In conversation with Mr. Jiyong Um, Logistics Expert Beyond X CEO, Chief Creative Officer, Connectors operator, and creator, we tried to understand the E-commerce Logistics market in South Korea.
“Increasing data volume of the growing E-commerce market and digital transformation is driving the growth of the logistics market in South Korea.”
Q1. How has the South Korean E-Commerce Logistics industry evolved over the past 5 years?
Korea's e-commerce logistics were on the fringes of the industry just 10 years ago. E-commerce logistics was neglected by traditional logistics companies because it was difficult to create economies of scale and density.
However, e-commerce transactions continued to grow. In e-commerce logistics, companies that create economies of scale and density and create profitability have emerged one by one. It was between 2018 and 2019 that large Korean logistics companies also entered the market with interest.
Paradoxically, it was not logistics companies that triggered the growth of e-commerce logistics, but e-commerce platform companies. The three largest e-commerce platforms in Korea, represented by Coupang, Naver, and SSG.com, all competed fiercely in logistics, and Corona 19 accelerated the competition.
Currently, e-commerce logistics are competing in a way that is moving towards greater speed. Competition among commerce companies has intensified from D+1 Delivery to D+0 same-day delivery, and new trends such as MFC (Micro Fulfillment Center) are drawing attention.
Q2. What have been recent developments in this industry? What were the major growth drivers?
All logistics are based on economies of scale. The growth engine of e-commerce logistics is inevitably developed in conjunction with e-commerce order volume. This is the background that led the development of logistics by e-commerce platform companies that extract huge orders by themselves.
In addition, the density of e-commerce orders is also an important indicator of logistics efficiency. A high order density is essential to create a performance metric represented by order throughput per hour and to achieve high density, you must increase the size of orders by region.
Q3. What is the Value chain for the E-commerce Logistics Market and what are the major entities currently prevailing in this entire value chain and if any (%) margins charged by them?
The value chain of e-commerce logistics can be divided into two main entities. One is a space operator that operates the Fulfillment Center. Another one is the Lastmile Delivery operator, which delivers the volumes from the Fulfillment Center to the final consumer.
Another player that's been getting a lot of attention lately here is the Middle-mile Logistics Operator. The Middle-mile Logistics Operator is responsible for supplying the right amount of goods to the Fulfillment Center.
Each player has a different rate system. In the case of a Fulfillment Center Operator, the shipping company receives the logistics handling cost (Picking & Packing) and storage cost. Last-mile Delivery Operator is paid the shipping cost per case to the shipper. Usually, the Fulfillment Center Operator offers the shipper an integrated fee including the last-mile delivery fee.
Finally, it is common for middle-mile delivery operators to contract directly with shippers. We transport cargo from the shipper's manufacturing and logistics base to the logistics base operated by the Fulfillment Center Operator and charge for it. Recently, cases where fulfillment center operators directly contract with middle-mile logistics companies to charge consolidated rates are increasing.
Q4. What impact did COVID-19 have on the South Korea E-Commerce Logistics Market?
Due to COVID-19, the e-commerce market will continue to grow at a high rate. E-commerce logistics also continues to grow at a high rate at the same time.
In 2022, however, this trend was reversed due to the deterioration of the macroeconomy. The growth rate of e-commerce in 2022 has fallen, and e-commerce logistics are also being adversely affected.
Q5. What challenges are currently faced by the South Korea E-Commerce Logistics Market? What is the future outlook for the E-Commerce Last mile shipment orders in terms of CAGR during 2021 - 2026?
Due to the deterioration of the macroeconomy, concerns about efficiency are increasing in e-commerce logistics as well. In order to move the industry in a direction that can make a profit in the long run, there is a high interest in the basic elements of logistics such as cost reduction and productivity increase. As a means to this end, interest in robotic automation is growing. On the other hand, there is growing skepticism about Micro Fulfillment, which is inherently high cost.
In terms of CAGR, e-commerce orders will continue to grow, but at a slower rate than before. It is not easy to predict the change in the number of orders in the future due to the effect of macroeconomic changes such as the base effect caused by COVID-19 and inflation. In particular, Korea is a country that has already recorded a high online penetration rate, so I think there will be a limit to the spread of the online penetration rate. If that happens, the number of operators who see new market opportunities in 'cross-border e-commerce' will increase.