart was outspending people based on So they started to sort of get that as another economy of scale advantage in IT spending. That’s kind of the picture of a traditional big retailer whose value proposition is not terribly different than coupon. What is the competitive fortress that coupon has been building? Well, a good portion of it sounds just like Walmart. They built out economies of scale in South Korea, a very prescribed market what they border based on distribution network density. More warehouses, more delivery people keep getting faster and faster with their delivery, more reliable and also cheaper and cheaper. Now they’re playing those. Now those don’t go on forever. You know, they do flatline at a certain point, but they’re going to have that advantage over a smaller competitor. They’ve got R&D and IT spending. As they get bigger than their competitor, they’ll just keep out spending them on IT, and hopefully that will lead to a lot of benefits. And they have the transportation and cost advantage like Walmart. Look, they’re not competing with people in China. They’re not. There’s a border. They’re not competing with people in Japan. There’s a sea. You know, they’ve got a much harder border. They only have to worry about competitors in South Korea. That’s quite a nice thing. We could have seen the Florida and California companies move into Arkansas, they just never did. Much more difficult to enter a new country. And then based on that, they get purchasing economies and they get cheaper and cheaper and they squeeze their suppliers because they’re mostly acting like a retailer. So that’s the Walmart picture. You know, this is a very supply side, traditional type strategy, like Walmart. Now what about the demand side? Now Walmart. the demand side is not awesome. Yes, you could say people like Walmart and they get in the habit of going and there’s some branding share of the consumer mind there, but there’s not really any switching costs or searching costs. I mean, their strength has always been on the supply side, on the cost side. Coupang has an ability to move on to the demand side that’s much more interesting. People don’t go to Walmart every day, but they can check their mobile app all the time, all day long. The experience is more engaging, it’s more enjoyable. They can start to merge in, they can start to build habits, they can start to merge in content. live streaming all of that stuff. So they’ve got the cost structure that to me looks a lot like a traditional Walmart model. But they’re able also to build out on the consumer side on the demand side. It’s probably fun to use. You probably get in the habit of just ordering things because you can get them delivered so fast and it’s fun to see the little package arrive at your door. That stuff doesn’t happen with Walmart. And then you can build from there, which is what I think they’re doing. So that’s something I think they can build out. As they move from a traditional retailer to a marketplace, they can start to build out network effects. That’s another big one, which Walmart doesn’t really have, although they kind of can. Here’s the thing about Walmart. It actually is kind of a marketplace platform. You know, what’s the difference between a retailer and a marketplace platform? Sometimes it’s just the contract terms. Like if you walk down the aisle at Walmart and you pick something off the shelf, that item is probably in the inventory of Walmart. And therefore it’s on their books, and therefore Walmart is the retailer, and it’s not a marketplace. But there could be items on their shelf that they haven’t technically taken possession of yet, and the supplier is putting them there, and Walmart just takes a fee for putting it on the shelf. So I mean, the line between retailer and marketplace is actually kind of a sliding scale. But definitely as you move, into a digital marketplace, that would be a physical marketplace. A digital marketplace, you can scale up to such degree that you can go far beyond that. So definitely the advantages Coupang has that like a Walmart doesn’t is share of the consumer mind, habit formation, and then the ability to build network effects around a large digital marketplace. So that’s all pretty cool. And then there’s probably one more, which is proprietary technology. At a certain point, You know, they’ve got the logistics, they’ve got the routing systems, they’ve got the AI, they’ve got the platform. At a certain point, they’ve built up quite a lot of software and intellectual property there. So they probably do have some proprietary technology, which I consider another type of cost advantage. So to sum that up, I count one, two, three, four, five, six potential competitive advantages with a coupon model. And it’s all very local with the prescribed market, which I always really like. So that’s why I started to use the phrase competitive fortress. It’s starting to look like a competitive fortress to me. Well, it’s halfway there, I think. I’ll put those as a list in the show notes if you’re curious. Okay, one to two more points and then I think we’ll wrap it up. This idea of… revenue scale and operating leverage which I spoke about in the previous podcast. I called this before, I’ve called it, I wrote a series of articles where I thought JD was doing something called profitless growth and here’s how I described it which is JD is using its superior scale as a retailer to achieve lower costs of goods sold via purchasing power. Right, purchasing economies, we just talked about that. Walmart