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Retail

Costco enters dawn delivery service market in S.Korea

South Korea has become the first country in which Costco offers early morning delivery service

By Jun 05, 2022 (Gmt+09:00)

3 Min read

Costco arrived in South Korea in 1998
Costco arrived in South Korea in 1998


Costco Wholesale Corp, a big-box retail giant, has begun dawn delivery services in South Korea as e-commerce is becoming the norm in the nation's grocery retail market, according to sources familiar with the matter.

From late May, the membership-only retailer has been offering free early morning delivery services for online orders over 50,000 won ($40) to customers in Seoul and neighboring Gyeonggi Province for the first time during its 24 years in the country.

With 16 outlets across the country, South Korea became the first country in which Costco offers morning delivery services among its stores in overseas markets. In Texas, it started a similar service, or same-day delivery, in cooperation with Uber Technologies Inc., a US mobility service company.

“The move demonstrated Costco’s determination to expand its presence at the expense of profit margins,” a retail industry official said.

The delivery services are being provided in cooperation with CJ Logistics Corp., South Korea’s largest moving and delivery service provider.

Domestic e-commerce leaders such as Kurly Inc., Coupang Corp. and Shinsegae Corp.’s SSSG.COM have been stepping up efforts to grab a bigger share of the market for fresh produce and daily necessities, encroaching on Costco’s share.

In some measure, the US warehouse-type retailer might be trailing the local online malls that allow customers looser deadlines by when an order must be made, such as 11 p.m. or midnight, for their orders to be delivered to by 7 a.m. the next morning.

For Costco’s online customers, orders must be placed by 5 p.m. the day before to be delivered by 7 a.m. the next morning.

REMARKABLE REVERSAL

Costco's entry into the early morning delivery market is a remarkable reversal of its no-delivery policy.

To better compete with established e-commerce platforms, Costco offers a 20% discount on a few selected items for its online shoppers.

E-commerce took about a 40% share of South Korea’s entire commerce market in 2021, or $196 billion of the $483 billion total, according to research firm Euromonitor. 

LOTTE'S RETREAT

Costco’s move is in stark contrast to that of South Korea’s retail titan Lotte Group, which recently pulled out of the loss-making dawn delivery market.

In April of this year, the country’s fifth-largest conglomerate ceased dawn delivery services for fresh food, two years after it jumped into the burgeoning e-commerce market to challenge sector leaders Coupang Corp. and Kurly Inc.

Coupang is South Korea's leader in early morning service with its trademark 'Rocket Delivery' 
Coupang is South Korea's leader in early morning service with its trademark 'Rocket Delivery' 


Coupang has been strengthening its fresh product offerings and competitive pricing, alongside its "Rocket Delivery," or same-day or day-after delivery.

Kurly, the operator of Market Kurly, is also following in the footsteps of Coupang as it is planning to go public this year.

GROWING LOSSES

However, both Coupang and Kurly are under pressure from growing losses.

Coupang saw its operating loss almost double to 1 trillion won in 2021 from the year earlier, despite a 50% jump in sales. Kurly’s operating loss widened by nearly 90% to 217.7 billion won during the same period, while its sales soared 64%.

Meanwhile, Costco could maintain its price competitiveness thanks to its global sourcing and efficient expense management, as well as annual membership fees.

“Costco seems to cover delivery costs with membership fees,” the retail industry official said.

But it is also suffering from declining operating margins in South Korea, which stood at 3.3% in 2020, versus 4.5% in 2015, according to its filing to the Financial Supervisory Service.

In 2020 alone, Costco Korea's sales expenses increased by 100 billion won due to a rise in wages and promotion and transportation costs. Dawn delivery services could add to its cost pressure.

In its fiscal year of 2020 ending on August 31, 2021, it reported 177.5 billion won in operating profit on sales of 5.4 trillion won.

(Updated on June 7 to clarify that Costco entered the dawn delivery service market and to remove the phrase that said the minimum amount for Shinsegae's free early morning service is 120,000 won)

Write to Dong-Hui Park at donghuip@hankyung.com
Yeonhee Kim edited this article.

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