Courier Growth Slows for a Second Year: What That Says About Delivery and Consumption

Courier delivery is the infrastructure of e-commerce, and e-commerce has been one of the biggest drivers of Chinese consumption over the past decade.

China's largest courier companies have all now reported last year's results. SF Express had the highest revenue (90.943 billion yuan). ZTO had the highest profit (4.387 billion yuan) and also carried the most packages, shipping 8.52 billion parcels over 2018.

The last to report was YTO, which delivered 6.664 billion parcels for the year, up 31.61%. YTO plugged into Taobao's delivery system in 2005, when Taobao itself was barely two years old. From then on, couriers were folded into the online shopping supply chain and became a piece of essential infrastructure.

The industry rode e-commerce into the fast lane. Annual parcel volume climbed from 2.28 billion in 2005 to 50.5 billion in 2018.

You could say parcel volume tracks the pace of e-commerce growth directly — better, arguably, than the gross merchandise value (GMV) the platforms report themselves, since orders placed during shopping festivals but never shipped still count toward GMV.

And e-commerce is the fastest-growing large category in Chinese consumption.

Over the past two years, that pace has slowed a great deal.

The Tongda couriers — STO, YTO, ZTO, Best Express and Yunda — each grew delivery volume by at least 34% last year, a rare speed in the Chinese economy today. Yet growth for the industry as a whole kept sliding, from 51% before 2017 to 26.46% now, back to where it stood after the 2008 financial crisis.

Parcel growth hasn't picked up in two years, and slows in step with consumption

Consumption growth across China began slowing before courier growth did. What moves the courier business more directly is e-commerce. Figures from the National Bureau of Statistics show e-commerce spending growth falling for 12 months straight, from 35.6% in February 2018 to 19.5% in February 2019, before edging back up to 21% in March 2019.

In China's courier market, the main business is carrying goods for e-commerce. Courier companies and internet companies built the country's e-commerce infrastructure together. E-commerce has been the biggest driver of Chinese consumption for a decade — all the more so now that the smartphone business and the auto business have each posted their first negative growth in decades. Slower consumption shows up in the growth rates of e-commerce and couriers alike.

The future income confidence index compiled by the People's Bank of China has also been falling since the second half of 2018. Slower spending and weaker confidence in future income passed through retail and e-commerce and on into the courier business.

Courier growth leans more and more on Pinduoduo's cheap goods, and rural growth is slowing too

The fourth quarter, which holds both Singles' Day (November 11) and Double 12 (December 12), has always been the quarter when e-commerce platforms spend heavily to buy growth. In the fourth quarter of 2018, Alibaba's quarterly revenue passed 100 billion yuan for the first time, but its 41% growth was already Alibaba's slowest in three years.

Alibaba's Daniel Zhang said at Davos early this year that the internet had let rural Chinese users "enter a very transparent world," and that "this will become another engine of China's economic growth."

But the ceiling on rural e-commerce is far lower than on the urban market.

Pinduoduo did most of the work behind e-commerce growth in 2018. For the full year, Pinduoduo's platform-wide GMV reached 471.6 billion yuan, up 232% from 2017, and orders across the platform reached 11.1 billion — 21% of all parcels the courier industry carried.

That rate far outpaced the giants who had spent twenty years grinding away at e-commerce.

Pinduoduo grew up in the gaps between Alibaba and JD.com, expanding fast by taking the open ground of cheap goods. But against average spending of 5,470 yuan per active buyer at JD.com and 8,732 yuan at Alibaba, a Pinduoduo active buyer spends only 1,126.9 yuan.

The pattern carried into online spending in the first months of this year.

A research note from Shenwan Hongyuan said "resilient" demand from Taobao and Pinduoduo pulled down the industry-wide average order value in the first two months of 2019. From January to February, industry parcel volume rose 21.9% year-on-year, while spending on physical goods bought online rose only 19.5%. Behind the falling order value is a shift in what people buy online.

