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O2O startups struggle on high marketing costs

All News 11:28 June 07, 2016

SEOUL, June 7 (Yonhap) -- South Korean startups in the online-to-offline (O2O) business have been faring poorly over the past couple of years due to high marketing costs amid a lack of solid revenue sources, data showed Tuesday.

With the use of smartphones growing fast, O2O startups have sprung up in South Korea in recent years, enabling consumers to use an app or website to order food, car rides, real estate and other services.

According to the data by the Financial Supervisory Service, Woowahan Brothers, the operator of South Korea's leading food delivery application "Baedal Minjok," which means "Delivery Nation" in English, posted an operating loss of 24.9 billion won (US$21 million) in 2015, which widened from a 15 billion won deficit a year earlier.

Location-based coupon application provider YAP Company saw its operating loss balloon to 14.2 billion won last year from 5.2 billion won in 2014. YAP Company currently operates an app dubbed YAP, which allows users to download coupons and discount information related to shops located near the users, including major franchises.

Over the cited period, the operating loss of car-sharing app SoCar widened to 6 billion won from 1.5 billion won. Industry watchers said other famous O2O startups are also sputtering despite their large initial investments.

And the situation is not so good for big Internet companies that have ventured into the O2O business.

Kakao Corp., the operator of South Korea's top mobile messenger KakaoTalk, saw its first-quarter operating profit tumble 48 percent on-year. Kakao offers apps for such diverse things as personal chauffeur services, taxi hailing and beauty salon reservations.

South Korea's top three social commerce operators -- Coupang, WeMap and Ticket Monster -- registered a combined loss of more than 800 billion won last year, according to the data.

Market watchers said O2O companies' losses were due to their growing marketing expenses aimed at securing market share. For example, Woowahan Brothers spent 31.3 billion won on marketing last year, up 41 percent from the previous year.

Also responsible was their high dependence on advertising for revenue, as the companies were unable to charge high fees on their services out of concern over bad optics, they said.

"Doubt has been cast on the viability of some O2O companies as they depend entirely on mobile advertising for revenue," said Yoon Jung-seon, an analyst at Hyundai Securities Co.

However, some experts said it is still too early to say whether local O2O companies have failed or succeeded because huge investments have boosted brand recognition, and the O2O ecosystem is still expanding on the back of greater consumer trust.

yskwak@yna.co.kr
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