does that. And by being bigger than their rivals, they can get their goods cheaper, which means that either they can have a higher gross margin, because they can keep their price similar to their competitors, and get a higher gross margin, or they can drop those prices down. And you’ll have a smaller gross margin, but they’re cheaper. You can do either. Now, What JD has traditionally done, JD’s sort of typical competitors are Amazon, but you can also look at them as competing with offline retailers. And what they have typically done is kept their gross profits artificially low. They could have a higher gross profit, but they’ve kept them low because they have… really good purchasing economies, they don’t have a lot of physical stores, and they’ve passed those savings on to consumers by keeping their prices low. That’s the profitless part of profitless growth. And in doing so, you know, they are as cheap or often cheaper than others. And what happens? Big surprise, more customers come to them, they start to get a little more market scale, they start to eat into the offline traditional retail spending more, people start to buy online, and it’s sort of, it’s a little bit of a virtuous cycle. Okay, then they’re a little bit bigger, they have more purchasing economies, they keep squeezing their suppliers, they pass all of those savings on to their consumers and so on and they’ve been doing this game for a long time. And then you also get some other economies of scale and things like IT and that. Okay. If you choose to pursue a profitless strategy, the goal there is to offer lower prices than your competitors and keep expanding and keep growing. Hence profitless growth. But there’s actually another part there. If you look at what JD has been doing over the years, they’ve been doing this for sure. But… At the same time, they’ve been keeping their gross profits lower than really they had to. They’ve also been increasing their spending on technology and logistics, not just in overall, but as a percentage. So, you know, we’re keeping it low. We’re driving down our prices and we keep flooding money into tech. So they’re taking that additional money they have by lower purchasing costs. and they’re using most of it to drop prices, but they’re using other parts of it to keep expanding their tech and logistics spending. And then the idea is, you know, you keep doing that long enough and you’ll capture more and more efficiencies, you’ll improve the user experience, and that will get you, probably make you cheaper and better over time. which again helps you more and more. So they spend a ton of money on automated warehouses and they make their own robots and they make their own drones and they keep building out their logistics network like crazy. And they just keep doing it. And that’s kind of what I call profitless growth. There’s all the 3G Capital, which is a company I really like. They are known for ruthless cost cutting, right? That’s what they’re famous for. It’s not really true. These are the Brazilian guys who bought Anheuser-Busch and a bunch of companies, and they’re known for being absolutely ruthless on cost cutting. That’s not quite true. They are absolutely ruthless on cutting costs that are necessary for the business. If a cost is not necessary, they get rid of it. If the cost is necessary, they are perpetually cutting and squeezing to the point where everybody screams. However, if a cost is strategic, they flood money into that. And every, this is why they’re so ruthless on the first part. Every dollar they free up from just an ongoing necessary costs like, I don’t know, electricity or something. Every dollar they can squeeze out of there, they put into their strategic costs, which are like marketing, R&D. And that’s how they win. They outspend their, they’re more ruthless on cutting costs than their competitors on one side. and then they also outspend their competitors on their strategic costs on the other. That’s pretty much what JD looks like to me. And I think that’s this sort of profitless growth strategy. I think that’s pretty much what Coupang is doing. So you’ll see articles written about them. Oh, they’re not making money yet. Look at their spending, look at their gross profits, look at the IT spending, and now imagine where this is gonna be in five years. Okay, last point on this is operating leverage, just to tie up last week’s podcast. You know, I spoke about revenue scale and operating leverage and how they are different when you go from the physical world to the online world, and when you go from the online world to the platform world. One, revenue scale gets a lot better. You know, opening a bunch of physical stores takes decades. Opening an online retailer, you can go within a couple years and cover the whole country. Marketplaces, platform business models scale even faster because the user groups are usually propelling your growth for you. So that’s TikTok going from one country to the whole world in 18 months. Okay, so right now it looks to me like Coupang is in mechanism number two there. They’re an online retailer growing quickly within their market. I’m curious to see how their marketplace might grow and how fast if… Now one, their growth is crazy right now. I mean, this is why everyone’s paying attention because they got like 80, 90% growth over the last year. That’s just mechanism number two. What if they move to pure marketplace growth? How big could this be? Or does their market limit them? So I’ve been thinking about that a little bit. And then the