[November 25, 2018]
* Initial Analysis *
The primary product level business model of Mercari is mobile app-based C2C marketplaces. Mercari’s C2C marketplace app portfolio has dominant market position in Japan. Mercari is trying to penetrate overseas markets with operations in US & UK. The US operation is still in early stage with GMV of US$ 71M in 3Q18 with MAU and other operation metrics undisclosed. The company now focuses on scaling up the US operation. The status of UK operation is unclear. Based on how the company reports, it seems the contribution from UK operation is neglectable.
Mercari has other ventures / initiatives such as Merpay (digital payment service) and Merchari (bike-sharing) to build a so-called ecosystem. The rationale behind building up an in-house payment system is quite obvious as commission expense currently accounting for around 1% of GMV in CY3Q18 (or ~ 10% of Net Sales) in Mercari Japan. Merely on the cost saving side, the more Merpay gets adopted by users, the more on-going commission expense Mercari can save. The business model of bike-sharing is unclear. Hopefully, it will not become a cash-burning initiative.
Group level business model is that the company uses cash generated by Mercari JP (a more mature cash cow) and money raised in IPO to fund other cash-burning “stars” such as Mercari US/UK and Merpay. Mercari acquired CARTUNE, a community service focusing on cars, via share exchange in October 2018. (One rationale behind the acquisition of CARTUNE can be found in Borja Moreno de los Rios’s post on Marketplace Liquidity) Mercari is also doing corporate venture capital (CVC) focusing on sharing economy, C2C businesses, and other ventures that aim to create a more active global marketplace.
Currently, Mercari adopts a straight forward 10% take-rate on GMV as its primary revenue stream. Going forward, it might implement different take-rates on vehicle parts as those components have high unit transaction price. The management’s attitude toward current take-rate level is that it’s reasonable. Mercari might be able to raise the take-rate by providing other value-added service in the future.
Mercari doesn’t disclose enough information on number of transactions so user behavior information such as transaction frequency and unit transaction size are missed. The participants at C2C marketplace can switch sides (overlapping between seller and buyer), so MAU is suitable as an unit measurement of transaction activity.
Below are monthly metrics only disclosed for FY3Q18
- Number of Seller: 2.0M
- Number of Listings: 24.6M
- Number of Transaction: 10.6M
- Number of Buyers: 3.1M
Mercari JP App downloads have already exceeded 70M while the MAU is only around 11M. To increase MAU, Merccari probably has to focus on user engagement. In terms of ARPU, transaction frequency might be increased by better curation, facilitation or community building. Unit transaction size depends on listing category and profile of user base (age, gender…).
An idea to increase good velocity (how many times a good has been changed hand): seller can leave a length-limited digital note on the item (virtual id) and can check the accumulation of notes when it changes hand with another note in the marketplace.
The unit economics shows that Mercari JP has potential to have a profitable growth when it further scales up if the competition is not fierce in the market. The healthy unit economics doesn’t mean this C2C marketplace has competitive advantage or is immune from competition.
Mercari JP has very high brand awareness and adoption among flee market app users in Japan. According to Macromill’s survey in CY2Q17, 94.0% of flee market app users responded they use Mercari. With the huge gap between app downloads and MAU, the implication of high market share is that the JP MAU expansion is a not task of user acquisition but user conversion and engagement.
Let alone marketplace differentiation (UI/UX…) / platform management, for a new entry or existing competitor willing to burn cash, price cut and subsidy (on shipping fees) are effective tools to make its marketplace another home for new users. If there’s no effective strategy to tackle multihoming behavior, price competition will just make everybody miserable except for users. With cash raised from IPO and access to capital market, Mercari is in a better position when competitors start price war.
The competition brought by Sea Group’s (SE.US) Shopee in Taiwan E-commerce market eventually led to the privatization of PCHomeStore (4965.TW) via share buyback by its parent company, PCHome Online (8044.TW).
