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Korea's logistics paradox: surging demand, looming vacancies

Dominance of giant e-commerce firms, international players' entry transform domestic logistics market

By Kim Hae-yeon

Published : Dec. 20, 2023 - 15:49

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From oversupply of logistics hubs to international giants’ entry, South Korea’s booming e-commerce industry is being reshaped by multiple challenges and changes.

According to Colliers Korea's December report, 114 logistics centers occupying over 10,000 square meters were registered this year, marking the highest figure since 2017.

The rise was fueled by the heightened demand for logistics centers that surfaced three years ago during the peak of the pandemic.

The Greater Seoul area saw a much more significant increase, with the gross area of logistics centers in the region seeing a 37 percent rise during the first half of the year, compared to the second half of last year, according to a report by real estate services firm Rsquare.

Such expansion is fueling concerns, as many distribution centers are struggling to secure tenants, leading to an overflow of vacancies.

In the first half of this year, the average vacancy rate for warehouses in metropolitan areas stood at around 10 percent – more than double that recorded in the same period last year.

Particularly alarming is the projected vacancy rate for cold warehouses, estimated to range between 30 to 50 percent, depending on the region.

Compared to ambient warehouses where items are stored at room temperature, cold warehouses generally face greater challenges in finding tenants due to limited demand.

The phenomenon serves as a clear indication of the industry's changing landscape, transforming into a survival-of-the-fittest scenario for e-commerce firms, say industry insiders.

"Many smaller enterprises struggle to keep pace, particularly when it comes to the critical 'last mile' in the cold chain," a leading e-commerce platform official said on condition of anonymity.

"Delivering refrigerated and frozen goods to customers’ doorsteps necessitates another chain of refrigerated and frozen vehicles, which incurs substantial costs. So even if there is demand, the delivery quality of frozen products often deteriorates, leading businesses to eventually bow out of the investment game in these perishable items," the official said.

What set the Korean market apart until a few years ago was its decentralized structure, which had allowed small to medium-sized companies to lease their own logistics centers and claim market share. Consumers made purchases directly from these companies' online corner stores, enjoying discounts and a diverse array of options.

The industry landscape is now trending toward dominance by a select few leaders, compelling small-sized vendors to prioritize selling their products on larger e-commerce platforms for greater efficiency and sales.

"The Korean market was quite unique in the past, as consumers have traditionally favored direct purchasing. However, the current trend is intensifying competition for sellers, since more and more consumers are solely relying on one or two platforms for fast and efficient delivery," the official added.

The result is that large e-commerce platforms are actually looking for additional rentals in better locations, despite rising vacancy rates in the short term.

Experts say, however, that this mismatch is likely to resolve itself.

"While the logistics centers market could look like it's in crisis from the outside, it's anticipated to achieve a gradual balance as the supply of logistics warehouses decreases over time," said Jung Jin-woo, head of research at Cushman & Wakefield Korea.

According to Jung, the financing crunch resulting from high interest rates has resulted in a comparatively low proportion of distribution centers that have actually completed construction and are operational for storage purposes.

Jung also observed that rather than leasing, major e-commerce platforms are likely to acquire or construct their own logistics centers in the future.

"In the initial stages, leasers do not exhibit specific preferences for their storage requirements. However, as the process advances, more detailed segmentation emerges regarding the types of items to be stored under different conditions. Consequently, leasers are becoming increasingly discerning, akin to consumers making purchases. This leads to an overall improvement in the quality of logistics centers."

Meanwhile, industry experts assess that the strong likelihood of AliExpress planning to secure a logistics warehouse in the country signals an ongoing demand for urban distribution centers. Specifically, e-commerce giants are in need of what is referred to as "micro fulfillment centers," referring to relatively small-scale storage facilities to reduce cost and transit times.

However, from the e-commerce firms' side, it is ultimately not just about finding the right logistics center tailored to the size and requirements of the business, but more so about being able to select, choose and store the appropriate items for delivery to consumers, according to an official at Coupang, the nation’s largest e-commerce platform operator.

The latest government data shows that Coupang occupies 24.5 percent of the nation's e-commerce market, followed by Naver with 23.3 percent and Shinsegae Group with 10.1 percent.

AliExpress officially entered the Korean market in 2018. According to market tracker Mobile Index, the number of AliExpress users has almost doubled this year, increasing from 2.27 million in January to 4.31 million as of October.