[The Crisis of e-Commerce]⑧ SSG.com’s Difficult 'Diet'... Growth Dilemma

Annual Growth Sales Also Declined Last Year
Operating Losses in the 100 Billion Won Range Continue for 3 Years
Financial Soundness Warning... "Investment Appeal ↓"
Breakthrough Through Management Efficiency and Competitiveness Enhancement

SSG.com, an e-commerce affiliate of Shinsegae Group, is experiencing growing pains as it embarks on a high-intensity cost-cutting campaign. The company is facing negative growth due to significant expense reductions aimed at escaping annual losses in the 100 billion KRW range. Shinsegae Group has initiated efforts to overcome deficits by replacing the CEO of SSG.com this year and implementing personnel restructuring. However, as growth stalls under a profitability-focused management approach, pressure from financial investors (FIs) to recover their investments is increasing, raising concerns about whether a capital injection of around 1 trillion KRW will be possible.

According to Emart’s semi-annual report on the 8th, SSG.com’s sales in the first half of this year amounted to 808.5 billion KRW, down 4.7% from 848.3 billion KRW in the same period last year. Following a 3.8% decline in annual sales last year to 1.6784 trillion KRW from 1.7447 trillion KRW the previous year, the rate of decrease has widened. This contrasts sharply with Coupang, the number one player in the e-commerce industry, which has posted growth rates exceeding 20% annually and saw its sales increase by more than 30% in the third quarter of this year.

SSG.com has terminated the exclusive contracts with actors Gong Hyo-jin and Gong Yoo, who were advertising models in 2023.

Expansion of Operating Losses... Large-Scale Cost Reductions Including Advertising Expenses

SSG.com was established in December 2018 by splitting off Emart’s online shopping mall and absorbed Shinsegae Mall in March of the following year. Sales jumped from 8.8 billion KRW in its first year to 844.1 billion KRW the next year, and surpassed 1 trillion KRW in 2020. After acquiring the fashion platform W Concept in 2021, sales grew to the 1.7 trillion KRW range in 2022, but the company’s size has shrunk since last year.

The worsening profitability led to drastic cost reductions. The company posted an operating profit of about 1 billion KRW in its first year but recorded an operating loss in the 80 billion KRW range the following year. It succeeded in halving its operating loss in 2021 but has been posting losses in the 100 billion KRW range since 2022. The COVID-19 pandemic accelerated the trend toward non-face-to-face shopping, intensifying competition in the e-commerce market. E-commerce companies lowered prices to attract customers and invested in logistics centers to compete in delivery, which increased losses.

However, since last year, the management focus shifted to profitability, leading to large-scale cost reductions. Marketing expenses were drastically cut, resulting in negative sales growth. In fact, SSG.com reduced advertising expenses from 61.5 billion KRW in 2022 to 48.6 billion KRW last year, and promotional expenses shrank from 34.2 billion KRW to 22.9 billion KRW. Consequently, costs were cut by more than 7 billion KRW, from 1.8559 trillion KRW to 1.7814 trillion KRW. However, reduced brand exposure and weakened price competitiveness appear to have caused sluggish sales.

Shinsegae Group carried out personnel restructuring this year by replacing the head of its e-commerce division. For SSG.com, the CEO was replaced with Choi Hoonhak, an expert in sales, and restructuring was initiated. In July, the company conducted its first voluntary retirement program since its establishment, with about 200 employees reportedly leaving. Additionally, as a cost-saving measure, SSG.com plans to relocate its office from the Gangnam Centerfield building to the KB Yeongdeungpo Tower in Yeongdeungpo in February next year.

Challenge of Securing 1 Trillion KRW Capital Injection

Shinsegae Group is seeking an investor to purchase 1,316,492 common shares of SSG.com (30% of total shares) held by Affinity Equity Partners and BRV Capital by the end of this year. SSG.com raised 1 trillion KRW from these financial investors in 2019 to strengthen its delivery competitiveness. At that time, both parties signed a put option agreement stipulating that if SSG.com’s gross merchandise volume (GMV) did not exceed a certain level or if IPO-related conditions were not met, the FI would have the right to sell their shares back to the company at a premium.

The FIs demanded that Shinsegae repurchase their shares early this year, claiming that SSG.com failed to meet both conditions, and agreed to find a new investor by the end of this year. Securities firms such as KB Securities are reportedly pursuing the acquisition of these shares.

The 24.4% stake in SSG.com held by Shinsegae, led by Chairwoman Chung Yoo-kyung, is also a challenge. Currently, Emart is the largest shareholder with a 45.6% stake. Recently, Shinsegae Group formalized the separation of its affiliates following Chairwoman Chung Yoo-kyung’s promotion, raising the possibility that Emart might acquire Shinsegae’s stake in SSG.com.

However, SSG.com has not been profitable since its establishment, triggering red flags regarding its financial soundness. Its consolidated current assets (assets convertible to cash within one year) were 821.1 billion KRW in 2019 when it received FI investments but nearly halved to 483.3 billion KRW last year. Meanwhile, current liabilities due within one year increased from 546.3 billion KRW to 672.5 billion KRW during the same period. Among current liabilities, accounts payable to suppliers amount to 474.4 billion KRW. Judging by these figures alone, the company appears unable to even pay its outstanding debts.

An SSG.com representative stated, "Recent sales reflect the 'balanced growth' strategy of growth and profitability that has been ongoing since the second half of 2022," adding, "In fact, total GMV increased last year, and losses decreased by 8.2 billion KRW. In the first and second quarters of this year, GMV grew by 16% and 5%, respectively, and EBITDA turned positive. We plan to achieve annual EBITDA profitability by boldly restructuring our business to improve profitability."