Luxury fashion platform Balaan faces thinning coffers amid mounting loss

Concerns are growing about the financial health of South Korean luxury fashion e-commerce platform operator Balaan Co. after its net loss doubled on-year to 37.9 billion won ($29.1 million) in 2022 despite Koreans' huge appetite for luxury brands, and its cash reserves are dwindling.

According to investment banking industry sources on Thursday, the Samdo Accounting Firm has flagged Balaan’s ability to continue as a going concern after its audit of the company’s financial statements for 2022.

The independent auditor noted that the high-end online shopping startup’s liabilities exceeded its assets by 655 million won as of Dec. 31, 2022. That means the company has grappled with negative working capital, a measure of a company’s liquidity and short-term financial health.

Balaan also faced cash strains, as its cash and cash equivalents contracted to 3.2 billion won as of end-2022 from 21.2 billion won a year earlier, and cash deposits plunged to 106 million won from 15 billion won over the same period.  

After posting a net loss of 37.9 billion won last year, double the previous year despite a 71% growth in sales to 89.1 billion won, the luxury fashion platform urgently needs to turnaround this year to prevent a sharper liquidity squeeze.

FUNDING DROUGHT

Last October, Balaan announced it had attracted 25 billion won in a Series C funding round from Shinhan Capital, Company K Partners, Daol Investment and two venture capital companies.

Including the latest funding, the luxury online shopping platform has drawn a combined 73.5 billion won since its founding in 2015.

But total funding for its Series C round was much smaller than its original plan for a 100 million won because investors turned conservative about lavish spending on luxury fashion e-commerce platforms, which have enjoyed rapid growth on the back of younger Koreans' passion for high-end fashion while plush with liquidity during the COVID-19 pandemic.

Investors have remained reluctant to invest in startups amid growing uncertainty about the global economy in the current inflation-triggered higher interest rate environment.

Although investor sentiment toward platform companies has not improved much, Balaan and its local rivals Trenbe Inc. and Must’it Inc. have begun tightening their belts.

SAVE AND INVEST IN NEW GROWTH

Balaan spent 38.5 billion won on marketing campaigns last year, more than double from a year ago, but it halted its TV ad starring famous Korean actress Kim Hye-soo in the fourth quarter of last year as part of efforts to cut costs.

The company expects its efforts to improve profitability will pay off this year and help it turn around.

Balaan said last year's loss stood at the anticipated level it had discussed with its investors earlier last year.

It also denied any liquidity risk raised by the market, saying it has been cashing in on 13 billion won worth of inventory without any problem.

Regarding the complaint that Balaan has failed to deliver 400 million won worth of products to its B2B platform partners for months after receiving their payments, the company also denied wrongdoing, saying some minor delays occurred because some companies failed to pay them on time. 

Balaan held nearly 50% of the total gross merchandise value (GMV) in the Korean luxury fashion e-commerce platform market last year. Its growth, however, hinges on whether it can pioneer new markets, market analysts said.

Balaan CEO Choi Hyung-rok said last year that the company aims to go global by 2024.

Though its mounting losses could delay its global push, it is expected to prepare by diversifying its product portfolios and adding new businesses with the latest investment.

The company is eyeing Asia as its first major overseas market.

Write to Jeong-Cheol Bae at bjc@hankyung.com
Sookyung Seo edited this article.