Onlookers from other markets might think the straight forward take-rate ia unsophisticated. In addition to commission, there are various revenue sources a marketplace can charge its users.
- Listing fee ($/listing)
- Payment process fee (x%)
- Other premium service
Mercari describes Mercari JP as being in stable growth phase and Mercari Overseas & other initiatives like Merpay as being in investment phase.
The profitable growth of Mercari JP is critical to Mercari’s master plan. The management thinks 30% to 40% annual growth is healthy for a marketplace in stable growth phase at current GMV of JPY 99.0B in FY1Q19. It’s futile to guess how long the high growth can sustain. What’s really important is to identify source of growth and resources required to support the growth. As discussed in the unit economics, the source of growth includes:
- user conversion (re-activation / retention)
- unit transaction price
- transaction frequency
If the company only focuses on users acquisition, it can run TVCM, launch CRM program or even do M&A deals. There’s much more to be done besides merely spending the money.
Someone in the company needs to decide which advertising channel is effective to acquire / re-activate users , what kind of CRM program retains users and increases listing /transaction activities, what complementary community that fits in Mercari’s ecosystem…
Internally, other teams need to lead and execute initiatives to improve UX/ customer satisfaction / platform stickiness…
To increase transaction activity on the C2C marketplace, probably strategies on community / social aspect / user generated content on the platform might work (my gut feeling…). Anonymous delivery is key to increasing social aspect in C2C marketplace. (The survey about Mercari JP’s satisfying features below was conducted by Mercari)
Human capital is indispensable to support the profitable growth of the marketplace. It’s relatively difficult for outsider to evaluate the workforce quality (while some Mercari’s talent acquisition activities have been reported). Mercari only discloses headcount information. It seems Mercari’s talent acquisition is heading in the right direction. How much value the increasing workforce can generate depends on the leadership of senior management.
*50 new graduates joined Mercari JP on October 1st. and assume zero churn on workforce in FY2Q19.
As most of user behavior improvement initiatives are data-driven, Mercari might focus on talent acquisition of engineers specializing in data science and algorithm.
[Mercari US & Merpay]
It seems Mercari US is experimenting on advertising channels (offline & online). The Q&A session transcript revealed that Mercari US’ GMV has not reached the critical level (they determine the number is Monthly GMV of US$ 100M). In term of investment scale in US operation, Mecari targets to maintain current level before operation getting to critical level mentioned above or GMV growth becoming stronger.
As long as we remain on track toward achieving this, we will continue with the current level of investment, but if we begin to fall short, we may reconsider our strategy. On the other hand, if the GMV growth becomes stronger, we will consider increasing the investment amount.
The timetable of Merpay is not disclosed. By leveraging existing marketplace, the adoption of payment service system should be easier. That said, we might see some incentives offered by Mercari to get users onboard at launch of Merpay.
Projection (Intellectual Exercise)
Metrics and information not shown in the table above:
- Mercari JP MAU will increase to 18.9M by FY4Q2024
- Non-Mercari JP operation will break-even in FY2Q2024
- If there’s no fierce competition in JP, no significant cash burn on Mercari Overseas / Merpay, no radical CVC investment, Mercari will not need external financing to grow the business. Since it’s hard to predict competitive environment, Mercari is likely to sit on the cash position.
DCF Valuation based on the above projection is around JPY 2,850 per share as of November 25, 2018. (10% WACC / 3% Terminal Growth / mid-point discounting / Excl. Long-term Investment)
What to Bet and What to track
- Bet on Leadership of management team and its execution
- Mercari JP’s ARPU (GMV/MAU) improvement
- Mercari US’s GMV traction
- Merpay’s development
- Without further information access I think it’s relatively difficult to have a conviction on this stock.
~ Related Posts ~
~ Material ~
~ Corporate Event ~
FY2Q19 earnings release is scheduled at 3pm or later Japan time on February 7, 2019.