After years of property-led growth and rising household debt, spending is harder to stimulate than it was ten years ago, and Chinese consumers are nowhere near as optimistic about the future as they were then.

Market share keeps concentrating in the big couriers, but it buys them no pricing power

As the major courier companies went public one after another over the past two years, market share concentrated further in 2018. It did not lift their profit margins much.

Revenue per parcel hasn't risen much either.

The nature of the business decides this.

Couriers are the infrastructure of the supply chain that shapes consumption. They connect merchants and sellers and shape the customer's experience directly. Yet neither buyer nor seller deals with a courier company.

Alibaba set up its logistics arm Cainiao in 2013, absorbing partners in an attempt to control logistics end to end. Since then, what buyers and sellers touch has not been the courier. To a consumer the prices are much the same, so the choice hardly matters. When you order a pickup through Alipay, the company Cainiao Guoguo assigns you depends on which courier nearby grabs the job first; consumers have no sense of courier brands at all.

If experience counts for anything, courier delivery is no gold mine even in Japan and the United States, where the market is highly concentrated. High share has not produced high bargaining power. Yamato Transport, Japan's leader, has a gross margin lower than Japan Post's or Sagawa Express's. Stripping out one-off items, FedEx's long-run net margin is about 4%-6% and UPS's about 6%-8%.

It isn't that the big couriers don't want to reach consumers directly. They have not managed it yet, and they keep trying. Not long ago SF Express reshaped its community fresh-grocery business, SF Best, closing stores in Shanghai, Wuhan, Qingdao and elsewhere to concentrate on South China and Beijing.

Labor and materials cost more, and that hits couriers too

JD.com landed at the center of public argument recently by scrapping the base salary for its delivery couriers. In an internal letter, Richard Liu said JD Logistics lost 2.3 billion yuan in 2018 and that the money it had raised would cover only "another" two years of losses. To cut those losses, the company said it "had no choice" but to drop the base salary.

To run more efficiently, courier companies have started doing what SF Express does and raising the share of company-owned outlets. That brings higher staffing and compliance costs with it.

Data from Zhiyequan put the average courier's pay at 3,900 yuan in 2013 and 4,900 yuan in 2017. Recruitment figures from 58.com show that by the first quarter of this year the national average monthly income for logistics and warehousing jobs was 6,425 yuan.

Harder still to reverse are the costs of dearer raw materials and tighter environmental rules.

Couriers raise prices before every Singles' Day, yet shipping rates have mostly gone down. The cardboard boxes they ship in have risen at least 100% since 2016 — and will keep rising.

Among these companies, SF Express's operating costs grew fastest: they reached 74.642 billion yuan in 2018, up 31.17% year-on-year, outpacing its revenue growth.

For the full year, YTO's operating costs were 20.427 billion yuan, up 21.95%, while its average revenue per parcel fell from 3.68 yuan in 2017 to 3.44 yuan.

Alibaba is everywhere: it said building logistics was too much work, yet its courier stakes are worth 15 billion yuan, about one ZTO

China's two biggest e-commerce companies each control couriers worth tens of billions of yuan.

Alibaba never built a logistics network of its own. It used Cainiao to gather the courier companies together instead.

In March, Alibaba announced a 4.66 billion yuan investment in STO. It had already taken stakes in YTO, ZTO and Best Express; Alibaba and its affiliates hold 10%, 11%, 14.6% and 29% of the four. At the four companies' market values, Alibaba's courier holdings are worth about as much as one ZTO or one Best Express.

That leaves out Cainiao itself.

JD Logistics was spun out of JD.com in 2017 and raises money on its own. Counting JD.com's delivery couriers across the country, it employs well over a hundred thousand people.

Figures released by JD.com show that after a February 2018 round backed by Hillhouse Capital, Sequoia China and others, JD Logistics was valued at roughly 100 billion yuan. In October 2018 it announced it would start offering courier service to individual customers.