question of operating leverage. You know, their tech in theory is gonna get them operating leverage. Their logistics, probably less so, but yes, probably. A lot of those costs that delivery people are more variable. But yeah, they’re well positioned on revenue scale and operating leverage, which both of those I like. Their biggest problem in life may end up just being that they’ve taken the market and there’s nowhere else to go on the e-commerce side because it’s only 51 million people. And then, okay, so they’re a well-entrenched local giant. I like businesses like that. And while everyone wants the rocket ship that can grow forever, There’s very few of those and I think as an investor you have to be able to make money on smaller locally dominant companies. That’s kind of my number, well it’s my number two target. My number one target is the ones with the massive growth potential, the Googles and all that. But there’s so few of those. You can’t just restrict yourself to those. If you’re able to shift and make money from local dominance, local giants, there’s a world of them out there. And by local, it doesn’t have to just be geographically local, like Coupang in South Korea or Nebraska Furniture Mart in Omaha. The local aspect can also be functionally local, like certain parts of semiconductors, or it could be customer wise, could be local, like Harley Davidson. You know, Harley Davidson, most people don’t buy those those big, huge, loud bikes. but a certain percentage of middle-aged white dudes in the U.S. absolutely do. They have had, at least traditionally, a very firm hold on that group’s minds. That’s a type of local dominance too. You know, I’ve told you the story before about how I was in Boracay, the island in the Philippines, and you know, it’s just a nice little beach island. You have to take a little boat to get there. It’s pretty small. And I just was fascinated by the one supermarket on the island. because it was just a great example of local dominance based on the supply side. Because there wasn’t a big enough population on the island to support two supermarkets of that size. So I was always curious how that person got that. So I think that’s enough for today. Questions I have for this company going forward to think about the strength of its sort of regional dominance in e-commerce and whether they can expand from there. into other digital services. Let’s say do a Go-Jek model. That would be very interesting. Where can they expand to? Because they are well positioned. They’re not just a Walmart where you go once every week. People check that thing every day. So they do have a consumer presence that is interesting. I do think about what’s their total addressable market as a retailer, as a marketplace. And then this little short list of things that JD has done. which I think Coupang will probably consider, and are they gonna do them? Number one would be a move into new retail. Okay, we’ve got the e-commerce play. Let’s start having physical stores, which is what a lot of JD and Alibaba are doing. Amazon tried this a little in the US, didn’t really go. It’s much more of an Asia phenomenon, or at least a China phenomenon. So I’m curious if they’re gonna move into physical retail, which I think is an interesting move. I’m curious if they’re going to partner up with any of the other digital players the same way JD partnered up with WeChat and Tencent, which was very interesting. I’m curious if they are going to move from commerce to content, which is pretty much standard now in Asia for sure, increasingly in the US. Live streaming. I don’t know. Short video. They could do it directly, maybe they do it by partnership, but this idea of merging content, commerce, and social media is pretty powerful. I think they’re well positioned to do that. So that’s kind of probably, and then the last one be, are they gonna externalize their logistics capabilities, which would get them even greater scale? If they start selling that as a service to anybody, that’s a pretty powerful move. That’s pretty much how JD Logistics has gone and now they’re going public. And I’m going to talk about that to the subscribers in the next day and then I’ll probably do a podcast on it in a week or so. Okay, so that’s it for this one. As for me, it’s kind of a slow week, pleasant. Basically buried in IPO filings all week drinking coffee, which is oddly pretty much my favorite thing to do. So I was actually in a pretty good mood all week. I’ve been watching WandaVision on Disney, Marvel, which I’m really enjoying. This is really kind of crazy because I grew up reading comic books, you know, and they were kind of, you know, they’re comic books. It’s very crude form of media. And now to have it be like the number one type of entertainment coming out of Hollywood with these, you know, gazillion dollar budgets, it’s kind of like reliving my childhood a little bit. but a much better version. So yeah, I’ve been enjoying this a lot. And then I guess this one’s gonna end in a couple weeks, Wandavision. And then the Winter Soldier, Falcon and Winter Soldier starts right after it. So they’ve just got like a kind of a pretty good pipeline of comic book based content coming my way or coming our way. Anyways, that’s my big plan for the next couple of weeks. Hopefully on the road on the plains in maybe late March Depending how things are going back to the US. I think Anyways, that’s it for me. I hope everyone is doing well. I hope you’re having a great week and Staying safe and I will talk to you next week. Bye. Bye