[The Crisis of e-Commerce]④ 'On the Edge' 1st Generation Open Market 11st Street... Direct Purchase on the Test Bench

11st Surpasses 'Half' Share of Direct Purchases Last Year
Chose Growth for Listing... Accumulated Deficits
Struggles to Find New Owner... Profitability Improvement Expected This Year

11st, the first-generation e-commerce platform that dreamed of becoming the 'Amazon of Korea,' is struggling to find a new owner. Following last year's failed initial public offering (IPO), a forced sale process is underway amid growing negative outlooks on the e-commerce market due to the large-scale settlement delays of Qoo10-affiliated TMON and WEMAKEPRICE (Timepf).

11st has expanded direct purchasing in recent years to grow its size, which led to increased operating losses and a sharp rise in debt ratio as assets significantly decreased during the process of recovering accumulated losses. This year, 11st is focusing all efforts on improving profitability by cutting costs, including workforce restructuring, to escape deficits.

'Adieu Open Market'... 11st Grows Bigger, Direct Purchase Share Surpasses 50% Last Year

Ahn Jung-eun, CEO of 11st.
[Photo by 11st]

According to the Financial Supervisory Service's electronic disclosure system on the 25th, 11st's direct purchase sales?buying products directly from manufacturers and selling them to consumers?reached 435.7 billion KRW last year, surpassing open market brokerage commission sales of 429.7 billion KRW.

As a first-generation e-commerce platform, 11st started as an open market where consumers purchase products listed by third-party sellers, and the platform earns revenue by taking a commission from the sales amount. However, the share of direct purchases, which was 3.9% in 2020 and 4.6% in 2021, expanded to 38% in 2022 and accounted for more than half of sales last year.

Open market brokerage commissions are typically around 10% of the sales amount. For example, selling a product priced at 10,000 KRW results in 1,000 KRW recorded as revenue. In contrast, direct purchases treat the entire sales amount of 10,000 KRW as revenue, allowing the company to increase its volume. This is the business model that Coupang and Kurly have grown with.

In fact, 11st's sales surged rapidly after launching 'Shooting Delivery' in 2022, a service enabling fast delivery of direct purchase products. Sales, which had remained around 500 billion KRW until 2021, jumped to 789 billion KRW in 2022 and further increased to 865.5 billion KRW last year, with 1 trillion KRW sales within reach this year. However, during this period, the cost of purchasing goods surged, significantly widening operating losses. While the company increased its volume, profitability deteriorated.

'Growth for Listing' Choice... A Double-Edged Sword

11st's expansion of direct purchase share, based on its open market foundation, was a move aimed at an initial public offering (IPO). In 2018, 11st secured a 500 billion KRW investment from H&Q Partners and Innoius Private Equity, promising to go public within five years. If the listing failed, they agreed to return the 500 billion KRW investment with an 8% annual interest.

The contract stipulated that if the listing was not completed by September 30, 2023, the financial investors (FIs) could force a sale (drag-along) of SK's shares. Before that, SK was granted a call option to repurchase the shares.

However, the listing failed last year, and SK Square, the largest shareholder of 11st, waived the call option, leading FIs to initiate the forced sale process. Although Qoo10, AliExpress, Oasis Market, and others were mentioned as acquisition candidates, no actual sale occurred. Since the beginning of the year, Chinese direct purchase platforms like AliExpress have aggressively targeted the domestic market with 'ultra-low prices,' intensifying competition in Korea's e-commerce market. The Timepf incident also highlighted the financial soundness of platforms.

Direct purchasing, which has been 11st's growth engine in recent years, carries the risk of inventory burden on the platform if products do not sell. Indeed, 11st's inventory assets surged from 6.9 billion KRW in 2021 to 71.9 billion KRW the following year and nearly 80 billion KRW (79.7 billion KRW) last year. Meanwhile, deposits held to pay third-party sellers after product sales decreased from 401 billion KRW in 2021 and 354.5 billion KRW in 2022 to 295.5 billion KRW last year, reflecting a decline in open market transaction volume.

As deposits sharply declined and accounts payable to suppliers decreased, the company's liabilities fell by 83.5 billion KRW to 488.9 billion KRW last year compared to the previous year. However, assets shrank as accounts receivable dropped sharply from 400.9 billion KRW in 2022 to 162.5 billion KRW last year due to transferring unrecovered credit card receivables to capital companies, causing the debt ratio to soar from 220% to 400% during this period.

Focusing on Profitability Improvement This Year... Soothing Open Market Sellers

Following the Timepf incident, 11st has been focusing on retaining open market sellers by expanding the 'Safe Settlement' service. This service pays 70% of the settlement amount the day after product delivery and the remaining 30% the day after the customer confirms the purchase. This allows sellers to receive more than two-thirds of their payment about seven days earlier than the usual settlement process, which can take up to ten days.

Last month, 11st's CEO Ahn Jung-eun officially expressed the parent company's support intentions. In a CEO letter sent directly to third-party sellers, Ahn stated, "We are continuously discussing various current issues, including the recent rapid changes in the e-commerce market with SK Square. SK Square's management also plans to actively cooperate so that 11st can provide customers with a safe and convenient shopping experience based on trust and grow together with sellers."

According to 11st, the company has recorded seven consecutive months of profitability in the open market segment from March to last month this year. The cumulative operating profit of the open market segment from January to September this year increased by more than 17 billion KRW compared to the same period last year, and the overall operating profit of 11st, including the retail (direct purchase) business, also rose by over 30 billion KRW year-on-year.

11st plans to concentrate its capabilities on self-help efforts to improve profitability this year. By the end of this year, it aims to introduce differentiated services that enhance customer benefits and convenience, such as 'Club Membership' and 'Family Payment.' Based on this, the company targets turning the open market business's operating profit positive this year and achieving overall operating profit profitability across all businesses next year.