But as growth across JD.com slowed, and with Cainiao keeping JD.com out of the Taobao and Tmall delivery system, a standalone JD Logistics has not had enough orders to sustain its growth. Mid-month, Richard Liu said in an internal letter that JD Logistics' funding would cover only two years of losses.

Many attempts at differentiation, and in the end the fight is still over basic delivery efficiency

SF Express, whose core business is courier delivery, moved into supply chain services and less-than-truckload (LTL) freight, while Deppon, which built itself on LTL freight and logistics, moved into courier delivery. Deppon has moved faster: its courier revenue reached 11.397 billion yuan in 2018, 49.5% of its total, passing its logistics revenue.

LTL freight generally means shipments under 3 tonnes. Within that, non-truckload shipments of 30 to 500 kilograms are called "small LTL," and dedicated-route shipments of 500 kilograms to 3 tonnes are called "large LTL."

SF Express's freight revenue last year was about 8 billion yuan, under 9% of the company's total. Against an LTL freight market worth 1.33 trillion yuan, SF Express looks to have plenty of room left.

But this is a badly fragmented industry. Everbright Securities estimates that the ten largest LTL freight companies together held under 3% of the market in 2017. Fragmentation and relatively low freight prices leave these companies making little money.

Set against Yunda, the courier with the highest margins, Deppon's gross margin is half of Yunda's and its net margin a fifth.

Another new experiment is same-city delivery, mostly food delivery.

SF Express in fact began carrying KFC orders in some cities as early as 2014, and after 2016 gradually added partnerships with Baidu Waimai, Meituan Waimai, McDonald's and other food businesses. In 2018, SF Express's same-city delivery revenue grew 172% to 995 million yuan, its fastest-growing line (though it was only 1% of revenue). Yunda runs something similar, "Yundipei," aimed mainly at personal same-city delivery and food orders.

Optimistic analysts believe that with China's O2O market growing 24% a year, courier companies still have plenty of room to improve their numbers.

That growth may not buy much profit, because the money in food delivery is not in carrying the food. It is still with the platforms, which decide which restaurants a user sees; a restaurant that wants more exposure has to buy advertising.

It is the same as couriers and e-commerce platforms: once a courier hands a McDonald's, KFC, HEYTEA or Meituan Waimai order to the customer, the customer relationship stays with the platform. Only a business that controls the customer can raise how much it earns per transaction, which is what finally shows up in the profit-and-loss statement. Meituan's 2018 annual report shows its take rate — revenue as a share of total transaction value — rising from 5% in 2016 to 12.6%.

As more couriers move into food delivery, the sameness that afflicts the courier business will take hold here too, and worse, because getting a rider to follow phone instructions to pick up and drop off a meal takes far less infrastructure than traditional courier delivery, which means moving aircraft and building warehouses across the country.

That may be why, beyond same-city delivery, courier companies are also chasing differentiation through overseas expansion, air freight, automation and adjacent businesses such as cold chain and heavy freight. All of it still comes back to the efficiency contest that has always defined the courier business.

SF Express and YTO have built fleets of their own: SF Express has 52 all-cargo aircraft, YTO has 9 in service. SF Express is building a cargo airport in Ezhou; YTO signed a 12.2 billion yuan airport construction agreement with the city of Jiaxing last July and plans to make it its global air logistics hub.

Building a fleet is part of completing a transfer network, and it shows how differently these companies put money into assets. ZTO's strategy is to spend heavily on company-owned transfer centers, buying land and equipment and building its own truck fleet. Yunda's capital spending goes mostly into automation, IT and tighter management. When YTO went public in 2016 it raised more than 2 billion yuan to put into automation.

The old, simple line — the Tongda couriers running on franchises, SF Express on directly owned outlets — has also disappeared. The Tongda companies own more and more of their outlets, and on busy routes such as Beijing to Shanghai the speed gap between SF Express and everyone else is narrowing.

As an analyst at CICC put it, competition among the big couriers from here will not be about strategy. It will be about execution.

Charts / Feng Xiuxia, Gong Fangyi